Synopsis of Multi-State Research Tax Incentives with a Spotlight on the State of Connecticut
By Peter J. Scalise, B.S., M.S.
In addition to the federal-level Research and Development Tax Credit pursuant to I.R.C. § 41, there are thirty three states that offer research tax incentives (i.e., whether in the form of a credit, deduction or grant) similar to the federal level research and development tax credit and these states generally follow the federal statutory, administrative and judicial interpretations on what constitutes qualified research expenses (QREs) with the notable exception of states such as Connecticut which lowers the threshold to utilize the Section 174 research and experimental expenditures definition for QREs.
It should be duly noted that state level research tax incentives can be much more lucrative than the federal tax credit because states often provide generous research tax incentives to encourage taxpayers to perform research and other business activities within their respective states. As a caveat, there are clearly distinctions in other state research and development incentive programs as well, such as California which generally follows the federal rules, but utilizes a different gross receipts calculation to include only sales of real, tangible, or intangible property held for sale to customers in the ordinary course of the taxpayer’s trade or business delivered or shipped to a purchaser within California, but does not include service-related receipts, rents or interest.
Furthermore, in addition to offering a research incentive, some states may allow an entity in a loss position (i.e., without a current tax liability in which to utilize the credit against) to immediately monetize their credit (i.e., “cash-in” the credit at a discounted selling price) with the state (e.g., Connecticut) or transfer it to a third party that may be able to utilize it (e.g., New Jersey), rather than carry it forward to a future year when a company has a tax liability to utilize it against.
[box title=”The subsequent list showcases the states offering a research based tax incentive program:” centered_title=”false” with_bg=”true”]
[one_third]
- Arizona
- Arkansas
- California
- Colorado (R&D within an enterprise zone)
- Connecticut (Section 174 lower threshold for QREs)
- Delaware
- Georgia
- Hawaii
- Idaho
- Illinois
[/one_third]
[one_third]
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Montana
- Nebraska
- New Jersey
[/one_third]
[one_third last]
- New York (includes job creation credit and investment tax credits)
- North Carolina
- Ohio
- Pennsylvania
- South Carolina
- Texas
- Utah
- Washington (B&O tax credit)
- West Virginia
- Wisconsin
[/one_third][/box]
The scope and application of our February Edition of The ETS SALT Tax Alert will showcase the State of Connecticut’s Research Tax Incentive Programs.
Incremental Research and Experimental Expenditures Credit
A corporation business tax credit is allowed for increases in incremental research and experimental expenditures (as defined in IRC §174) conducted in Connecticut.
The credit is equal to 20% of the amount by which research and experimental expenditures in Connecticut in the current income year exceed research and experimental expenditures in the preceding income year.
To capture the credit, Form CT-1120 RC, Research and Experimental Expenditures Credit, and CT-1120K, Business Tax Credit Summary, must be filed with the taxpayer's return.
The credit may be carried forward for 15 years but may not be carried back. A qualified small business (i.e., an entity with gross income in the previous year that did not exceed $70 million and that has not met the gross income test through transactions with a related person) that cannot claim the credit because it has no tax liability (not including minimum tax or capital base tax) may carry forward the credit or it may obtain a refund of 65% of credit value (up to $1.5 million).
The Connecticut credit includes all costs incidental to the development or improvement of a product, including any pilot model, process, formula, invention, technique, patent, or similar property. However, overhead and other expenses, such as general and administrative expenses that do contribute directly to the research and development effort do not qualify. In addition, Connecticut allows companies without a current tax liability to monetize their credit at a discounted selling price.
There is no sunset date for this credit.
Non-Incremental Research and Development Expenditures Credit
A corporation business tax credit is allowed for research and development expenses incurred in Connecticut. “Research and development expenses” are expenses that may be deducted under IRC §174 (as in effect on May 28, 1993) and basic research payments as defined in IRC §41 if the expenditures are incurred for research and experimentation and basic research conducted in Connecticut and not funded (as provided in IRC §41(d)(4)(H)) as in effect on May 28, 1993) by any person or governmental entity other than the taxpayer or a person included on a combined return with the taxpayer.
The credit percentage is based, in part, on the amount of R&D expenses incurred:
- For taxpayers with expenses of $50 million or less, the credit is equal to 1% of expenditures;
- For taxpayers with more than $50 million but no more than $100 million, the credit is equal to $500,000 plus 2% of expenses over $50 million;
- Companies headquartered in an Enterprise Zone with 2,500 or more employees and revenues in excess of $3 billion may elect to compute the credit based on 3.5% of research and development expenses;
- The credit allowed to a qualified small business (i.e., a business with gross income in the previous year that did not exceed $100 million and that has not met the gross income test through transactions with a related person) is 6% of expenses;
Taxpayers that incur more than $200 million in R&D expenses in an income year must reduce credit amount by specified percentages if workforce reductions exceed a certain level.
The Connecticut credit includes all costs incidental to the development or improvement of a product, including any pilot model, process, formula, invention, technique, patent, or similar property. However, overhead and other expenses, such as general and administrative expenses that do contribute directly to the research and development effort do not qualify. In addition, Connecticut allows companies without a current tax liability to monetize their credit at a discounted selling price.
To capture the credit, Form CT-1120 RDC, Research and Development Credit, Form CT-1120K, Business Tax Credit Summary, and certain attachments must be filed with the taxpayer's return.
This credit may be carried forward indefinitely but may not be carried back. Taxpayers that also claim the research and experimental expenditures credit or the credit for research and development grants to institutions of higher education cannot claim the credit for the same expenditures.
There is no sunset date for this credit.
Research and Development Credit for Grants to Institutions of Higher Education
A corporation business tax credit is allowed for the incremental increase in amounts spent by a taxpayer on grants to a Connecticut institution of higher learning for the purposes of research and development related to advancements in technology. “Research and development related to advancements in technology” means development of new products or new uses for existing products and improving methods for producing products. The term does not include testing or inspection for quality control purposes; efficiency surveys, management studies, consumer surveys, or other market research; advertising or promotional activities; or research in connection with literary, historical, or similar projects.
The credit is equal to 25% of the amount by which qualifying grants made in the current income year exceed the average qualifying grants made in the three immediately preceding income years. Total corporation business tax credits cannot exceed 70% of tax due prior to application of credits and cannot be applied against the minimum tax.
To capture the credit, Form CT-1120 GC, Tax Credit for Research and Development Grants to Institutions of Higher Education, and Form 1120-K, Business Tax Credit Summary, must be filed with the taxpayer's return.
The credit may not be carried forward or back. Credits may only be claimed by the entity that earned the credit.
There is no sunset date for this credit.
About The Author
Peter J. Scalise serves as the National Partner-in-Charge and the Federal Tax Practice Leader for Engineered Tax Services. Peter is also a highly distinguished and long-standing member of both the Board of Directors and Board of Editors for The American Society of Tax Professionals and is the Founding President and Chairman of The Northeastern Region Tax Roundtable, an Operating Division of ASTP. Peter is a frequent keynote speaker for the AICPA, ABA, ASTP, NATP, TEI & AIA on specialty tax incentives and legislative updates from Capitol Hill.
ETS Disclaimer
The article is designed to provide authoritative information on the subject matter covered. However, it is distributed with the understanding that the publisher, editors, and authors are not engaged in rendering legal, accounting, or other related professional services for your client base. Consequently, it is your responsibility to exercise all of the necessary measures to ensure proper tax preparation and tax advisory services for your client base.
Circular 230 Disclaimer
In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.
