Key Takeaways
- Connecticut created a new tax credit of up to $1,000 per covered employee for qualifying small businesses offering an ICHRA through the state health insurance exchange.
- Owners of certain qualifying small businesses conducting R&D in Connecticut may be eligible for a new personal income tax credit based on eligible research and development expenses.
- Businesses interested in the new R&D credit need to understand the DECD voucher and documentation requirements before tax-return preparation.
- Connecticut has not followed all recent federal changes involving depreciation and research expenditures, so federal and state deductions may differ.
- Businesses planning significant purchases, expansion, or research expenditures should consider Connecticut tax treatment as part of the decision.
Connecticut enacted several tax changes in 2026 that could affect business owners, including new credits for certain employers and pass-through businesses and changes in how the state will treat some deductions available at the federal level.
Not every change will apply to every business. But if you provide employee health benefits, operate a partnership or S corporation that invests in research and development, or are planning significant business investments, there are a few new rules worth knowing about.
A New Credit for Small Businesses Offering ICHRAs
Health insurance can be a significant expense for small businesses, particularly those that may not have the size or buying power to make a traditional group plan practical. Some employers are turning instead to Individual Coverage Health Reimbursement Arrangements, or ICHRAs, which allow businesses to reimburse employees for some or all of the cost of individual health insurance rather than offering a traditional group plan.
Connecticut is now offering a tax incentive to certain small businesses that provide employees with an ICHRA through the state health insurance exchange. Beginning with the 2026 tax year, qualifying small businesses may be eligible for a state tax credit of. up to $1,000 per covered employee.
The credit is equal to the lesser of the employer’s qualified ICHRA contributions or $1,000 per covered employee and is available for the first two years the employer offers the arrangement. Connecticut has capped the program at $5 million in credits each year, with applications considered on a first-come, first-served basis. Businesses interested in the credit shouldn’t assume it will remain available indefinitely and should consider applying once they have determined that an ICHRA makes sense for their employees and their business.
A New R&D Credit for Owners of Qualifying Small Businesses
Connecticut has expanded access to research and development tax incentives by creating a new personal income tax credit for owners of certain qualifying small businesses that conduct R&D in the state.
For taxable years beginning on or after January 1, 2026, owners of qualifying small businesses with gross income of no more than $70 million may qualify for a credit based on 6% of eligible research and development expenses paid or incurred by the business during the year.
The maximum credit that may be reserved for a qualifying business is $1.5 million, and the state can reserve no more than $25 million in credits under the program for a taxable year. Businesses must obtain a tax-credit voucher through the Connecticut Department of Economic and Community Development to claim the credit.
Businesses that may qualify should identify potential R&D expenditures now and understand the DECD voucher and documentation requirements rather than waiting until tax-return preparation to determine whether the credit applies.
Connecticut and Federal Deductions Won’t Always Match
Recent federal tax changes expanded or changed deductions available for certain business investments and research expenditures. Connecticut hasn’t followed all of those changes in the same way or on the same timetable.
Connecticut modified its corporation business tax rules in response to federal changes involving depreciation and research and experimental expenditures. For depreciation, the state decoupled from the new federal deduction under Internal Revenue Code Section 168(n), which applies to certain qualified production property.
Connecticut also established different timing for its conformity with federal rules governing research and experimental expenditures. Among the changes, the state delayed conformity with the new federal Section 174A rules by one year and established specific treatment for research expenses from earlier tax years.
The result is that a business receiving a deduction for federal tax purposes should not automatically assume Connecticut will provide the same deduction in the same year. For a significant purchase, expansion, or research expenditure, the state treatment needs to be part of the calculation, too.
What Should You Do Now?
These changes don’t require every Connecticut business owner to take action. They do create new considerations for some of the decisions businesses are already making. If any of these provisions could apply to your business, the next step is to determine how the rules fit your specific situation before making assumptions based on the federal tax treatment or a headline about a new credit.
If you have questions about how Connecticut’s 2026 tax changes may affect your business, reach out to us. We can help you understand what applies and factor the tax implications into the decisions you’re already making.