SALT Advisory Insights: A Spotlight on the Connecticut R&D Tax Credit Program

Part of a Series on State and Local R&D Tax Credits

Connecticut offers a research and development tax credit for related expenditures made in the state. Qualifications for the credit closely mimic those of the federal R&D tax credit. The credit may be applied against the state’s corporate business tax. Connecticut differentiates between a non-incremental research and development credit (Conn. Gen. Stat. §12-217n) and an incremental research and experimental expenditures credit (Conn. Gen. Stat. §12-217j).

A qualified small business is entitled to a tentative tax credit equal to 6% of its research and development expenses. Such a business is defined as a company that has gross income for the previous income year that does not exceed $100 million and has not met the gross income test through transactions with a related person.

All other businesses calculate their allowable credits on an escalating scale. For companies with annual R&D expenditures of $50 million or less, the credit is one percent of expenditures. At the high end, for companies with annual R&D expenditures over $200 million the credit equals $5.5 million plus six percent of expenditures over $200 million.

If it results in a greater tentative tax credit, companies headquartered in one of the state’s enterprise zones, with revenues in excess of $3 billion and more than 2,500 employees multiply their research and development expenses by 3.5% instead of using the tax credit scale provided in the regulations.

For qualified small businesses, the upside of the tax credit is that if they do not have tax liabilities against which to apply allowable credits, they may sell them back to the state at 65 percent of the full value or they may carry them forward until they have taxable revenue. Another positive feature is that un-usable tax credits may be carried forward until they can be used, with the proviso that they be used in the order in which they were allowed.

PMBA Insight: The Connecticut R&D tax credit is structured to incentivize companies from start-up to enterprise level to innovate and grow business in the state. However, unlike some other states where the R&D tax credit can offset the entire tax liability, the Connecticut credit can offset only up to 50 percent. In addition, companies that reduce employment may have their R&D tax credit reduced by a percentage scaled to the amount of workforce reduction. On the positive side, although the state has been struggling with budget deficits, it continues to seek ways to attract and grow business as exemplified in the following update.

Update: New Bill Offers Solution to Stranded Tax Credits

In the state budget for the biennium ending June 30, 2019, the legislature added a measure that now allows companies with unused tax credits that exceeded the 50 percent applicable to their corporate taxes (known as “stranded” tax credits) to apply for funds to be used for facility construction or expansion and related additional hiring. Building plans must be approved and projects must meet additional requirements. The legislature set aside a $50 million annual fund for this purpose.

PMBA Insight: We’re not certain how helpful this measure will be to many companies and, therefore, to growth in Connecticut. We believe it’s more likely that larger rather than smaller companies will take advantage of this incentive. A small company trying to innovate, go to market and build revenues – even when it has achieved taxable revenue levels – is not likely to be thinking about, let alone planning, to build its headquarters.

According to an article in HartfordBusiness.com, as of 2016, Connecticut businesses had a total of $1.8 billion in stranded tax credits. However, economic experts quoted in the same article were disappointed in the $50 million annual cap for un-stranding them. The Connecticut Center for Economic Analysis at UConn calculated that every $1 billion in stranded tax credits used would yield 45,000 jobs, while the $50 million would only result in 2500. By all means, 2500 jobs is good for the state and the new regulation is a boon to any company that can benefit from it. Hopefully it will prove itself, leading to expansion and perhaps other innovative ways to use stranded credits that will benefit smaller companies.

Could your company in Connecticut or around the U.S. qualify for and benefit from R&D tax credits? We’ll help you find out. For a complimentary consultation, please contact the PMBA National R&D Tax Credit Practice at R&DTaxIncentives@PMbusinessadvisors.com. For more information about our R&D tax credit services, visit this page.