For small businesses in Connecticut, one of the biggest takeaways from Gov. Ned Lamont’s State of the State address on Wednesday is a proposal to allow so-called “pass-through” entities to earn a R&D tax credit.
Allowing small businesses to access research and development tax credits is among the Lamont administration’s policy priorities for the 2026 legislative session, according to the Connecticut Business & Industry Association. Extending the credit to small businesses is a key element of CBIA’s 2026 Policy Solutions, which focus largely on small business needs.
Under current law, Connecticut offers a 1%-6% tax credit at the corporate level. This structure unintentionally strands thousands of pass-through entities such as LLCs, partnerships, and S-corporations. According to the CBIA, the governor’s proposal evens the playing field for small businesses by allowing pass-through entities to earn a credit equal to 6% of qualifying R&D expenditures, subject to approval by the state Department of Economic and Community Development.
Under the proposal, tax credits for pass-through entities will be capped at $25 million annually, with an additional $1 million per-entity limit.
Expanding the R&D tax credit to pass-through entities helps keep startups from relocating, encourages reinvestment, and strengthens the state’s innovation ecosystem, CBIA reported in a post-address analysis this week.
“For Connecticut’s business community, this is exactly the kind of smart, targeted policy that promotes growth for thousands of small businesses,” said CBIA Senior Policy Director Paul Amarone. “It rewards risk-taking, incentivizes research, and allows existing businesses in Connecticut to grow and expand.
“Lawmakers should seize this opportunity to modernize the R&D tax credit and reaffirm Connecticut’s commitment to small businesses.”
The governor’s proposal also recognizes the realities faced by early-stage startup companies.
Many businesses operate at a loss in their early years as they hire talent, develop intellectual property, and introduce their products to the market.
This is particularly critical for biotech startups and smaller advanced manufacturing businesses, where research costs are high, workforce development is a critical piece of growth, and modernization is required to compete in a quickly evolving economy.
Because the credit applies to pass-through entities, much of the revenue effect falls under the state’s volatility cap, limiting exposure to the General Fund.
Other Lamont budget measures
- Universal Preschool Endowment: The governor is proposing to move an additional 3% of revenue from the state pension paydown into the General Fund, and any surplus – estimated at $300 million per year – will be deposited in our brand-new Universal Preschool Endowment. The fund will be seeded by the fiscal 2025 surplus.
- Property tax credit: Lamont proposes an increase $50 to the $350 to the property tax credit. The credit was $200 five years ago.
- Aid to schools: Lamont’s budget would add $160 million to funding for schools, which means the state would have met the legislature’s 10-year timeline for education cost sharing increases two years ahead of schedule.
- Special education grants: The governor proposes $14 million in incentive grants for districts to provide the highest quality special ed programming in-district. The fiscal 2027 budget includes an additional $40 million to help subsidize support for those students.
- New schools: The capital budget includes $500 million for new schools.
- Housing: Lamont wants to continue the annual $400 million investment in housing – workforce, affordable, supportive, multi-family.
- Rail improvements: Funding for commuter train improvements are increasing to $1.2 billion in 2027, a three-fold increase from a few years ago.
