Connecticut Farmers: Put the New 20% Investment Tax Credit to Work

Back in July 2025, we provided some insights into the new 20% Investment Tax Credit (ITC) that Connecticut Farmers can take advantage of starting in 2026. Recently, the state put out some additional guidance on the credit. Today’s blog will review the overall credit and the additional guidance so that farmers can plan for the new changes.

Read Tax Credits for Connecticut Farmers

Those eligible for the credit are farmers who make at least two-thirds of their federal gross income from farming. There is also the ability to look at a three-year average for qualification embedded in the rules. Another law change, effective for income and taxable years commencing on or after 2027, changes the definition to include a taxpayer whose federal gross income from farming for the income or taxable year is at least two-thirds of excess federal gross income or not less than two hundred fifty thousand dollars.

Example:

John has $500,000 of farm income in 2026 and $500,000 of non-farm income, which has been consistent the last few years. He would not be considered an eligible farmer in 2026 because he does not have at least two-thirds of his income from farming. However, in 2027, because he has over $250,000 of farm income, he would be considered an eligible farmer.

The next logical question is what constitutes gross income from farming.

What is Farm Income?

Agricultural production includes engaging, as a trade or business, in

• The raising and harvesting of any agricultural or horticultural commodity,
• Dairy farming,
• Forestry,
• The raising, feeding, caring for, shearing, training or management of livestock, including horses, bees, poultry, fur-bearing animals or wildlife or
• The raising and harvesting of fish, oysters, clams, mussels or other molluscan shellfish,
• Wine from a farm winery licensed pursuant to section 30-16,
• Christmas trees, whether dug for transplanting or cut from the stump, or
• Apple juice and cider by a farmer who holds both an apple juice and cider manufacturing permit and a farmer tax exemption permit issued pursuant to section 12-412.

What Investment Qualifies?

Farm investment property is defined as machinery and equipment, as well as building and structural components of buildings that:

• Are acquired, constructed, reconstructed or erected and placed in service on or after January 1, 2026,
• Are located in Connecticut,
• Have a class life of more than four years,
• Is not acquired from a related party,
• Is not acquired to be leased, and is not leased during the 12 full months following the asset’s placement in service, and
• Held and used in Connecticut in the ordinary course of agricultural production for not less than five years following the date of acquisition.

Guidance from the state will construe the meaning of equipment to mean “any device separate from machine that is essential to agricultural production.” With regard to buildings, they must have a nexus to farming or agricultural production. A non-exhaustive list from the states indicates that this will likely include:

• Farmhouses
• Livestock barns and shelters
• Silos
• Buildings for machinery, supplies and crop storage

Example:

Going back to John above, if he has $100,000 of farm investment property and qualifies as an eligible farmer, then he will receive a $20,000 refundable ITC from the state when he files his personal income tax return. If he owes $3,000 in state tax, he will use the first $3,000 to offset that tax and be refunded $17,000.

John should also be aware of a few things. First, he cannot “double dip” and claim any other credit on the property in which he is claiming the ITC. Second, if he doesn’t use it for five years, he will have to “recapture,” i.e. pay some of the credit back to the state in most cases.

Finally, the excess $17,000 refund will be included in his federal gross income in the year he receives the money. For example, if John received the $17,000 for tax year 2026, when he files and receives the money in 2027 then he will have $17,000 of gross income to report in 2027.

Tax Planning Begins Now

It is important to begin tax planning early this year in Connecticut by fully optimizing the planning around ITC. This is true not only of the capital expenditures being considered, but also from a governance standpoint. As shareholders and partners receive additional refunds generated from the business, it is important for them all to be on the same page as to what to do with those refunds. Will those refunds be treated as personal benefits to LLC members? Will they be placed back into the business for working capital? The best financial and governance planning begins with discussions today.