Are R&D Tax Credits Available in Connecticut?

The state of Connecticut provides the Research and Development (R&D) Tax Credit which allows C corporations to claim both incremental AND non-incremental Research and Development Tax Credit for R&D expenses paid or incurred by the corporation within the state. The definition of qualified research expenses for both credits is expenses that may be deducted under IRC § 174 and basic research payments defined under IRC § 41.

Here is a summary of the two credits:

Incremental R&D Credit

  • The tax credit is equal to 20% of the incremental increase in R&D expenses that are conducted in Connecticut.
  • Connecticut caps the credit at 70% of the corporate business tax liability.
  • This tax credit may be carried forward for up to 15 years. No carryback is allowed.
  • Exchange of Tax Credit – A taxpayer whose gross income does not exceed $70 million and who cannot take the credit as a result of having no tax liability may elect to carry 100% of the credit forward or may be eligible to exchange the credit for a refund equal to 65% of the credit’s value, subject to certain limitations. Only tax credits earned in the current year and entitled to be claimed in the current year may be exchanged for refund.
  • A taxpayer cannot claim the R&D credit for the same expenses it uses to claim the non-incremental research and experimental expenditures credit.

Non-incremental R&D Credit

  • A qualified small business (QSB) can claim a tax credit equal to up to 6% of the current year's R&D expenses, dependent on gross receipts.
  • For non-QSBs the credit is:
    • 1% of expense up to $50 million;
    • $500,000 plus 2% of expenses over $50 million and up to $100 million;
    • $1.5 million plus 4% of expenses over $100 million and up to $200 million; and
    • $5.5 million plus 6% of expenses over $200 million.
  • For tax years beginning on or after January 1, 2021, any unused credits can be carried forward up to 15 years. Prior years can carry forward for an unlimited period of time.
  • Connecticut caps the credit at 70% of the corporate business tax liability.
  • Partially refundable for taxpayers whose gross income does not exceed $70 million AND have no tax liability.

Connecticut R&D Tax Credit Case Study

A Stanford company designs and manufactures components for the aerospace industry. The company claims R&D credits each year for the development activities of its engineers. This project involved a multi-year study.

The Company qualified for the federal R&D Tax Credit of $327,833 and an additional $184,000 for the state R&D Tax Credit in Connecticut.

FEDERAL
CONNECTICUT
Year
Total QREs
Credit
Total QREs
Credit
2021
$1,300,000
$135,333
$1,300,000
$72,000
2020
$900,000
$91,000
$900,000
$52,000
2019
$650,000
$63,000
$650,000
$36,000
2018
$450,000
$38,500
$450,000
$24,000
Total $3,300,000 $327,833 $3,300,000 $184,000


You can read more about this Connecticut case study here.

Four-Part Test

Qualified research activities are defined by the four-part test outlined below

  • Technological in Nature
    Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.

  • Permitted Purpose
    Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

  • Eliminate Uncertainty
    Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.

  • Experimentation
    All activities must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.

Research and Development Tax Insights

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