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March 17, 2023

CT can't determine economic impact of bill expanding R&D tax credit to pass-through entities

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A bill that would extend research and development tax credits to pass-through entities in Connecticut has gained momentum in the legislature, but the state said it's not able to judge the economic impact.

Starting Jan. 1, 2024, the bill would establish a tax credit totaling 6% of the research and development expenses paid or incurred by S corporations, limited liability companies and limited liability partnerships during the tax year.

The bill would allow pass-through entities – mainly small businesses – to take advantage of the research and development tax credit. Currently, it is only applied to the corporation tax.

The Connecticut Business & Industry Association supports the bill, noting that many companies in the state, including manufacturers, rely heavily on innovation and continuously seek to improve their processes and products to stay competitive.

Expanding the tax credit would allow them to invest in equipment and other efficiencies, but also employees, the group said. It would help offset the cost of hiring additional engineers, scientists and other professions, according to the group’s testimony.

“R&D is costly, but necessary,” the CBIA said in written testimony to the General Assembly. “With only one out of every 100 research-and-design initiatives being successful, it’s a hard decision to spend financial resources, time and energy knowing that there will likely be 99 unsuccessful initiatives that will never have a return on investment.”

Jim Gildea, chair of the ManufactureCT Government Affairs Committee, said in written testimony that pass-through businesses and S corporations do not always have the resources and manpower needed to make critical investments in research and development. 

“It is an unfortunate catch-22 that class S corporations and pass-through entities, who would perhaps benefit the most from the research and development tax credits do not get them and are forced to fend for themselves when it comes to research and development,” Gildea wrote.

A Department of Economic and Community Development study on the impact of extending the tax credit found the state does not currently have a way to measure research and development expenses of pass-through entities, as the data is not reported to the Department of Revenue Services.

While state data on company R&D spending exists, it is not broken down by the type of company, the report said.

The bill was introduced by the Commerce Committee and a public hearing was held on Feb. 10.

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