Day: February 27, 2026

The House Ways and Means Committee is considering changes to how Vermont defines taxable income for businesses that invest in research and development. Vermont companies spend millions of dollars each year on R&D across advanced manufacturing, software, biotechnology, and applied research. The tax treatment of those investments directly influences capital allocation, hiring decisions, and long-term competitiveness.

The proposal contains two interdependent components that must be evaluated together. In combination, these changes could materially shape Vermont’s innovation climate, affecting how growth-stage and capital-intensive firms evaluate future investment in the state.

What the Bill Does

The draft legislation makes two significant changes.

First, it adds back federal Section 174 deductions for research and experimental expenses. That means Vermont would not allow businesses to deduct their R&D expenses when calculating state taxable income.

Unlike other areas of the tax code, such as bonus depreciation, the draft does not restore those expenses through state level amortization. As written, R&D costs would not be deductible for Vermont tax purposes.

Second, the bill increases Vermont’s R&D tax credit from 27 percent to 75 percent of the federal R&D credit. That is a substantial increase and would make Vermont’s credit one of the most generous in the country.

These two provisions must be understood together.

What This Means in Practice

There are two primary ways states can treat R&D spending.

One approach is deductibility. Businesses subtract their R&D expenses from taxable income, just like wages, rent, or other operating costs.

Another approach is relying more heavily on tax credits, which apply only to businesses that calculate and qualify for the federal R&D credit and have sufficient tax liability to use it.

Under the existing draft, Vermont would move away from deductibility and rely more heavily on the expanded credit.

For Businesses That Claim the Federal R&D Credit

Businesses that calculate and claim the federal R&D credit would see a larger Vermont credit under the proposed 75 percent rate.

However, because the deduction would no longer be allowed, the total state tax benefit may be smaller than under a system that includes both deductibility and a credit. The outcome depends on each firm’s cost structure and federal credit calculation.

For Businesses That Incur R&D Expenses but Do Not Claim the Credit

Not all businesses that invest in R&D claim the federal credit. Some may not meet the qualification thresholds. Others may not calculate it due to complexity or cost.

Under the draft language, those businesses would lose deductibility of R&D expenses and would not receive the benefit of the credit increase. For those firms, the proposal would result in higher Vermont taxable income.

For Early Stage and Growing Firms

Firms in a loss position or early growth stage often rely on deductions to build net operating losses that can offset future income.

If R&D expenses are permanently disallowed for Vermont purposes, those costs would not be recoverable at the state level, which may affect long term planning and investment decisions.

Timing Versus Permanence

A key distinction in this debate is whether Vermont intends to delay deductibility or eliminate it.

If Vermont required R&D expenses to be amortized over several years, businesses would still recover their costs over time. That is a timing adjustment.

Under the existing draft, there is no amortization restoration. As written, the policy would permanently disallow deduction of R&D expenses at the state level.

That structural difference has meaningful economic implications.

Where the Opportunity and the Risk Sit

The increase to a 75 percent R&D credit is significant. If structured correctly, it could position Vermont as a strong competitor for innovation-based investment.

The risk lies in how the deduction and credit interact. If the credit expansion is paired with preserved cost recovery, the proposal could strengthen Vermont’s competitiveness while maintaining revenue balance. If deductibility is permanently removed, the policy becomes more uneven. Some firms would benefit from the higher credit. Others would see a durable increase in state taxable income.

The Bottom Line

This proposal is not simply about increasing a tax credit. It is about how Vermont defines taxable income for businesses that invest in research and development. Understanding whether the policy preserves deductibility or permanently eliminates it is essential to evaluating its impact.

The Vermont Chamber will continue to work with lawmakers to ensure that tax policy advances affordability, predictability, and long-term competitiveness while avoiding unintended consequences for the businesses that power Vermont’s economy.