Innovation is a driving force behind Connecticut’s economy. From advanced manufacturing and aerospace to software, biotechnology, medical devices and specialty engineering, businesses continue developing new products, processes and technologies.
Recent changes to state and federal tax policy could make those investments more financially advantageous.
Beginning this year, more small businesses are eligible for Connecticut’s R&D tax credit, while the federal One Big Beautiful Bill Act, passed last year, allows companies to immediately deduct certain domestic research expenses. Together, the changes could reduce tax liabilities and free up cash for continued research and development.
R&D tax credits can reduce a business’s federal income tax liability. In addition, more than 30 states, including Connecticut, offer their own R&D tax credits, allowing businesses to further reduce state tax liabilities.
Connecticut’s R&D credits have historically been limited to C corporations, but the state uses a broader definition of qualifying research expenditures than the federal government and many other states. In addition to wages, supplies, contract research and computer rental costs, Connecticut may include certain indirect and overhead expenses that support qualified research, potentially increasing the credit benefit.
On May 26, Gov. Ned Lamont signed legislation expanding R&D tax credit eligibility beyond C corporations to certain small businesses, including S corporations and partnerships with less than $70 million in revenue that conduct qualified research in Connecticut. Effective for tax years beginning on or after Jan. 1, 2026, eligible taxpayers may claim credits of up to the lesser of 6% of their R&D expenses or $1.5 million for qualifying Connecticut research not funded by grants, contracts, government or third parties.
The law also enhances refundability, allowing qualified small businesses to monetize credits for 90% of their face value for biotechnology businesses or 65% of their face value for all other businesses.
Together with Connecticut’s expansive qualified research expenses definition, this expansion can fuel innovation, accelerate commercialization and encourage reinvestment in technology, advanced manufacturing and jobs.
Federal changes
The One Big Beautiful Bill Act (OBBA) restored the immediate deduction of domestic research and experimental expenditures beginning after Dec. 31, 2024, replacing the prior five-year capitalization requirement. Foreign research and experimental expenditures costs remain subject to 15-year amortization.
This change can improve cash flow, accelerate cost recovery and free up capital.
Businesses, however, should monitor unintended consequences. As an example, some states have decoupled from federal treatment and continue requiring capitalization for state purposes. Connecticut temporarily decoupled from OBBBA’s changes, requiring C corporations to follow capitalization requirements through 2025.
Conformity to OBBBA begins for tax years starting on or after Jan. 1, 2026.
Many companies assume the R&D credit applies only to laboratories or technology startups. In reality, eligibility is activity-driven. Qualifying activities generally involve developing or improving products, processes, software or techniques; addressing technical uncertainty; and using experimentation, testing, modeling, prototyping or evaluating alternatives.
For Connecticut businesses, the combination of federal R&D credits, immediate domestic expensing under OBBBA and Connecticut’s enhanced credits can provide significant tax benefits.
Businesses that proactively identify qualifying activities, document their research efforts and align their tax strategy with their innovation strategy will be best positioned to maximize benefits in 2026 and beyond.
Myunghee Geerts is managing director of R&D Tax Credits in the National Tax Office at CBIZ Advisors LLC.
