Committee Fails to Act on Bill Opening R&D Tax Credit to Small Business
The General Assembly’s Finance, Revenue, and Bonding Committee failed to act on legislation giving small businesses access to the state’s research and development tax credit program.
The measure encourages investment in the state’s economy, allowing smaller firms to deduct a portion of their research and development expenses from their taxes, as large corporations can.
Connecticut’s manufacturing sector, which has many companies structured as S corporations, limited liability companies, and limited liability partnership companies—collectively referred to as pass-through entities—will be a major beneficiary of the legislation.
Due to the current tax structure, these companies are unable to take advantage of the R&D tax credit, which can only be applied to the corporation tax.
Level Playing Field
HB 5488 allows pass-through entity businesses to deduct an amount equal to 6% of their research and development expenses from their personal income taxes.
This puts these small businesses on a level playing field and will spur more investment in developing new products by companies of all sizes.
Despite having a relatively minimal cost to the state, the R&D tax credit has proven to attract entrepreneurs, foster startup businesses, and promote private sector investment in Connecticut.
Connecticut’s R&D tax credit program requires that costs claimed by companies be thoroughly vetted to ensure there is a direct link between the costs and legitimate R&D activity.
Return on Investment
The legislation reflects one of CBIA’s 2022 policy priorities, which were focused on strengthening Connecticut’s economic recovery from the pandemic.
The R&D tax credit has demonstrated time and time again to generate a substantial return on investment and create jobs in the state.
A 2015 report by the nonpartisan Office of Legislative Research showed that the state earned between $1.24 to $2.36 in net revenue for every dollar claimed through the R&D tax credit.
The report also noted that between 1,406 to 3,648 jobs were added every year attributable to the credit.
Amending the law to allow pass-through entities to take advantage of this credit will not only improve the economic condition of the state, but help position it to be a leader in key, high tech industries of the future.
The cost of this proposal remains to be seen, but absent additional investment in high growth and high-paying industries in the state, Connecticut could be entering a prolonged period of slowed economic recovery.
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