OLR Bill Analysis

sSB 669

AN ACT CLARIFYING POLICIES REGARDING THE EXPENDITURES ELIGIBLE FOR THE RESEARCH AND DEVELOPMENT TAX CREDIT AND THE SALES TAXATION OF MANUFACTURING MACHINERY AND EQUIPMENT.

SUMMARY:

This bill narrows the types of research and development (R&D) expenses, and reduces the amount of contract research expenses, for which a company can claim either of the state's two R&D corporation tax credits. Under the bill, a company may claim only those expenses that are eligible for a federal R&D tax credit. Under current law, a company can claim a state credit for any research and experimentation expenses that federal tax law allows it to deduct on its federal return.

On the other hand, the bill increases the rates for both state R&D tax credits by 50%. It increases the incremental R&D credit from 20% to 30% of a company's annual increases in R&D spending. It increases the non-incremental (“rolling”) R&D credit, which varies depending on the amount of R&D spending in Connecticut and the company's size, from a range of 1% to 6% of eligible R&D spending to 1. 5% to 9% of that spending.

The bill applies to R&D tax credits for eligible R&D expenses that companies make in income years starting on or after January 1, 2006.

The bill also establishes a 16-member task force to study tax relief for manufacturers and report to the Finance, Revenue and Bonding and Commerce committees by January 1, 2007.

EFFECTIVE DATE: The R&D credit changes are effective July 1, 2006 and apply to income years starting on or after January 1, 2006. The task force provision takes effect on passage.

§§ 1 & 2 - R & D TAX CREDITS

R&D Expense Limit

Current law allows a company to claim a state R&D tax credit for any R&D expenses federally deductible under § 174 of the Internal Revenue Code (IRC). The federal law and its accompanying regulations allow a company to deduct any reasonable R&D expense it incurs in connection with its trade or business. The costs must be for R&D “in the experimental or laboratory sense” and generally include all costs “incident to the development or improvement of a product,” such as attorneys' fees spent to obtain a patent (Treas. Reg. § 1. 174-2(a)).

The bill limits the expenses eligible for a state R&D credit by tying them to the expenses for which the company can receive a federal R&D credit under IRC § 41. That law limits eligible expenses to the following:

Among the types of expenses currently eligible for a state R&D credit that the bill would exclude are:

Under both current law and the bill, to be eligible for a state R&D credit, expenses must occur in Connecticut.

R&D Credit Increase

The state has two R&D credits, incremental and non-incremental. The bill increases the credit percentages for both by 50%.

The incremental R&D credit provides a credit equal to a percentage of a company's increase in direct expenses for R&D conducted in Connecticut over its previous year's expenses. The bill raises the credit from 20% to 30% of the annual increase.

The non-incremental (“rolling”) R&D credit provides a tax credit equal to a percentage of R&D spending in Connecticut. The percentage varies according the amount of R&D spending or, in certain cases, company size and number of employees. The bill increases the credit range from 1%-6% to 1. 5%-9% (see Table 1).

TABLE 1: CURRENT AND PROPOSED NON-INCREMENTAL R&D CREDITS

§ 3 – MANUFACTURERS' TAX RELIEF TASK FORCE

The bill establishes a 16-member task force to study tax relief for manufacturers. The task force must:

The task force members are the (1) Finance, Revenue and Bonding and Commerce Committee chairmen; (2) the revenue services and economic and community development commissioners or their designees; and (3) 10 members representing various groups appointed by the governor and legislative leaders (see Table 2).

TABLE 2: MANUFACTURING TAX RELIEF TASK FORCE APPOINTEES

Any task force member who is appointed by a legislative leader may be a legislator. Appointing authorities must make their appointments within 30 days after the bill's passage. Vacancies are filled by appointing authorities. The House speaker and the Senate president pro tempore select the task force chairmen from among the members. The chairmen must schedule the first meeting within 60 days after the bill's passage.

The task force must report to the Finance, Revenue and Bonding and Commerce committees by January 1, 2007. It goes out of existence on that date or the date it delivers its report, whichever is later. The Finance, Revenue and Bonding Committee staff serves as the task force staff.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute