Are R&D Tax Credits Available in Arizona?

Yes. The state of Arizona Research and Development (R&D) Tax Credit is a valuable benefit for companies developing new products and services. The Arizona R&D tax credit provides a tax credit for increasing qualifying research activities in the state of Arizona including research funded by taxpayers at state universities. Arizona has both refundable and nonrefundable credit. Arizona leverages the federal section 41 rules regarding the qualification of qualified research activities. The amount of the credit is based on the excess, if any, of the qualified research expenses and basic research payments for the taxable year over the base amount as defined in section 41(c) of the internal revenue code and is computed as follows:

  • If the excess is $2.5 million or less:
    • For taxable years beginning before December 31, 2030, the credit is equal to 24% of that amount.
    • For taxable years beginning from and after December 31, 2030, the credit is equal to 20% of that amount.
  • If the excess is over $2.5 million:
    • For taxable years beginning before December 31, 2030, the credit is equal to $600,000 plus 15% of any amount exceeding $2.5 million.
    • For taxable years beginning from and after December 31, 2030, the credit is equal to $500,000 plus 11% of any amount exceeding $2.5 million.
  • In order to qualify for the refundable portion of the tax credit, a company must qualify for the regular tax credit and employ less than 150 full-time employees.
  • The refundable amount is 75% of the allowable credit that exceeds the taxpayer's tax liability. The remainder of the excess credit amount is waived if the taxpayer elects a refund.
  • Arizona has capped the refundable amounts for all taxpayers to $5 million in any calendar year. The refunds will be allowed by the Arizona Commerce Authority on a first-come, first-served basis.
  • The amount of any additional credit for university-related research is not refundable and may be carried forward for the next 5 consecutive years.
  • For tax years beginning before 2022, unused credits can be carried forward for the next 15 consecutive years.
  • For tax years beginning after 2021, unused credits can be carried forward for the next 10 consecutive years.

What are the Potential Benefits of this Tax Credit?

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies)

Arizona R&D Tax Credit Case Study

A manufacturing company in Phoenix that creates cylinders for the extraction and storage of different coolants and chemicals qualified for a substantial credit. The company claims R&D credits each year for the development activities of its engineers. This project involved a multi-year study.

The Company qualified for the federal R&D Tax Credits of $255,000 and an additional $306,000 in Arizona state R&D Tax Credits. 

FEDERAL
ARIZONA
Year
Total QREs
Credit
Total QREs
Credit
2021
$750,000
$75,000
$750,000
$90,000
2020
$700,000
$70,000
$700,000
$84,000
2019
$650,000
$65,000
$650,000
$78,000
2018
$450,000
$45,000
$450,000
$54,000
Total $2,550,000 $255,000 $2,550,000 $306,000

You can read more about this Arizona case study here.