DRS: SN 93(21), Corporation Business Tax Credit for Research and Development Expenses

 

STATE OF CONNECTICUT
DEPARTMENT OF REVENUE SERVICES

450 Columbus Blvd
Hartford CT 06103

SN 93(21)

Corporation Business Tax Credit for Research and Development Expenses


PURPOSE: The purpose of this Special Notice is to explain two new corporation business tax credits for research and development expenses. Part I of this Special Notice explains the credit created by 1993 Conn. Pub. Acts 433. Part II explains the credit allowed under Conn. Gen. Stat. 12-217j.


STATUTORY AUTHORITY: 1993 Conn. Pub. Acts 433 and Conn. Gen. Stat. 12-217j, established by 1993 Conn. Pub. Acts 403.


EFFECTIVE DATE: Applicable to taxable years beginning on or after January 1, 1993.


PART I

NEW CREDIT FOR RESEARCH AND DEVELOPMENT EXPENSES: 1993 Conn. Pub. Acts 433 (hereinafter "the Act") creates a new corporation business tax credit for research and development expenses paid or incurred for income years beginning on or after January 1, 1993.

The credit is given for research or experimental expenditures deductible under 26 U.S.C. 174 (determined without regard to 26 U.S.C. 280C(c) and any federal elections to amortize such expenses that were otherwise deductible for federal purposes) and for basic research payments as defined under 26 U.S.C. 41 to the extent not deducted under 26 U.S.C. 174. (See subsection (b) of 1 of the Act.)

The credit applies only to those expenditures paid or incurred for such research and development conducted in Connecticut. (See subsection (b) of 1 of the Act.)

The credit does not apply to expenditures that are funded by any grant, contract, or otherwise by a person or governmental entity other than the taxpayer, unless such other person is included in a combined return with the person paying or incurring such expenses. (See subsection (b) of 1 of the Act.)

The credit does not apply to such research and development expenditures for which a credit is given under Conn. Gen. Stat. 12-217j or 12-217l. (See subsection (h) of 1 of the Act.)


Amount Of Credit Allowed: The amount allowed as a credit under the Act increases ratably from 1% of the annual research and development expenses paid or incurred, where such expenses equal $50 million or less, to 6% of the annual research and development expenses paid or incurred, where such expenses exceed $200 million. (See subsection (c) of 1 of the Act.)


Taking The Credit: Although the credit is allowed for income years beginning on or after January 1, 1993, the credit may not be taken until income years beginning on or after January 1, 1995. (See subsection (d) (1) of 1 of the Act.) Any credits allowed for income years beginning on or after January 1, 1995 may be taken in the income year in which they were paid or incurred, subject to these limitations:

  • No more than one-third of the amount of the credit allowed for any income year may be included in the amount of the credit that may be taken in that income year. (See subsection (d)(2) of 1 of the Act.)
  • The total amount of the credit that may be taken for any income year is limited to the greater of (a) 50% of the taxpayer's tax liability, determined without regard to any credits allowed by the Act, or (b) the lesser of 200% of the credit otherwise allowed for the income year and 90% of the taxpayer's tax liability, determined without regard to any credits allowed by the Act. (See subsection (d)(3) of 1 of the Act.)
  • Credits that are allowed but which exceed the amount that may be taken in an income year may be carried forward to each successive income year until such credits are fully taken. Credits must be taken in the order in which they were allowed. (See subsection (d)(4) of 1 of the Act.)

Special Rule For Taxpayers With Research and Development Expenses Over $200 Million: The Act provides that there shall be a reduction in the credit otherwise allowed for any taxpayer that pays or incurs research and development expenses in excess of $200 million for the income year if such taxpayer's net "workforce reductions", which are measured by its "historical Connecticut wage base", exceed 2%. The credit otherwise allowed for such taxpayers will be reduced by an amount ranging from 10% to 70% if such taxpayer's "historical Connecticut wage base" for the income year is reduced by more than 2% to 6%, respectively. No credit will be allowed where such taxpayer's "historical Connecticut wage base" is reduced by more than 6%. (See subsection (f) of 1 of the Act.)

The "historical Connecticut wage base" is the "Connecticut wage base" for the third full income year immediately preceding the current income year. However, the "historical Connecticut wage base" for the first three income years commencing or after January 1, 1993, shall be the "Connecticut wage base" for May 1993, converted to an annual basis.

The "Connecticut wage base" for any income year is the total wages assigned to Connecticut for such income year under Conn. Gen. Stat. 12-218, excluding wages paid to the taxpayer's ten most highly-compensated executives and any compensation on which the recipient is not subject to federal income tax in such year.

Excluded from the definition of "workforce reductions" are reductions in wages attributable to the transfer of work done by a taxpayer in this state to a party in this state or outside the United States, or to reductions in volume, productivity improvements or the discontinuance of operations due to obsolescence or the like.

The Connecticut wages attributable to any new jobs or jobs moved into Connecticut by the taxpayer during, or subsequent to, the income year, shall be an offset to any workforce reduction of a taxpayer for that income year.

Within sixty days of the close of each income year, any taxpayer subject to this rule must certify to the Commissioner of Economic Development whether or not there has been any workforce reduction for the income year just completed, the amount thereof, any offsets thereto.


Special Rule For Aerospace Companies: In addition to the "wage base" test set out in subsection (f) of 1 of the Act, "aerospace companies" are subject to a special rule for income years beginning on or after January 1, 1993 and before January 1, 1996. For those income years no credit for research and development expenses, as otherwise provided for by the Act, shall be allowed to any "aerospace company" whose net aggregate transfers of "historical economic base functions" outside this state since January 1, 1993 through the end of such income year, have "materially reduced" the historical economic base functions in this state. (See subsection (e) of 1 of the Act.)

An "aerospace company" is any taxpayer, whether or not included in a combined return, engaged principally in the aerospace industry and whose research and development expenses during each of the income years beginning on or after January 1, 1990, 1991, and 1992, respectively, exceeded $200 million.

"Historical economic base functions" means those economic base functions conducted by an aerospace company in Connecticut on January 1, 1993, whose continuance in this state, as determined by the Commissioner of Economic Development, will further the policies set forth in Conn. Gen. Stat. 32-221 (Declaration of Policy for the Economic Development and Manufacturing Assistance Act of 1990). Such historical economic base functions shall be set forth in a binding memorandum of understanding between each aerospace company and the Commissioner of Economic Development.

"Material reduction" means a reduction of more than 2% in the historical economic base functions conducted in this state. Excluded from the definition of "material reduction" are reductions of historical economic base functions in this state attributable to the transfer of an historical economic base function to a person in this state or outside the United States, or to reductions in volume, productivity improvements or the discontinuance of operations due to obsolescence or the like.

Any transfers that otherwise may be counted in determining whether a material reduction has occurred may be offset to the extent economic base functions listed in, or comparable to those listed in, the memorandum of understanding are increased in Connecticut.

Each aerospace company must obtain a certificate of eligibility from the Commissioner of Economic Development for any year to which subsection (e) of 1 of the Act applies. Within 60 days of the close of each income year to which this special rule applies, each aerospace company must certify to the Commissioner of Economic Development that for the income year just completed there has been no such net aggregate material reduction in the company's historical economic base functions conducted in this state.


PART II

CREDIT FOR INCREASING RESEARCH AND EXPERIMENTAL EXPENDITURES: Conn. Gen. Stat. 12-217j provides a corporation business tax credit for increasing research and experimental expenditures, as defined in 26 U.S.C. 174, for research and experiments conducted in Connecticut and for income years beginning on or after January 1, 1993, the amount of the credit is equal to 10% of the amount spent by the corporation directly on research and experimental expenditures which exceeds the amount it spent in the preceding income year for such expenditures. For income years beginning on or after January 1, 1994, the amount of the credit is equal to 20% of such excess. The expenditures for which a credit is given under Conn. Gen. Stat. 12-217j are not eligible for the credit given under 1 of 1993 Conn. Pub. Acts 433.


TAXPAYERS INCLUDED IN COMBINED RETURNS: Where one or more taxpayers properly included in a combined return pays or incurs research and development expenses, all allowances and limitations set out in the Act shall be made on an aggregate basis for all taxpayers included in such combined return. (See subsection (g) of 1 of the Act.) Accordingly, throughout this Special Notice all references to "taxpayer" and "aerospace company" are meant to refer, in the case of a combined return, to the combined group in which such taxpayer or aerospace company is included.


EFFECT ON OTHER DOCUMENTS: None.


EFFECT OF THIS DOCUMENT: A Special Notice is a document that announces a new policy or practice in response to changes in State or federal laws or regulations or to judicial decisions. A Special Notice indicates the Department's informal interpretation of Connecticut tax law and may be referred to for general guidance by taxpayers or tax practitioners.


PLEASE NOTE THE FOLLOWING NEW INFORMATION ABOUT DRS.

FOR FURTHER INFORMATION: To order forms and publications or for further information, call the Department of Revenue Services at 860-297-5962 (Hartford area or out-of-state) or 1-800-382-9463 (in-state). Forms and publications may be ordered through voice-mail 24-hours a day by choosing Option 3 on your touch tone telephone.

Electronic Delivery Options: You can also obtain tax forms and publications 24-hours a day from our Web home page at http://www.ct.gov/drs. Telecommunications Device for the Deaf (TDD/TT) users only call 860-297-4911 during business hours.


SN 93(21)
Corporation business tax
Issued: 8/27/93