For years, Connecticut’s research and development credits were available only to C corporations. If your company was an S corporation, partnership or LLC, you could do meaningful research in the state and receive no state credit for it. That changes in 2026.
What the new credit does
Under Public Act 26-68, § 267, Connecticut now offers an income tax credit for qualifying small businesses that perform research in the state. The credit is 6% of eligible R&D spending paid or incurred in Connecticut during the year, and it applies to taxable years beginning on or after January 1, 2026.
Who qualifies
The credit is open to S corporations, entities taxed as partnerships, and single-member LLCs treated as disregarded entities, as long as the business had less than $70 million of gross income in its most recent taxable year. Income from related-entity transactions counts toward that limit. That covers many of the manufacturers, engineering firms, technology companies and life-science businesses we work with.
What counts as R&D spending
Eligible spending generally includes R&D expenses that are deductible federally and basic research payments that qualify for the federal research credit. The research must be performed in Connecticut, and spending funded by a grant or contract with another party doesn’t qualify. If you already claim the federal research credit, much of the groundwork for this credit may already exist.
Even businesses without a tax bill can benefit
The most valuable feature for growing companies is that part of the credit can be turned into cash. If the credit is more than your Connecticut income tax, you can ask DRS to exchange the excess for a partial refund: 90% for biotechnology businesses and 65% for other qualifying small businesses.
Here’s a simple example. A pass-through manufacturer spends $500,000 on qualifying research in Connecticut in 2026. Its credit would be $30,000. If the owners have no Connecticut income tax to apply it against, the business could receive about $19,500 in cash. A biotech company in the same position could receive about $27,000.
Limits and competition for credits
A single business can reserve no more than $1.5 million of credits in a taxable year, the overall program is capped at $25 million, and the DECD commissioner has discretion to prioritize applications. Applying early is important.
The deadline that’s easy to miss
The credit runs through a voucher program managed by the Department of Economic and Community Development, and businesses must verify their eligible spending with DECD within 90 days after the end of the taxable year. For calendar-year businesses, that means verification for 2026 spending is due around March 31, 2027, before most pass-through returns are even finished. The documentation has to be ready by then.
How this fits with federal and other Connecticut rules
Federal law now allows businesses to deduct domestic research costs right away, and the federal research credit is still available. Connecticut’s 2026 budget, however, does not follow some of the federal research expense changes for earlier years. Reviewing your federal credit, your federal deduction and the new state credit together will help you claim each correctly and avoid duplicate or inconsistent treatment.
Steps to take now
- Confirm eligibility. Check your entity type and make sure gross income, including related-entity income, is under $70 million.
- Identify your Connecticut research. List the projects, people and costs tied to research done in the state, and exclude anything funded by grants or customer contracts.
- Reserve your credit early. Contact DECD about reserving a credit allocation as soon as possible, given the program cap.
- Start tracking now. Use project codes, timesheets and expense tags for the rest of 2026 so the 90-day verification isn’t a scramble in March.
- Plan for the refund. If you expect little Connecticut tax liability, factor the potential refund into your 2027 cash-flow forecast.
We can help!
Our tax and advisory teams help Connecticut businesses identify qualifying research, document it and claim the credits they’ve earned. If you think your business may qualify, contact your Accavallo & Company advisor before year-end.
