Connecticut has long offered research and development tax credits to C corporations through the corporation business tax. Now, for the first time, the state has extended a targeted R&D credit to qualifying pass-through businesses. Signed into law by Governor Lamont on May 26, 2026, Public Act 26-68, § 267, creates an income tax credit for qualifying small businesses and includes a partial refund feature that makes the credit valuable even for businesses that have not yet generated significant Connecticut income tax liability.
Overview
The new income tax credit equals 6% of eligible research and development expenditures paid or incurred in Connecticut during the taxable year. The credit applies to taxable years beginning on or after January 1, 2026.
Eligible Taxpayers
The credit is available to S corporations, entities treated as partnerships for federal income tax purposes, and single-member limited liability companies that are disregarded entities for federal income tax purposes, provided that the business had gross income of less than $70 million for its most recent taxable year, including income derived from transactions with related entities as determined by the DECD commissioner.
Eligible Research and Development Expenditures
In general, eligible expenditures include federally deductible research and development expenses and qualifying basic research payments that are eligible for the federal research credit. To qualify, the expenditures or payments must relate to research and development or basic research conducted in Connecticut and may not be funded through a grant or contract with a public or private entity.
Credit Limitation
A qualified small business may not reserve more than $1.5 million of credits for any taxable year.
Partial Refundability
If the credit exceeds the taxpayer’s Connecticut income tax liability, the taxpayer may apply to the Department of Revenue Services (DRS) to exchange the excess for a partial cash refund. Biotechnology businesses may receive a refund equal to 90% of the excess credit, while other qualified small businesses may receive a refund equal to 65% of the excess credit.
This feature is particularly important for early-stage and growth-oriented businesses that may not yet generate sufficient taxable income to fully utilize available tax credits.
Administration and Verification Requirements
The credit is administered through a voucher program overseen by the Connecticut Department of Economic and Community Development (DECD). To claim the credit, a business must verify its eligible expenditures with DECD within 90 days after the close of the taxable year.
Because the verification period is relatively short, businesses should maintain detailed records of qualifying research expenditures throughout the year rather than attempting to gather supporting documentation after year-end.
Significance of the New Credit
Connecticut’s innovation economy includes a broad range of startups and pass-through entities in industries such as biotechnology, advanced manufacturing, and defense technology. Until now, these businesses have been unable to benefit from the state’s existing corporate R&D credits, which apply only against the corporation business tax. The new credit addresses that gap by providing a meaningful state-level incentive for qualifying pass-through entities.
Planning Considerations
Businesses that wish to take advantage of the new credit for the 2026 taxable year should confirm eligibility (including the $70 million gross income threshold and entity-type requirements), apply to DECD to reserve a credit allocation as early as possible given the $25 million program-wide cap and the commissioner’s discretionary prioritization criteria, and implement procedures to track qualifying Connecticut R&D expenditures throughout the year to ensure timely verification within the 90-day post-year window.
Businesses with questions regarding eligibility, qualifying expenditures, documentation requirements, or the interaction of the new credit with existing federal and state incentives should consult their tax advisors regarding the application of this new Connecticut tax benefit.