Posted by William Mehi on 08.12.20
Like the federal government, the state of Arizona provides a generous research and development (R&D) tax credit as an incentive to those who conduct R&D activities within the state. In Arizona, the R&D incentive provides an income tax credit for increased R&D activity within the state. Companies may also be eligible for a “basic research” credit if their payments made in cash to a qualified university or scientific research organization for research conducted in Arizona exceed a base period amount.
Arizona offers both refundable and nonrefundable credits for eligible businesses. As with other states’ R&D programs, as well as the federal R&D tax credit, the goal is to encourage Arizona businesses to invest in R&D activities. Under current Arizona law, taxpayers with expenses that do not exceed $2.5 million are eligible to generate a 24% credit over the calculated base amount. For companies whose eligible expenses exceed $2.5 million, the allowable credit amount is $600,000 plus 15% of the amount of expenses over $2.5 million, which is subject to certain limitation.
The state of Arizona makes R&D tax credits available to individuals and businesses that conduct research activities within the state. The state follows the federal guidelines for calculating wages, supplies, and contractors. Similar, the base period is aggregated in much the same way as federal, however only sales within the state of Arizona are utilized.
Administered exclusively by the Arizona Department of Revenue using Arizona Form 308 or 308-1, the state’s R&D program was originated in 1992 for corporations and in 1999 for individuals.
In 2010, legislation was enacted to provide a partial refund of the R&D tax credit. This R&D refundable tax credit program is administered by the Arizona Commerce Authority (ACA). The legislation makes it possible for a qualifying company to be eligible to claim a partial refund of its current year excess R&D credit. A qualified company that employs fewer than 150 full-time employees can apply to the ACA for a partial refund of up to 75% of the excess credit amount. Any unused credits may be carried forward for 15 consecutive years.
During the 2011 legislative session, the nonrefundable R&D program was further enhanced with an additional credit amount if the taxpayer made basic research payments during the tax year to a university under the jurisdiction of the Arizona Board of Regents, which include Arizona State University, Northern Arizona State University and the University of Arizona.
This additional credit amount is equal to 10% of the basic research payments that constitute excess expenses for the tax year over the base amount. This increased credit, which is capped at $10 million for one calendar year, is administered by the Arizona Department of Revenue. Any taxpayer applying for the university R&D tax credits must first apply for a certification of research payments from the ACA for tax years beginning from and after Dec. 21, 2010.
Taxpayers must submit an application to the ACA following the end of the taxpayer’s tax year. Applications for prior taxable years will be considered if there is still available credit under the credit “cap” for that calendar year.
The R&D tax credit can be a lucrative incentive for innovative businesses in Arizona. Plus, given the new permanent nature of the federal tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, call us at 800-260-4138 or please leave us a message below.