If your company does research and development in Connecticut (and you’re not a traditional C-corporation) there’s a significant policy change moving through the state legislature that could put real money back in your pocket.
For years, Connecticut’s R&D tax credit has been largely off-limits to the thousands of small businesses, startups, and growth-stage companies that operate as pass-through entities: LLCs, S-corps, partnerships, and similar structures. That’s all quickly about to change.
What’s Happening: Connecticut’s R&D Tax Credit Expansion
Two parallel pieces of legislation are working their way through Hartford right now:
- HB 5319 — passed the Commerce Committee unanimously before moving to the Finance Committee for review.
- SB 84 — Governor Ned Lamont’s budget proposal, which includes nearly identical language.
Both bills would create a new R&D tax credit voucher program for pass-through entities (administered by the Department of Economic and Community Development) and would apply starting with the 2026 tax year.
Who Would Qualify?
The proposed expansion targets businesses with under $70 million in gross annual income that are organized as pass-through entities, meaning their tax liability flows through to individual owners rather than at the corporate level.
This is particularly significant for:
- Early-stage biotech and life sciences companies
- Small and mid-sized manufacturers
- Technology startups and SaaS companies
- Engineering and R&D-intensive professional services firms
“Thousands of Connecticut innovators operate as pass-through entities and currently lack access to meaningful R&D incentives,” CBIA’s Chris Davis told the Finance Committee at a March 11, 2026 hearing. “These businesses often fund research internally, operate on tight margins, and absorb significant risk when developing new products or processes.”
How Much Is the Credit?
Here’s what the proposed program looks like in practical terms:
- Credit rate: 6% of qualifying R&D expenditures
- Annual per-company cap: $1 million (some sources cite up to $1.5 million — confirm with your advisor as the legislation is still moving)
- Statewide program cap: $25 million annually
- Refundability: Companies with little or no tax liability can receive a portion of unused credits as a refund — enabling even pre-revenue companies to benefit
- Biotech carryback: Qualifying biotech companies could receive refunds of up to 90% of their credit value
Connecticut’s existing R&D credit for corporations already offers a tiered rate of 1% to 6% depending on expenditure levels. This expansion would bring pass-through entities into the same framework, with the 6% rate applied to qualifying expenses.
Why This Matters for Connecticut’s Innovation Economy
Connecticut is home to more than 24,000 life sciences workers generating roughly $7 billion in GDP, alongside major clusters in advanced manufacturing, aerospace, and financial technology. The problem is that most of the companies driving that innovation don’t qualify for the state’s existing R&D credit.
Industry advocates at the hearing made the case plainly: R&D investment is the foundation of competitive manufacturing and high-growth tech. Without accessible incentives, smaller companies shoulder those costs entirely on their own or consider locating elsewhere.
The proposal also includes meaningful fiscal guardrails (the program cap, per-company limits, and DECD oversight) that address legislators’ longstanding concerns about cost predictability. That’s a key reason this effort appears to have more political momentum than prior attempts.
Don’t Stop at the State Credit: The Federal R&D Tax Credit Is Still on the Table
Connecticut’s expanded credit is a meaningful development, but it’s part of a larger picture. Companies doing qualifying R&D work can also access the federal R&D tax credit under Section 41 of the U.S. tax code.
The federal credit generally allows companies to claim 20% of qualifying research expenses above a base amount (or 14% under the Alternative Simplified Credit method). For small businesses without significant prior R&D history, the ASC method often delivers a better result.
Key developments at the federal level in 2025:
- Section 174 expensing restored: The One Big Beautiful Bill Act (OBBBA) restored immediate expensing of R&D costs under Section 174, reversing the 5-year amortization rule that had significantly reduced the value of R&D incentives for many companies.
- Retroactive small business relief: The OBBBA included retroactive relief for small businesses affected by the amortization change, meaning some companies may be eligible for amended returns.
- New Form 6765 Section G requirements: The IRS has introduced additional documentation requirements for R&D credit claims — a reminder that audit-readiness is more important than ever.
For Connecticut companies, the opportunity is clear: stacking the state credit with the federal credit can significantly amplify the total return on R&D investment.
Actionable Strategies for Connecticut Innovators
1. Start tracking qualifying activities now
The proposed Connecticut credit would apply to the 2026 tax year. That means your activity and expense tracking should already be underway. Qualifying R&D expenses typically include wages for employees conducting research, supplies used in experimentation, and contract research costs.
2. Understand the pass-through entity structure implications
If your business is an LLC, S-corp, or partnership, you’ve historically been locked out of Connecticut’s R&D credit. Under the proposed expansion, that changes, but how the credit flows to individual owners will depend on your entity structure. Talk to your tax advisor now rather than at year-end.
3. Don’t overlook the federal credit
Many Connecticut businesses are claiming the state R&D credit (or will soon) without realizing they may also qualify for the federal Section 41 credit. The two are independent programs with separate qualification criteria, and both require proper documentation.
4. Build your documentation system proactively
Both the IRS and Connecticut’s Department of Revenue Services expect detailed records: project descriptions, employee time allocation, qualifying expense categories, and methodology. Pulling this together retroactively is costly and error-prone. Getting it right from the start protects your claim.
5. Consider a specialist, not just your general accountant
R&D tax credits are one of the more nuanced areas of tax law. General accounting firms often treat them as a line item rather than a core competency, which can mean missed qualifying activities or inadequate documentation if a claim is challenged.
The Bottom Line
Connecticut’s proposed R&D tax credit expansion is the most significant change to the state’s innovation incentive structure in years. For the thousands of small businesses, startups, and growth-stage companies that operate as pass-through entities, it represents a real funding opportunity; potentially up to $1 million in credits annually, with refundability provisions that matter most to early-stage companies.
Combined with the federal R&D tax credit, companies doing qualifying work in Connecticut have a compelling case for accessing meaningful non-dilutive capital.
