Connecticut R&D Tax Credit

Connecticut’s R&D tax credits offer many benefits, such as fueling growth and rewarding innovation in a company. They are an important source of funding a business can use to expand, boost R&D, and recruit new personnel.

Many organizations are still unaware that you don’t have to be involved in product development to apply. Activities like manufacturing techniques, software development, and quality improvements all qualify for an R&D tax credit. Even startups can use them against their payroll tax for up to five years.

In Connecticut, only C-Corps can apply for research and development credits. There are two types of R&D tax credits available, the first being the Research and Experimental Expenditures Credit (RC Credit, which is incremental) and the second Research and Development Expenditures Credit (RDC Credit, which is non-incremental).

The RC Credit

This type of credit equals 20% of the amount your corporation spent on research and experimental expenses over what it spent on such expenses during the prior tax year. If your corporation is a QSB (Qualified Small Business), you may worry about not being able to claim the RC credits in a fiscal year in which you would otherwise be eligible because you don’t have a tax liability. However, you can still exchange tax credits for a refundable sum equivalent to 65% of the credit’s value (view Form CT-1120 XCH).

What Do You Need to Apply for a Connecticut Research and Development Tax Credit?

If you are considering applying for the RC credit, please remember you need to submit the application before the return deadline or extended deadline. Aside from having a filled-out Form CT-1120RC, you must also supply the following information:

• A thorough and detailed account of the kind of research initiatives your firm carried out throughout the income year, together with the location (or multiple locations) of the research,

• A thorough explanation of the procedures followed to determine the amount directly invested in research and experimentation carried out in Connecticut,

• A thorough breakdown of each data source utilized to finalize the tax credit, as well as any expenditure allocation calculations and procedures employed,

• Every staff member whose salaries are covered by the research expenses must provide their work title and a thorough job description.

The RDC Credit

The RDC Credit is similar to the RC Credit in the way that it also depends on the volume of the Connecticut-based eligible R&D expenditures. Moreover, it might be refundable for some Qualified Small Businesses. However, in this case, the credit for a QSB is equivalent to 6% of its qualifying R&D expenses. Other businesses can calculate the RDC in one of the following ways:

• 1% of costs (assuming $50 million or lower),

• $500,000 + 2% of any amount above $50 million (if above $50 million but under $100 million),

• If above $100 million but lower than $200 million, it’s $1.5 million + 4% of the excess, or

• $5,500,000 + 6% of any surplus exceeding $200 million.

• Companies based in an Enterprise Zone (or EZ for short) with incomes over $3 billion and over 2,500 workers should multiply the R&D costs by 3.5% rather than using the calculations described above, depending on which computation yields the larger credit amount.

Other Things to Keep in Mind

The RC Credit and the RDC Credit adhere to IRC § 174 and IRC § 41. However, each has its own set of certification requirements. The ensuing R&D costs could be particularly eligible:

• Expenses made in conjunction with the taxpayer’s trade or company convey R&D expenditures in the laboratory or experimental context,

• All expenses related to creating or improving a product and any expenditures associated with prototypes, methods, formulas, inventions, techniques, or other intellectual property. The end product may be retained for sale, lease, or license, or it may be employed by the firm in its operations (internal R&D),

• Costs associated with getting a patent, like the legal expenditures needed to create and perfect a patent application.

What Doesn’t Qualify for the Connecticut Research Tax Credit?

IRC §174 costs that don’t qualify include the following:

Overhead and Additional Costs

For instance, you will not receive an R&D tax credit for administrative and general costs. They are related to a company’s overall operations but do not directly support the research and development effort.

Routine Checks

The routine inspection or testing of products and goods for quality checks, efficiency analyses, management analyses, customer surveys, promotions, or advertising doesn’t qualify. That includes research related to historical, literary, or similar initiatives.

Buying Someone Else’s Product

Unfortunately, you cannot get an R&D tax credit for acquiring a patent, model, product, or procedure from someone else.

To get more information on Connecticut R&D Tax Credits, please follow this link.

Connecticut R&D Tax Credit: Summary

RC Credit — Incremental: 20% of the difference between qualifying research and experimental costs paid in the current claim year and those paid during the previous claim year. The RC credit has a carryforward period of 15 years.

RDC Credit — Non-incremental: 6% of the R&D costs (for Qualified Small Businesses only), or computed using the info above. The RDC credit has a carryforward period indefinitely.

For QSBs with less than $70 million in gross income the preceding year, the Exchange of Tax Credit for Refund is capped at $1.5 million each tax year.

Important Points to Remember

• A company is considered a QSB if its gross revenue was less than $70 million in the preceding fiscal year.

• This credit is available for corporate income taxes only (C-corps filing Form CT-1120).

• S-corps are not eligible for an R&D tax credit since they don’t bear corporation taxes, and there’s also no flow-through credit.