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.
  • Depending on the tax year, the credit can reduce up to 70% of the corporate business tax liability.
  • This tax credit may be carried forward for up to 15 years.
  • Partially refundable for taxpayers whose gross income does not exceed $70 million AND have no tax liability.

Non-incremental R&D Credit

  • A qualified small business can claim a tax credit equal to up to 6% of the current year's R&D expenses, dependent on gross receipts.
  • 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.
  • Depending on the tax year, the credit can reduce up to 70% of the corporate business tax liability.
  • Partially refundable for taxpayers whose gross income does not exceed $70 million AND have no tax liability.

What are the Potential Benefits of this Tax Credit?

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies)

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 of 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.