Maximizing Tax Savings for Connecticut Manufacturers

The following article was provided by Whittlesey. It is reposted here with permission.

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The manufacturing sector is vital to Connecticut’s economy, creating job opportunities, driving innovation, and facilitating community growth.

As the industry faces a rapidly evolving market, it is critical to leverage tax-saving opportunities to remain competitive.

Tax incentives such as the federal and state research and development credits, the Work Opportunity Tax Credit, and energy-related credits can help manufacturers reduce costs and reinvest in their operations.

Here’s how these programs can benefit you.

Federal R&D Tax Credit

The federal R&D tax credit, officially termed the Credit for Increasing Research Activities (Internal Revenue Code Section 41), rewards companies for developing or improving products, processes, or technologies.

For manufacturers, this could involve:

• Designing prototypes
• Experimenting with advanced materials
• Software development
• Automating production lines to improve efficiency

Eligible expenses may include:

• Wages for employees directly involved in R&D
• Costs of supplies and prototypes
• Contract research conducted by third parties

Depending on the circumstances, manufacturers could convert up to 20% of certain R&D expenditures into a more beneficial tax credit.

Businesses can optimize claims and ensure compliance during audits by tracking project costs, employee time, and related expenses through dedicated systems.

Connecticut R&D Credits

For certain C-corporation taxpayers, Connecticut amplifies the federal R&D incentives with Connecticut tax credit programs:

Incremental R&D Expenditure Credit

Allows companies to claim 20% of the amount by which their current-year R&D spending exceeds the average of the previous three years.

This is particularly beneficial for manufacturers steadily increasing research investments.

Non-Incremental R&D Expenditure Credit

Offers up to a 6% credit for research-related expenses.

Unused credits can be carried forward for up to 15 years. Unfortunately, no carryback of this credit is allowed.

Connecticut Might Just Buy That R&D Credit

A qualified small business (i.e. a business’ prior year gross income was less than $70 million) that cannot take the Connecticut R&D tax credit in a year, because it has no Connecticut tax liability, may be able to exchange the tax credit with the state for a refund equal to 65% of the value of the tax credit. 

A qualified small business that files a Form CT-1120 is permitted to exchange this tax credit if:

• The company’s apportioned net income is $0 or less, regardless of the amount of its capital base tax; or
• The company’s capital base tax is equal to $250.

Work Opportunity Tax Credit

The WOTC incentivizes employers to hire individuals from specific target groups facing employment barriers, such as US veterans, long-term unemployment recipients, ex-felons, and Supplemental Nutrition Assistance Program beneficiaries.

Key benefits include:

• Credits up to $9,600 per eligible employee, depending on their demographic category and time worked
• Opportunities to diversify the workforce while addressing staffing needs with proper training programs

To claim the WOTC, employers must file IRS Form 8850 and supporting documentation within specific deadlines.

Integrating the WOTC screening into the hiring process can help manufacturers seamlessly access these savings.

Energy Credits: Opportunities Amid Policy Changes

As federal energy policies shift, manufacturers can still find valuable opportunities at the state and local levels.

In Connecticut, organizations like the Connecticut Green Bank and local utility providers offer programs that support renewable energy adoption and energy efficiency improvements.

As federal energy policies shift, manufacturers can still find valuable opportunities at the state and local levels.

These may include rebates for energy-efficient upgrades and incentives for renewable energy projects.

Manufacturers can decrease operational costs by taking advantage of these programs.

Working with knowledgeable tax professionals who stay informed on the latest federal and state policies can help you take advantage of any potential savings.

Leveraging Opportunities

Connecticut manufacturers have several opportunities to maximize their tax savings, which is essential for staying competitive in today’s challenging market.

By utilizing these savings, businesses can reinvest in upgrading equipment, employee training, or implementing more sustainable practices.

However, navigating these incentives often requires expert guidance due to their complexity and the need for careful planning and documentation.

We encourage Connecticut manufacturers to explore these options to propel their business forward and avoid leaving valuable savings on the table.

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About the author: Brenden Healy is a partner at Whittlesey, one of New England’s largest regional accounting firms. He specializes in tax planning and consulting services for the manufacturing, distribution, and professional service industries. Healy is passionate about helping businesses uncover opportunities to reduce tax liability and achieve sustainable growth.