Connecticut Administrative Code › Title 12 - Taxation › 740(a) - INCOME TAX › Part XIII - Accounting periods and accounting methods › Section 12-708-9 - Change from accrual to installment method of accounting

Current through July 10, 2024
(a)
General.
If a person has
				changed the method of accounting from the accrual to the installment method for
				federal income tax purposes, any installment payments actually received in the
				year of change or in subsequent taxable years (such year or years being
				referred to as "adjustment years"), on account of sales or other disposition of
				property made in any taxable year prior to the year of the change, are required
				to be included in federal adjusted gross income and consequently are included
				in Connecticut adjusted gross income. Therefore, profits attributable to
				installment sales which were taxed in the year of sale, because the person was
				then on the accrual method of accounting, would also be taxed in the adjustment
				years (i.e. during the years the installments are actually received after the
				change to the installment method of accounting). To avoid such duplication of
				Connecticut income tax, any additional Connecticut income tax for the
				adjustment years attributable to the receipt of installment payments properly
				accrued in a prior year shall be reduced by an amount equal to the portion of
				Connecticut income tax, for any year or years preceding the year of change,
				attributable to the prior accrual of income from installment sales included in
				Connecticut income in the adjustment years.
(b)
Reduction in Connecticut income tax
				for adjustment.
The Connecticut income tax for an adjustment year shall
				be reduced by the lesser of the following amounts:
Method 1:
that proportion of the Connecticut
				  income tax for the prior year (in which the installment sales were reported on
				  the accrual basis) which the amount of installment sales gross profits
				  reportable in the prior year of sale and in the adjustment year bears to the
				  Connecticut adjusted gross income for such prior year of sale; or
Method 2:
the excess, if any, of the amount
				  of the Connecticut income tax for the adjustment year on the entire Connecticut
				  taxable income over the amount of Connecticut income tax for such year,
				  computed without regard to the amount of the installment sales gross profits
				  reported in both the prior year of accrual and in the adjustment year.
Where previously reported installments received in an
				  adjustment year include installments on sales made in more than one prior year,
				  the reduction allowable with respect to the installments for each prior year
				  shall be computed separately. In such a case, the excess Connecticut income
				  tax, calculated under Method 2 above, computed with respect to the installments
				  from all prior years shall be prorated over the several prior years in
				  proportion to the amount of the duplicated installment sales profits
				  attributable to each such prior year.
Example:
The computation of the reduction of
				  Connecticut income tax of a resident individual for adjustment years is
				  illustrated by the following example (assume that the tax rate remains at 4.5%
				  for all taxable years involved):
Year 1
Year 2
Year 3
(accrual basis)
(adjustment year)
(adjustment year)
Gross profit from installment sales (receivable in 5
							 installments)
$10,000
$ 2,000
(from year 1 sales)
$ 2,000
(from year 1 sales)
$3 ,000
$ 3,000
(from year 2 sales)
(from year 2 sales)
$ 5,000
(from year 3 sales)
Other gross income
$ 8,000
$15,000
$11,000
Total gross income
$18,000
$20,000
$21,000
Personal exemption
$12,000
$12,000
$12,000
Connecticut taxable income
$ 6,000
$ 8,000
$ 9,000
x 4.5%
x 4.5%
x 4.5%
Connecticut income tax
$ 270
$ 360
$ 405
Computation of adjustment-year 2:
Connecticut income tax attributable to year 1 installment payments in
				  year 2 (first adjustment year), the year in which the change was made from the
				  accrual basis to the installment basis:
Method 1:
Connecticut income tax attributable to prior inclusion in
				  year 1:
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				  to view image
Method 2:
Connecticut income tax on Connecticut taxable income,
				  including
Connecticut income tax on Connecticut taxable income,
							 including gross
profit from year 1 sales . . . . . . . . . . . . . .
							 . . . . . . . . . . . . . . . . . . . . . . . . . .
$360
Connecticut income tax on Connecticut taxable income,
							 excluding such
gross profit: Connecticut taxable income as above .
							 . . . . . . . . . . . . . . . . . .
$8,000
Less gross profit from year 1 sales accrued in prior
							 year . . . . . . . . . . . . . . . .
$2,000
Revised Connecticut taxable income . . . . . . . . .
							 . . . . . . . . . . . . . . . . . . . . . .
$6,000
Connecticut income tax on revised Connecticut taxable
							 income . . . . . . . . . .
$270
Additional Connecticut income tax attributable to
							 prior year installment
payments ($360-$270) . . . . . . . . . . . . . . . .
							 . . . . . . . . . . . . . . . . . . . . . . . . .
$90
Therefore, the Connecticut income tax for year 2 (first
				  adjustment year) may be reduced by $30, the lesser of the two amounts computed
				  above.
Computation of adjustment-year 3:
Connecticut income tax attributable to year 1 installment payments in
				  year 3 (second adjustment year):
Method 1:
Connecticut income tax attributable to prior inclusion in
				  year 1:
Click here
				  to view image
Method 2:
Connecticut income tax on Connecticut taxable income,
							 including gross
profit from year 1 sales . . . . . . . . . . . . . .
							 . . . . . . . . . . . . . . . . . . . . . . . . . .
$405
Connecticut income tax on Connecticut taxable income,
							 excluding such
gross profit: Connecticut taxable income as above .
							 . . . . . . . . . . . . . . . . . .
$9,000
Less gross profit from year 1 sales accrued in prior
							 year . . . . . . . . . . . . . . . .
$2,000
Connecticut income tax on revised Connecticut taxable
							 income . . . . . . . . . .
$315
Additional Connecticut income tax attributable to
							 prior year installment
payments ($405-$315) . . . . . . . . . . . . . . . .
							 . . . . . . . . . . . . . . . . . . . . . . . . .
$90
Therefore, the Connecticut income tax for year 3 (second
				  adjustment year) may be reduced by $30, the lesser of the two amounts computed
				  above.
(c)
Change by
				a partnership from accrual to installment method of accounting.
In the
				case of a change by a partnership from the accrual method of accounting to the
				installment method, partnership income includes for each adjustment year any
				installment payments actually received in such year, even though such amounts
				were included in partnership income from prior years under the accrual method.
				Each partner shall determine separately such partner's distributive share of
				profits attributable to installment payments included in partnership income in
				the year of sale and in any adjustment year, and shall compute the partner's
				Connecticut income tax reduction with respect thereto in accordance with the
				provisions of this section.
(d)
				Statement to be attached to Connecticut income tax return. A taxpayer who
				changes from the accrual method to the installment method shall attach a
				statement to the Connecticut income tax return for each adjustment year
				showing:
(1) the pertinent facts as to sales
				in each year preceding the year of change;
(2) the number of remaining taxable years
				over which it shall be necessary to compute adjustments; and
(3) a schedule showing the computation, as
				prescribed by this section, of the adjustment for the taxable year.