Two major pieces of legislation that were passed in 2025 — one federal and one state — will positively impact Connecticut businesses that engage in research and development in 2026.
The One Big Beautiful Bill Act and Connecticut’s biennial state budget, both passed the same week last summer, include significant expansions of R&D benefits.
Domestic incentive
On the national level, the ability to expense domestic R&D costs immediately and not amortize them will be a big money saver.
Companies will be able to essentially catch up on costs they’ve had to capitalize in recent years and deduct domestic R&D costs for tax years beginning after Dec. 31, 2024. Foreign R&D costs still have to be capitalized and expensed over a 15-year period, which was done specifically to encourage domestic investment.
The Big Beautiful Bill allows businesses that amortized domestic R&D costs in tax years 2022 through 2024 to elect either a full deduction of their remaining, unamortized R&D expenses in 2025 or to spread the deduction evenly over 2025 and 2026.
Qualified small businesses — generally those with less than $31 million in average annual gross receipts from 2022 through 2024 — are given two options under the law.
They may either amend their 2022-24 tax returns to fully deduct domestic R&D costs for those years, or deduct remaining unamortized domestic R&D expenses from 2022 and 2023 while immediately expensing domestic R&D costs incurred in 2024.
Make it here
Connecticut’s expansion of the R&D tax credit significantly affects both established and emerging biotechnology companies in the state.
The change is relatively straightforward. For qualified biotechnology companies eligible to exchange R&D tax credits because of current-year losses, the exchange rate will increase from 65% to 90% of the credit’s value.
Companies that do not qualify for the cash exchange may continue to use the credits to offset Connecticut corporation business taxes.
This is especially key for emerging companies that don’t have revenue, profits or income and are surviving from fundraising round to fundraising round.
This tax credit reimburses cash flow to offset some of the expenses that companies are investing in R&D in Connecticut, thereby extending their runway.
Connecticut offers two types of research and development tax credits: an incremental credit of 20% and a non-incremental credit, generally equal to 6% of qualifying spending.
For example, if a business spent $50,000 on qualifying R&D in one year and $150,000 the next, the $100,000 increase would generate a $20,000 incremental credit, while the total spending would also produce a $3,000 non-incremental credit.
Under state law, only 33% of the non-incremental credit may be exchanged for cash. Based on that structure, a qualified biotechnology company eligible for the cash refund could exchange $21,000 in R&D tax credits for a direct cash payment of $18,900.
Direct cost identification and proper documentation are critical to accurately claiming and defending an R&D tax credit.