Posted by Jeffrey Feingold on 08.03.23
Arizona offers a variety of tax credits, including R&D tax credits, to businesses and organizations that are looking to maximize their savings. R&D tax credits are available for research and development activities, and they provide businesses in Arizona with a powerful incentive to invest in new products, processes, and technologies. By understanding how these tax credits work, businesses in Arizona can significantly reduce their taxes and better leverage their investments in research and development.
What are Research and Development Tax Credits?
Research and Development Tax Credits are a type of incentive program designed to encourage businesses to invest in research and development activities. Under Internal Revenue Code section 41, the R&D Tax Credit program is a general business tax credit that allows eligible businesses to offset some of their federal tax liability.
In Arizona, there are two types of R&D tax credits: refundable and non-refundable. The refundable portion allows businesses to receive a cash refund for any excess credits, while the non-refundable portion can only be used to offset tax liability. Additionally, businesses can earn an additional non-refundable credit by making basic research payments to Northern Arizona University, the University of Arizona, or Arizona State University. To qualify for the refundable portion of the tax credit, businesses must have qualifying research activities and expenses. These activities can fall under four broad categories: applied research, basic research, experimental development, and computer software development. Qualified research expenses that contribute to these categories include wages, supplies, and contract research expenses. By engaging in eligible research and development activities, businesses can not only benefit from federal tax credits but also from state tax credits specific to Arizona.
How do Arizona's R&D Tax Credits work?
Research and development tax credits in Arizona are divided into two categories: refundable and non-refundable. The non-refundable credits are designed to reduce tax bills and do not provide cash refunds. These credits are managed by the Arizona Department of Revenue and are calculated based on specific formulas. Until December 31, 2030, corporations can receive a state tax credit of 24% for the first $2.5 million of expenses and 15% for expenses exceeding $2.5 million. After December 31, 2030, the state tax credit for corporations decreases to 20% for the first $2.5 million and 11% for expenses exceeding this amount. Businesses also have the opportunity to earn additional non-refundable credit by making basic research payments to select universities. Specifically, Northern Arizona University, the University of Arizona, and Arizona State University offer a 10% credit on these payments.
On the other hand, refundable tax credits are provided in the form of a refund and are managed by the Arizona Commerce Authority (ACA). To qualify for the refundable portion of the tax credit, companies must first qualify for the non-refundable tax credit and employ fewer than 150 full-time employees. Applications for refundable credits must be submitted on the first business day of the year, and eligible companies can receive up to $100,000. However, it's important to note that the pool for refundable tax credits is capped at $5 million each year. In the 2022 tax year, there was high demand for the credit, with taxpayers requesting $6,759,095 in refund applications. While not all applicants received the full amount they requested, a majority did receive the credit they applied for.
Eligibility requirements for Arizona's R&D Tax Credits
To qualify for Arizona's R&D Tax Credits, your business must meet certain eligibility requirements. These requirements typically include:
1. Conducting qualified research: Your business must engage in activities that involve technological advancements and aim to create new or improved products, processes, or software. This research must be conducted within Arizona.
2. Incurring qualified expenses: To be eligible for the tax credit, your business must incur qualified research expenses (QREs). These expenses can include wages paid to employees directly involved in R&D, supplies, and contracted research services.
3. Documentation: It is crucial to maintain detailed documentation of your R&D activities and expenses. This documentation should include project records, employee time sheets, research logs, and invoices.
4. Timely filing: Arizona's R&D Tax Credits must be claimed within 36 months after the end of the taxable year in which the expenses were incurred.
It is important to note that each business's eligibility may vary based on their specific circumstances. Consulting with a tax professional or a R&D tax credit specialist like Tax Point Advisors can help ensure that you meet all the necessary requirements and maximize your potential savings.
By understanding and meeting these eligibility requirements for Arizona's R&D Tax Credits, your business can take full advantage of the incentives and potentially reduce its tax liability while investing in innovation and growth.
Tips for maximizing your savings with Arizona's R&D Tax Credits
1. Keep detailed records: It's crucial to maintain accurate and comprehensive records of all your research and development activities. This includes documenting expenses, employee hours, and project details. The more evidence you have, the easier it will be to demonstrate your eligibility for the tax credits.
2. Consult with a tax professional: To ensure you are taking full advantage of the available credits, it's recommended to consult with a tax professional who specializes in R&D tax credits. They can help navigate the complex regulations and identify all eligible expenses that can be claimed.
3. Identify eligible activities: Understand the specific activities that qualify for the R&D tax credits. This includes activities such as product development, software development, process improvement, and prototype testing. By identifying these activities, you can ensure that you are accurately tracking and documenting the associated expenses.
4. Maximize startup benefits: If you are a startup with fewer than 150 full-time employees, you may be eligible for a partial refund from the Arizona Commerce Authority. Take advantage of this opportunity to recoup a significant portion of your research and development expenses.
5. Explore additional credits: In addition to the R&D tax credits, Arizona also offers 'basic research' credits for payments made to universities and research organizations. Keep track of these payments and ensure they exceed the base period amount to maximize your overall tax savings.
By following these tips, businesses in Arizona can maximize their savings with R&D tax credits and fuel further innovation and growth. Remember, staying organized, consulting with professionals like Tax Point Advisors, and taking advantage of all available benefits will help you make the most of these valuable tax credits.
Find Out if Your Activities Qualify
Taking advantage of Arizona's R&D Tax Credits can lead to substantial financial benefits for your business.
Request a free assessment to determine qualifying R&D tax credit eligibility.
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.
