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February 10, 2025 Focus | Accounting

Here’s how CT manufacturers can maximize tax savings

By Brenden Healy

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

Brenden Healy

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 (R&D) credits, the Work Opportunity Tax Credit (WOTC), and energy-related credits can help manufacturers reduce costs and reinvest in their operations.

Here’s how these programs work.

Federal R&D tax credit

The federal R&D tax credit 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; and 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.

Connecticut R&D credits

For certain C corporation taxpayers, Connecticut amplifies the federal R&D incentives with its own 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.

R&D tax credit buy back

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 federal WOTC incentivizes employers to hire individuals from specific target groups facing employment barriers, such as U.S. veterans, long-term unemployment recipients, ex-felons, and Supplemental Nutrition Assistance Program (SNAP) 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 WOTC, employers must file IRS Form 8850 and supporting documentation within specific deadlines. Integrating WOTC screening into the hiring process can help manufacturers seamlessly access these savings.

Energy credits

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.

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.

Brenden Healy, CPA, is a partner at Whittlesey, one of New England’s largest regional accounting firms.

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