Connecticut Considers Extending R&D Tax Credit to Pass-Through Entities: A Major Shift for Small Businesses

A significant legislative change is on the horizon for Connecticut’s small businesses. The state’s Commerce Committee is currently considering House Bill 7008. If passed, the bill would extend the state’s research and development (R&D) tax credit to pass-through entities such as Partnerships and S-Corporations. This marks a significant expansion of the existing tax credit, which is currently only available to C-Corporations.

Why This Matters

For years, the R&D tax credit has been a vital tool for fostering innovation and economic growth. However, its availability has been restricted to larger corporations, leaving many smaller businesses unable to access these benefits. This bill seeks to level the playing field, allowing smaller manufacturers and technology firms—many of which operate as pass-through entities—to claim a 6% credit against the state income tax for qualifying R&D expenditures starting January 1, 2026 (Hartford Business, 2025).

This expansion is particularly relevant for clients and CPA contacts in Massachusetts and Connecticut, where cross-border business activity is common. The ability to access this credit could provide a boost for businesses that have historically been at a disadvantage compared to their C-Corporation counterparts.

Industry Support and Implications

Industry leaders and advocacy groups are already voicing strong support for the bill. Jim Gildea, President of ManufactureCT, emphasizes that this tax credit would be critical for smaller manufacturers, who often struggle to allocate resources for R&D. A recent survey identified R&D investment as one of the most pressing concerns for manufacturers, reinforcing the importance of this bill.

Similarly, Paul Amarone of the Connecticut Business & Industry Association (CBIA) argues that small businesses, particularly those with fewer than 100 employees, regularly invest in innovation but currently lack access to the same financial incentives as larger corporations. Expanding the R&D credit to these businesses could stimulate innovation, encourage technological advancements, and drive economic growth in the state (CBIA, 2025).

Potential Roadblocks

Despite widespread industry support, the bill faces potential hurdles. Daniel O’Keefe, Commissioner of the State Department of Economic and Community Development (DECD), has expressed reservations about creating a new tax credit program. Instead, he has urged lawmakers to back Governor Ned Lamont’s budget proposal, which focuses on making the existing R&D credit for biotechnology firms refundable at 90% of its value (CT Insider, 2025).

A similar proposal to extend the R&D tax credit to pass-through entities was introduced during the 2024 legislative session. The proposal ultimately failed to advance past the Finance, Revenue, and Bonding Committee. The outcome of this latest effort remains uncertain, but the momentum behind the initiative suggests that it could gain traction in the coming months (CBIA, 2025).

What’s Next?

The Commerce Committee is scheduled to conduct a public hearing on the bill on Thursday at 11 a.m. ET in Room 1E of the Legislative Office Building. Businesses, industry groups, and other stakeholders will have the opportunity to voice their support or concerns about the proposed expansion (Hartford Business, 2025).

EPSA USA will continue monitoring this development closely, particularly given its potential impact on our clients and CPA partners in Massachusetts and Connecticut. If passed, this bill could represent a major opportunity for small businesses to invest in innovation and remain competitive in an evolving marketplace.

Stay tuned for further updates on this critical legislation and how it could shape the future of R&D incentives in the region.

Sources referenced in the article:

1.        Hartford Business Journal: “CT Commerce Committee considers R&D tax credit for pass-through entities.”

2.        Connecticut Business & Industry Association (CBIA): “Tax Credit Expansion Could Spur Economic Growth.”

3.        CT Insider: “Lamont floats $1.8 million in new tax credits for CT bioscience startups as part of his new budget.”

4.        CBIA: “Committee Raises R&D Tax Credit Bill.”