If your Vermont business spends money figuring out how to make something work — a better filter coating, a more efficient assembly line, a new formulation that survives shipping without cracking — the state just decided that work is worth nearly three times as much to you at tax time.
On June 18, 2026, Governor Phil Scott signed Act 164 (H.933), a broad tax-administration bill that, buried among provisions on property taxes and education funding, contains one line that matters enormously to Vermont's small manufacturers and technology companies: starting with tax year 2027, the state's research and development tax credit jumps from 27% of the federal R&D credit to 75%. That's not a rounding-error adjustment — it's one of the largest single-state R&D credit increases in recent memory, and it puts Vermont among the most generous states in the country for this incentive.
If you've never claimed Vermont's R&D credit before because 27% didn't feel worth the paperwork, this is the moment to reconsider.
What Actually Changed
Vermont's R&D credit has always worked as a straightforward percentage of whatever federal R&D credit you claim under Internal Revenue Code Section 41, calculated on the portion of your research spending that happened inside Vermont. Before Act 164:
- Credit rate: 27% of the federal credit, apportioned to Vermont-based research expenditures
- Filing mechanism: Vermont Form BA-404, filed alongside your federal Form 6765 and your regular Vermont return (IN-111 for individuals, BI-471 for pass-through entities, CO-411 for corporations)
- Carryforward: Unused credit can be carried forward up to 10 years
Act 164 leaves the mechanics untouched — you'll still file the same forms and use the same federal computation as your starting point — but for tax year 2027 and beyond, the rate nearly triples to 75%. The state also raised the annual statewide cap on this bucket of economic-development tax credits from $3 million to $3.5 million, giving the Department of Taxes more room before credits get prorated among claimants.
To put the size of the jump in perspective with a simple example: a Vermont manufacturer that generated a $50,000 federal R&D credit previously received a $13,500 state credit (27%). Under the new rate, that same $50,000 federal credit produces a $37,500 state credit — an extra $24,000 that didn't exist under the old formula, for identical research spending.
Why This Is Specifically Aimed at Manufacturers
The legislative record and coverage from the Vermont Chamber of Commerce make clear the target audience: small manufacturers who compete nationally on product innovation but operate on thin margins that make a 27% credit feel like an afterthought. Vermont currently ranks around 25th nationally for R&D spending as a share of its economy — not a state anyone associates with a deep innovation-incentive tradition. Act 164 is a deliberate attempt to close that gap.
Chroma Technology, an employee-owned optical filter manufacturer in Bellows Falls, is the example state officials have pointed to publicly. The company makes precision optical glass filters used in telescopes, satellite imaging, and medical diagnostics — and during the pandemic, pivoted its filter-development work to produce components used in PCR COVID testing equipment worldwide. That's the profile lawmakers had in mind: a small, technically sophisticated manufacturer whose survival depends on continuously developing the "next product," in the words of Chroma's COO, Janette Bombardier.
If your business does anything that resembles that pattern — iterating on a manufacturing process, testing new materials or formulations, building custom tooling or automation, or developing proprietary software that controls physical production — you likely already generate qualifying research expenses under the federal four-part test (technological in nature, aimed at a permitted purpose, intended to eliminate technical uncertainty, and involving a process of experimentation). Act 164 just made capturing that spending on your Vermont return worth far more than it used to be.
The Companion Piece: How Vermont Now Treats R&D Expense Deductions
Act 164 didn't happen in isolation — it's Vermont's response to a federal shift that already reshaped the R&D tax landscape nationally. The One Big Beautiful Bill Act (OBBBA), signed in 2025, permanently restored full, immediate expensing for domestic research and experimental costs under new Section 174A, reversing the five-year amortization requirement that had forced businesses to capitalize R&D spending since 2022. That federal change also let small businesses — defined as those with average annual gross receipts under roughly $31 million — retroactively amend 2022–2024 returns to claim the deductions they'd been forced to spread out.
Vermont had to decide whether to conform to that federal treatment at the state level, and early drafts of this year's tax bill worried the business community: one version reportedly would have added back the federal Section 174A deduction entirely, meaning Vermont taxable income would stay artificially high even after the federal fix. After input from the House Ways and Means Committee, the Administration, and the Vermont Chamber of Commerce, the final bill settled on a middle path that mirrors the federal small-business threshold:
- Businesses under the ~$31 million average-receipts threshold (the same federal small-business definition used in OBBBA) can fully and immediately deduct Vermont research expenses, matching federal treatment
- Larger businesses must still amortize those research expenses over five years for Vermont tax purposes, even though they get immediate federal expensing
That $31 million line is doing double duty in Act 164 — it determines who gets immediate state-level expensing of R&D costs, and coverage suggests it's the same threshold framing the manufacturer-focused messaging around the credit increase. If your business is anywhere near that boundary, it's worth confirming with a tax professional which side of the line you land on for the 2027 tax year, since it affects both your deduction timing and how much the enhanced 75% credit is actually worth to you in present-value terms.
What to Do Before Tax Year 2027
Because the rate change doesn't take effect until tax year 2027, you have real runway to prepare — and preparation is exactly what determines whether you actually capture the benefit or leave it on the table.
1. Start tracking Vermont-sourced research expenses now, separately from other states. The Vermont credit only applies to qualified research expenditures physically incurred within Vermont — wages for employees doing qualified research in-state, supplies consumed in Vermont-based testing, and contract research performed in Vermont. If your research team or facilities span multiple states, you need a clean apportionment trail, not a year-end reconstruction project. This is where transparent, line-item bookkeeping pays for itself: if every payroll run, materials purchase, and contractor invoice tied to research work is coded to a distinct account (or tagged by location) as it happens, apportioning Vermont-specific expenditures on next year's BA-404 is a query, not an archaeology project.
2. Confirm your federal Form 6765 is airtight. Because Vermont's credit rides entirely on the federal computation, any weakness in your federal R&D credit documentation — the four-part test analysis, contemporaneous project records, time-tracking for research employees — flows straight through to your state credit exposure. A 75% state credit built on a shaky federal claim is still a shaky claim; get the federal documentation right first.
3. Model the swing before you file for 2027. Run the numbers on what your credit looks like at 27% versus 75% using your current-year research spending as a proxy. For many small manufacturers, that comparison alone is the business case for finally investing in a proper R&D credit study — a project that often gets shelved when the payoff looks marginal, but is a different conversation entirely at nearly triple the state benefit.
4. Watch the $3.5 million statewide cap. Because the credit basket is capped statewide (not per-company), a surge of Vermont businesses claiming the enhanced credit in the same year could, in theory, trigger proration if aggregate claims exceed $3.5 million. That's a scenario to monitor as tax year 2027 approaches, particularly if you're planning a large one-time research initiative and have flexibility on timing.
Keep Your Research Spending Organized From Day One
Capturing a credit like this depends entirely on being able to show, clearly and with a paper trail, exactly what you spent on research and where. Beancount.io provides plain-text accounting that makes it straightforward to tag and track research-related payroll, supplies, and contractor costs as they happen — giving you an auditable, version-controlled record instead of a scramble to reconstruct Vermont-specific R&D spending after the fact. Get started for free and see why developers and finance professionals are switching to plain-text accounting.