Business Success

The House Ways and Means Committee has advanced a miscellaneous tax bill updating Vermont’s conformity with federal tax law and making several targeted changes to the state’s tax code.

While many provisions are technical, the decisions in this bill will influence how Vermont businesses calculate taxable income, deduct certain expenses, access tax incentives, and ultimately decide where to invest in research, development, and innovation.

Because Vermont does not automatically conform to federal tax law, the Legislature periodically reviews changes made by Congress and decides which provisions to adopt at the state level. Following the passage of H.R.1 last summer, lawmakers are now determining how those federal tax changes should apply within Vermont’s tax system — and where the state will take a different policy approach.

Why it matters: For businesses making investment decisions, these conformity updates can matter as much as changes to tax rates. The structure of deductions, credits, and cost recovery rules influences where companies choose to invest in equipment, research, and workforce expansion.

What This Means for Vermont Businesses

Federal conformity decisions shape how businesses calculate taxable income and how certain investments are treated under Vermont’s tax code.

Many provisions in this bill affect how companies recover the cost of investments such as equipment purchases, research and development, and financing. These rules influence how businesses plan capital investments, evaluate new projects, and forecast future tax liability.

Several federal provisions that expand deductions for operating expenses will flow through to Vermont, while lawmakers chose not to adopt certain federal tax preferences tied to investment income and international taxation.

For Vermont businesses, the practical result is straightforward: some federal tax changes will apply automatically to Vermont returns, while others will require separate state adjustments.

Research and Development Policy

Research and development policy is one of the most closely watched business provisions in the bill.

In recent years, federal tax rules changed how companies deduct research expenses, requiring many businesses to spread those deductions over five years rather than deducting them immediately.

Recent federal legislation restored immediate deductibility for smaller businesses. The House Ways and Means Committee advanced the following conformity choices:

• Small businesses, as defined under federal law (those with average annual receipts under roughly $31 million), will be able to fully deduct research expenses.
• Larger businesses will continue to amortize those expenses over five years for Vermont tax purposes.

Earlier concepts considered would have permanently disallowed the deduction of research expenses at the state level. That proposal raised significant concerns among innovation-driven employers.

The final structure reflects extensive collaboration among the House Ways and Means Committee, the Administration, tax professionals, and the Vermont Chamber of Commerce. Chair Kornheiser noted during the committee’s discussion the Vermont Chamber’s role in helping shape the R&D framework and bringing business expertise into the policy development process.

Major Expansion of Vermont’s R&D Tax Credit

The bill also significantly expands Vermont’s existing research and development tax credit.

Currently, Vermont’s credit equals 27 percent of the federal R&D credit for qualifying research conducted in the state.

The bill increases that rate to 75 percent of the federal credit and raises the annual statewide cap from $3 million to $5 million.

The takeaway: If enacted, this would represent one of the largest expansions of Vermont’s research incentive in recent years.

Other Federal Tax Changes Vermont Will Adopt

Several federal changes affecting business taxation will flow through to Vermont under the bill.

• More generous expensing of business equipment: Federal law increased the amount businesses can immediately expense for depreciable assets from $1 million to $2.5 million. Vermont will conform to this change, allowing businesses to recover equipment costs more quickly.
• Expanded business interest deductions: Federal law increased the allowable deduction for business interest from 30 percent to 50 percent of adjusted taxable income. Vermont will conform to this provision, allowing businesses with significant borrowing to deduct a larger share of interest expenses.
• Changes to controlled foreign corporation reporting rules: Federal adjustments to pro rata share rules will flow through to Vermont, affecting companies that hold interests in certain foreign corporations.
• Updates to corporate charitable deduction limits: Federal law changed how corporations calculate deductions for charitable contributions. Vermont will conform to those changes as well.
• Federal expansion of the Child and Dependent Care Tax Credit will also flow through to Vermont’s corresponding state credit.

Where Vermont Chose a Different Path

In several areas, the Committee chose not to adopt new federal tax preferences.

These include:

• Qualified Small Business Stock (QSBS): Federal law expanded the exclusion for capital gains on certain startup investments. Vermont will not conform to that change, meaning those gains remain taxable at the state level.
• Section 250 international income deductions: The bill decouples Vermont from federal deductions related to certain international income earned by multinational corporations. This provision represents one of the largest revenue components in the bill.
• Special depreciation for certain production facilities: Federal law created a new bonus depreciation provision for some manufacturing property. Vermont will not adopt that provision and will instead continue requiring the property to be depreciated over time.

The Bottom Line

Federal conformity bills often receive limited attention because many provisions are technical.

However, the choices made in these updates can significantly influence how Vermont businesses calculate taxable income and how the state structures economic incentives.

This year’s bill reflects a mix of policy decisions: adopting several federal changes that expand business deductions, declining to follow others that would reduce state revenue, and significantly expanding Vermont’s research and development tax credit.

The Vermont Chamber will continue working with policymakers to ensure Vermont’s tax system supports a competitive, predictable environment for the businesses that drive Vermont’s economy.

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.