R&D Tax Credits in Arizona
The Arizona R&D tax credit adopts the federal definition of research and development and qualifying research expenses, except qualified research expenditures (QREs) may include only research conducted in Arizona. The R&D project must follow the federal guidelines for being technology-oriented and while not mandatory, Arizona does expect to see a substantial amount of costs related to experimentation. Since much of the work done on a Federal return applies to the Arizona return, it makes sense to claim both credits.
Arizona R&D Credit Rates
- The allowable current year credit is a percentage of the excess of the Arizona QREs for the taxable year over the base amount and the Arizona basic research payments.
- From 2011 to 2017, the R&D Tax Credit is equal to 24% of the first $2.5 million in qualifying research expenses plus 15% of the qualifying expenses in excess of $2.5 million.
- For tax years 2018 and after, the credit rates will be 20% of the first $2.5 million in QREs plus 11% of the qualifying expenses in excess of $2.5 million.
- Any unused credit can be carried forward for 15 years.
Refundable Credit
- Beginning in 2010, an eligible business may be able to claim a partial refund of its current year excess credit amount.
- A qualified business that employs less than 150 full time employees can apply to the Arizona Commerce Authority for a partial refund of up to 75% of the excess credit amount.
- An additional credit of 10% is allowed for companies conducting R&D through Arizona universities.
- Up to $5 million in refund credits is allowed in any calendar year. Therefore, refunds are approved on a first-come, first-serve basis.
Timing Issues
- A business with a calendar year may file on or after the first business day following the close of the previous calendar year.
- A fiscal year taxpayer may file on or after the first business day after the end of the fiscal year.
- For example, a taxpayer with a June 30, 2014 fiscal year end could apply for a partial refund of R&D credits as early as July 2, 2014, if the cap has not been expended. If the cap has been reached, the fiscal year end taxpayer may file an application on or after the first business day of 2015, only if the taxpayer has NOT filed its tax return with revenue for the tax year in which the R&D credit was generated.
Case Study
A wine company in Arizona began an R&D project in 2013 that allowed them to claim a significant credit for the years in which qualified activities were conducted.
Summary of credits:
| FEDERAL | ARIZONA | ||||
| Year | Total QREs | Credit | Total QREs | Credit | |
| 2015 | $850,000 | $51,000 | $850,000 | $102,000 | |
| 2014 | $700,000 | $42,000 | $700,000 | $84,000 | |
| 2013 | $500,000 | $30,000 | $500,000 | $60,000 | |
| Total | $2,050,000 | $123,000 | $2,050,000 | $246,000 | |
Arizona R&D Credit Forms
Corporations and flow-through entities must use Form 308 while Individuals must use Form 308 – I to claim the arizona research credit. Both forms allow for one method of calculation, being the federal regular credit method as the Alternative Simplified Credit method is not available for the Arizona credit .
