Connecticut Just Changed the Rules on R&E Deductions and Bonus Depreciation

Connecticut recently enacted two significant changes to its corporation business tax that may affect how businesses compute their state tax liability and, in some cases, may create additional tax obligations for prior years. These changes were enacted as part of Public Act No. 26-68, §§ 265–266 and are effective as of May 26, 2026.

The legislation responds to federal tax changes made by the One Big Beautiful Bill Act (OBBBA), Pub. L. No. 119-21, which restored immediate expensing for domestic research and experimental (R&E) expenditures and introduced a new 100% bonus depreciation deduction for qualified production property. Connecticut has chosen not to follow the federal approach in several key respects.

Importantly, the legislation includes a limited window for affected taxpayers to pay any additional tax due without incurring interest or penalties.

Decoupling from Bonus Depreciation for Qualified Production Property

Effective for income years beginning on or after January 1, 2026, Connecticut decouples from the new federal bonus depreciation deduction for qualified production property under IRC § 168(n).

This means taxpayers subject to the Connecticut corporation business tax must add back any federal deduction claimed under § 168(n) when computing Connecticut net income. This is consistent with Connecticut’s existing add-back requirement for federal bonus depreciation claimed under IRC § 168(k). 

Delayed Conformity to Federal R&E Expenditure Changes

The OBBBA enacted new IRC § 174A, which permits taxpayers to immediately deduct domestic R&E expenditures in the year paid or incurred, generally effective for taxable years beginning after December 31, 2024. The OBBBA also includes transition rules allowing taxpayers to deduct previously capitalized domestic R&E costs from the 2022–2024 period, and a separate retroactive election that permits eligible small businesses to apply immediate expensing to taxable years beginning after December 31, 2021.

Connecticut does not adopt any of these changes for the 2022 through 2025 income years. Instead, Connecticut conforms to IRC § 174 as it existed on July 3, 2025, which is the TCJA-era version that requires taxpayers to capitalize and amortize domestic R&E expenditures over a five-year period. Connecticut also specifically disallows the retroactive small business election under Section 70302(f) of the OBBBA. Beginning with the 2026 income year, Connecticut conforms to § 174A and permits immediate deduction. 

In practical terms, a taxpayer that amended its federal returns to claim immediate R&E deductions for 2022 through 2025 must still capitalize and amortize those expenditures for Connecticut purposes and should maintain separate Connecticut amortization schedules for each affected year.

Relief from Interest and Penalties

The legislation provides two forms of transitional relief:

• Bonus depreciation: For income years beginning on or after January 1, 2026, taxpayers will not be subject to interest on estimated tax underpayments attributable to the new § 168(n) add-back, provided the underpayment arose before the legislation’s enactment.
• R&E expenditures: The legislation authorizes the Commissioner of Revenue Services to waive penalties and interest on any additional tax attributable to Connecticut’s treatment of R&E expenditures for the 2022 through 2025 income years, provided the additional tax is paid by November 15, 2026 or the due date of the return on which the additional tax is reported, whichever is applicable, regardless of extension.

What Should Businesses Do Now?

• Review Connecticut tax positions for the 2022 through 2025 income years to determine whether any immediate R&E deductions were claimed that Connecticut requires to be amortized.
• Calculate any resulting additional Connecticut tax liability promptly so that payment can be made by the applicable deadline and available relief from penalties and interest can be preserved.
• Revisit 2026 estimated tax calculations to reflect the required add-back for any bonus depreciation claimed under IRC § 168(n).
• Maintain separate records and amortization schedules for Connecticut purposes, as Connecticut’s treatment now differs from federal law in several respects.
• Carefully evaluate the Connecticut consequences before making or relying on any retroactive federal R&E election for the 2022 through 2025 income years.