DRS: Research and Development (Nonincremental) Expenses 01JAN2014

Research and Development (Nonincremental) Expenses Tax Credit

Conn. Gen. Stat. §12-217n


Description and Applicable Taxes

A tax credit may be applied against the tax imposed under Chapter 208 of the Connecticut General Statutes for research and development expenses incurred in Connecticut.




Qualified small business means a company that has gross income for the previous income year that does not exceed $100 million and has not met the gross income test through transactions with a related person, as defined for purposes of the fixed capital investment credit.


Research and development expenses mean those expenses that may be deducted under IRC §174, as in effect on May 28, 1993, and basic research payments as defined under IRC §41, provided the expenditures and payments are:

  • Paid or incurred for the research and experimentation and basic research conducted in Connecticut; and
  • Not funded, as provided in IRC §41(d)(4)(H), by any grant, contract, or otherwise by a person or governmental entity other than the taxpayer unless the other person is included in a combined return with the person paying or incurring such expenses.

Research and development expenses may include but are not limited to:

  • Expenditures incurred in connection with the taxpayer’s trade or business represent research and development  costs in the experimental or laboratory sense;
  • All costs incident to the development or improvement of a product including any pilot, model, process, formula, invention, technique, patent, or similar property. The product can be used by the corporation in its trade or business or can be held for sale, lease, or license; or
  • Costs of obtaining a patent, such as attorneys’ fees expended in making and perfecting a patent application.

The following are examples of IRC §174 expenses that do not qualify:

  • Overhead and other expenses, such as general and administrative expenses, that relate to a corporation’s activities as a whole and do not contribute directly to the research and development effort; or
  •  The ordinary testing or inspection of materials or products for quality control, for efficiency surveys, management studies, consumer surveys, advertising or promotions, for research in connection with literary, historical, or similar projects, and the costs of acquiring another’s patent, model, production, or process.


Tax Credit Amount

A qualified small business is entitled to a tentative tax credit equal to 6% of its research and development expenses. All other companies calculate their tax credit as provided in the chart below:


Research and

Development Expenses

Tentative Tax

Credit Percentage

$50 million or less


More than $50 million
but not more than $100 million

$500,000 + 2%
over $50 million

More than $100 million
but not more than $200 million

$1,500,000 + 4%

over $100 million

More than $200 million

$5,500,000 + 6%

over $200 million


If it results in a greater tentative tax credit, companies headquartered in an Enterprise Zone, with revenues in excess of $3 billion, employing more than 2,500 employees, shall multiply their research and development expenses by 3.5% instead of using the tax credit percentage listed above.



Connecticut Wage Base Reduction

Taxpayers that pay or incur more than $200 million in research and development expenses in an income year must reduce their Research and Development tax credit if workforce reductions exceed certain percentages. To determine the extent of workforce reductions, the current Connecticut wage base is compared to a historic Connecticut wage base determined from the third full income year immediately preceding the current income year. The Connecticut wage base is calculated from the total wages assigned to Connecticut with exclusions for the ten most highly paid executives of the taxpayer.


The Research and Development tax credit must be reduced by the following percentages based on the extent of the workforce reduction from the historic wage base.


Workforce Wage Base
Reduction Percentage


Not more than 2%


More than 2% but not more than 3%


More than 3% but not more than 4%


More than 4% but not more than 5%


More than 5% but not more than 6%


More than 6%




How to Compute the Tax Credit

The allowable tax credit is the lesser of:

  • One-third of the amount of the tax credit allowable for any income year; or
  • The greater of:

1.   50% of the taxpayer’s tax liability, determined without regard to any tax credits allowed 
      by this tax credit; or

2.   The lesser of 200% of the tax credit otherwise allowed for the income year or 90% of 
      the taxpayer’s tax liability, determined without regard to this tax credit.

Any taxpayer also claiming a corporate business tax credit on Form CT-1120RC, Research and Expenses Tax Credit, must reduce the amount of research and development expenses that might otherwise be taken into account in computing the allowable credit by the amount of the incremental increase in research and experimental expenditures, as computed on Form CT-1120RC.


Calculate the tax credit by multiplying the amount spent on research and development conducted in Connecticut by the appropriate percentage. The calculation reported on Form CT-1120 RDC, Research and Development Credit, must be entered on Form CT-1120K, Business Tax Credit Summary.



Combined Return Filers

In the case of a taxpayer filing Form CT-1120CR, Combined Corporation Business Tax Return, all allowances and limitations will be made on an aggregate basis for all taxpayers included in the combined return, provided, the tax credit attributable to a qualified small business may be taken only against the combined tax liability attributable to the qualified small business. The amount of the combined tax for all corporations properly included in a combined corporation business tax return that is attributable to a qualified small business will be in the same ratio to the combined tax that the net income apportioned to Connecticut of the qualified small business bears to the net income in the aggregate of all corporations included in the combined return. For the purposes of computing this ratio, any net loss apportioned to Connecticut by a corporation included in the combined return will be disregarded.    



Carryforward and Carryback Limitations

Tax credits that are allowed but that exceed the limitation amounts may be carried forward to each successive income year until such credits are fully taken. All allowable tax credits from prior years must be carried forward and applied before the current year tax credit may be taken. No carryback is allowed.



How to Claim the Tax Credit

Complete Form CT-1120 RDC and attached it to Form CT-1120K. The following information should be attached to Form CT-1120 RDC.


  • A full and complete description of the nature of the research projects conducted by the company during the income year, and the location(s) where the research is conducted;
  • A full and complete description of the methods used to obtain the total expenditures and payments for research and experimentation and basic research conducted in Connecticut;
  • A detailed description of each source of information used to compute the tax credit, including the methods and calculations of expense allocation, if any; and
  • The job title and detailed description of each employee whose wage are included in the research expenses.

Exchange of Tax Credit for Refund

A qualified small business that cannot take this tax credit in a taxable year in which it could otherwise be taken, as a result of having no tax liability, may exchange the tax credit with the State of Connecticut for a tax credit refund equal to 65% of the value of the tax credit or may elect to carry the tax credit forward as indicated above.


For the purpose of exchanging tax credits, qualified small business means a company that has gross income for the previous year that does not exceed $70 million and has not met the gross income test through transactions with a “related person” as defined in the Fixed Capital Investment tax credit summary. Note that while the definition of qualified small business contains a $70 million gross income amount for tax credit exchange purposes, a $100 million gross income amount is used to determine whether a taxpayer meets the definition of a qualified small business for the purposes of determining the correct tax credit percentage.


A qualified small business may receive no more than $1,500,000 of tax credit refund for any one income year. A qualified small business that reports no net income and pays the minimum tax of $250 or the capital base tax under Conn. Gen. Stat. §12-219 is permitted to exchange this tax credit.


A qualified small business that wishes to exchange tax credits must complete Form CT-1120XCH, Application for Exchange of  Research and Development or Research and Experimental Expenditures Tax Credits by a Qualified Small Business, and submit it with its return for the income year on or before the original due date or, if applicable, the extended due date of the return. No application for refund of the tax credit may be made after the due date or extended due date of the return.



Where to Get Additional Information

Direct inquiries to:

Connecticut Department of Revenue Services

25 Sigourney St Ste 2

Hartford CT 06106

1-800-382-9463 (Connecticut calls outside the Greater Hartford calling area only), or

860-297-5962 (from anywhere)




Statutory and Regulatory References

Conn. Gen. Stat. §12-217n, as amended by 2013 Conn. Pub. Acts 232, §13; Conn. Gen. Stat.§12-217ee; IRC §§41 and 174. 


Last updated January 1, 2014