Connecticut takes a different approach to rewarding research investment than most states, offering two separate credits that businesses can use depending on how their research spending has grown over time. With recent legislative expansions aimed at small businesses and biotech, now is a good time for Connecticut companies to revisit whether they’re capturing the full benefit available.
Two Credits, Two Paths
The Connecticut Department of Revenue Services administers two distinct research credits, and businesses may be eligible for one or both depending on their spending pattern.
The Incremental Research Credit rewards year over year growth in research spending. It equals 20% of the increase in Connecticut research expenditures compared to the prior year, and it’s capped at 70% of a corporation’s business tax liability.
The Non-Incremental Research and Development Credit takes a different approach, applying a tiered rate to a company’s total Connecticut research expenditures regardless of year over year growth. Rates start at 1% on research expenditures up to 50 million dollars and increase through several brackets to 6 % on amounts above 200 million dollars. Qualified small businesses can access a 6 percent tentative rate, while certain large headquartered companies operating in enterprise zones may qualify for a 3.5% rate.
Built In Support for Small Businesses
Connecticut has taken deliberate steps to make its R&D credits more accessible to companies that aren’t yet profitable enough to use a credit against tax liability. Qualified small businesses, generally those with gross income under 70 million dollars, can exchange unused credits for a cash refund rather than carrying them forward indefinitely. Recent legislation increased that refund exchange rate to 90% for qualifying small biotechnology companies, reflecting the state’s push to support its growing life sciences sector.
No Industry Restrictions
Unlike states that limit eligibility to a defined list of target industries, Connecticut’s R&D credit is open to qualifying businesses across all sectors. That said, certain industries tend to be especially active claimants given the concentration of research activity in the state, including:
- Advanced manufacturing, a longstanding pillar of the Connecticut economy
- Aerospace, including component design and engineering for aircraft systems
- Biotechnology and life sciences, an increasingly vocal and fast growing sector
- Financial technology, particularly among early stage companies building new platforms
What This Means for Your Business
Because Connecticut offers two separate credit calculations, businesses should evaluate both to determine which produces the greater benefit, and small businesses in particular should pay close attention to the refund exchange option rather than assuming a standard carryforward is the only path. Given the pace of legislative change in this area, a periodic review is worthwhile even for companies that have claimed the credit in past years.
CSSI is dedicated to helping businesses identify and defend tax savings through detailed, engineering based studies. If you’d like to know whether your Connecticut operations qualify, request a free analysis to get started.
FAQ: Connecticut R&D Tax Credit
Why does Connecticut have two different R&D credits?
The state offers an Incremental Research Credit for companies whose research spending grows year over year, and a Non-Incremental Research and Development Credit based on total research expenditures regardless of growth. Businesses should evaluate both to see which applies more favorably.
How much is the Incremental Research Credit worth?
20% of the increase in Connecticut research expenditures over the prior year, capped at 70% of the corporation’s business tax liability.
How does the Non-Incremental credit work?
It applies a tiered rate starting at 1% on research expenditures up to 50 million dollars and rising to 6% on amounts above 200 million dollars, with a 6% tentative rate available to qualified small businesses.
Can a small business get a refund instead of a carryforward?
Yes. Qualified small businesses, generally those with gross income under 70 million dollars, may exchange unused credits for a cash refund. Qualifying small biotechnology companies can exchange at a 90% rate.
Are certain industries excluded from the credit?
No. Connecticut’s R&D credit has no industry or geographic restrictions and is available to any qualifying business.
Which industries are the most active claimants?
Advanced manufacturing, aerospace, biotechnology and life sciences, and financial technology are especially prominent, though eligibility isn’t limited to these sectors.
How do I know if my business qualifies?
The best way to find out is through a professional analysis of your research activities and expenses. CSSI offers a free analysis to help determine eligibility and estimate potential savings.
