CT Examiner recently published an Op-Ed by Bill Claffey, a tax attorney and partner at the accounting firm Fiondella, Milone and LaSaracina LLP (FML) with offices in Glastonbury, Enfield, New Haven, Stamford and Stafford Springs.
The major takeaways from the article are:
- Connecticut is a national leader in encouraging innovation through its research and development tax credit.
- The percent of tax liability the R&D credit can offset and the value it can bring to a business in Connecticut.
- Connecticut’s R&D tax credit is statutory and included within the tax return preparation. There is no pre-approval process nor application required.
- Our neighboring states, the stronger R&D incentives in these states generally require an application, pre-approval and are targeted to specific industries.
- The costs claimed by companies must be vetted thoroughly by the taxpayer to direct link between the costs and R&D activity.
- Connecticut’s R&D tax credit directly rewards year-over-year spending. Increased R&D spending from the prior year receives a 20-percent credit, while non-incremental R&D spending receives a credit on a sliding scale from 1-6%. Other states have a base amount ‘floor’ that must be spent before the business can begin to claim R&D credits and generally the percentages do not reach 20%.
- The definition of qualified R&D spend is quite broad as compared to other states. While other state R&D credits limit qualified spend to wages, supplies and 65% of consulting fees, in Connecticut costs such as equipment rental, hiring attorneys for patent work and other expenses directly related to R&D are includible at 100% to the extent incurred in Connecticut.
- Connecticut allows companies to exchange the credit for 65% cash if they are in a current-year tax loss. Most other states do not allow a refund provision. This is critical to early stage development companies, especially in the biotech sector where the runway to generating revenue can be 7-10 years.