ADOR & Arizona R&D Tax Credit Analysis
AZ

ADOR R&D Tax Credit Report

Core Definition

The Arizona Department of Revenue (ADOR) administers the state's Research & Development tax credit, offering a tiered incentive of up to 24% on qualified expenses to spur local innovation. It ensures compliance with A.R.S. § 43-1168 while processing claims via Form 308, often in conjunction with the Arizona Commerce Authority.

This interactive report analyzes the structural relationship between the ADOR and the R&D credit. Unlike the federal credit which is purely non-refundable, Arizona offers a unique tiered structure and a partial refundability option for small businesses. The sections below allow you to explore the calculation logic, the refund caps, and the compliance requirements necessary to successfully claim this benefit.

Base Credit Rate
24%

On first $2.5M of QREs

Highest in Region
Excess Credit Rate
15%

On QREs over $2.5M

Tiered Structure
Max Refundability
75%

Of credit value (max refund $3.75M)

Requires <150 Employees

This report is for educational purposes regarding Arizona Department of Revenue R&D Credits. Values are estimates based on A.R.S. § 43-1168. Consult a qualified CPA for tax filing.

The Arizona Department of Revenue’s Central Role in the R&D Tax Credit: Compliance and Calculation Mandates

The Arizona Department of Revenue (ADOR) is the state authority responsible for the administration, compliance, and auditing of the non-refundable component of the Arizona Research and Development (R&D) Tax Credit program. This key role involves processing claims filed via Arizona Form 308 (or 308-I) and strictly enforcing the calculation methodology prescribed by A.R.S. § 43-1168.

This administrative jurisdiction ensures that all foundational R&D claims adhere to state-adapted federal standards, defining the prerequisites for both the general tax credit and the specialized refundable and university research programs.

Section 1: Executive Summary: The ADOR and Arizona R&D Credit Nexus

The Arizona R&D incentive program is legislatively intended to encourage Arizona businesses to maintain and increase their investment in research and development activities within the state.1 The program is structured into non-refundable and refundable components, leading to a crucial division of administrative duties.

ADOR’s primary mandate is the management of the non-refundable R&D tax credit.1 This credit is utilized solely to reduce a taxpayer’s Arizona income tax liability to zero; it does not result in a cash refund from ADOR.5 The importance of ADOR’s function cannot be overstated, as the technical qualification process executed under its guidance forms the essential prerequisite for accessing any other component of the state R&D ecosystem. The core compliance requirement, Form 308 (or 308-I), must accurately establish the validity of the qualified research expenses (QREs) and the base amount calculation. Any failure to comply with ADOR’s standards concerning the non-refundable credit invalidates the entire claim, including the potentially more lucrative refundable portion managed by the Arizona Commerce Authority (ACA).

The non-refundable credit has been in place for corporations since 1992 (A.R.S. § 43-1168) and for individuals since 1999 (A.R.S. § 43-1074.01).2 This long-standing statutory foundation dictates that ADOR’s focus is on technical adherence to Internal Revenue Code (IRC) § 41 standards, ensuring the state benefits from verifiable, sustained, and qualified R&D activity.

Section 2: Legal Foundations and Administrative Partition

2.1 The Dual Administration Model: ADOR vs. ACA Jurisdiction

The Arizona R&D tax credit program operates under a unique dual-administration model, requiring coordination between the state’s revenue department and its economic development agency.

ADOR’s Exclusive Mandate (Non-Refundable Credit)

The ADOR, often referred to simply as “Revenue” in state statute, retains exclusive oversight of the non-refundable credit portion of the program.1 This role encompasses the development of tax forms (Form 308 for corporate entities and Form 308-I for individuals) 7, providing instructional guidance, processing the claims, determining the carryover amounts, and conducting subsequent compliance audits. This credit is vital because, although non-refundable, it acts as a dollar-for-dollar reduction in Arizona income tax liability.5

ACA’s Certification Mandate (Refundable Component)

In contrast, the Arizona Commerce Authority (ACA) administers the partial refundable component of the program (A.R.S. § 41-1507).1 This highly beneficial component is generally restricted to smaller businesses—those employing fewer than 150 full-time employees worldwide.3 A qualifying company may apply to the ACA for approval of a refund of up to 75% of their current year’s excess credit amount.3 The ACA program is capped at a maximum refund of $100,000 per taxpayer annually and is subject to an aggregate calendar year cap, which has recently been increased from $5 million to $10 million.3

Filing Sequence and Compliance Implications

The interaction between the two agencies mandates a specific filing sequence. A taxpayer seeking the refundable component must first qualify for the non-refundable credit and then obtain a Certificate of Qualification from the ACA before filing their tax return with ADOR.10 This refundable amount, once certified by the ACA, is then reported on ADOR Form 308 (specifically on Line 41a of Part 7).13 This process confirms that the ADOR calculation standard is the mandatory first step for all claims, even those directed toward the ACA for refund approval.

Table 1: Arizona R&D Tax Credit Administrative Roles

Component Administering Authority Primary Function Statutory Reference
Non-Refundable Credit Arizona Department of Revenue (ADOR) Calculation review, compliance, tax return filing (Form 308/308-I), carryover management. A.R.S. § 43-1168 / § 43-1074.01
Refundable Component Arizona Commerce Authority (ACA) Qualification certification, approval of 75% excess credit refund (capped at $100k/taxpayer). A.R.S. § 41-1507
University R&D Credit Approval ADOR (Final Approval) & ACA (Certification) Approving the 10% additional credit amount and managing the $10M aggregate cap. A.R.S. § 43-1168(D)

2.2 Statutory Authority: A.R.S. § 43-1168 and the IRC § 41 Linkage

Arizona’s R&D tax credit statute, A.R.S. § 43-1168, explicitly links the state credit allowance to the federal framework established by IRC § 41.14 This foundational linkage means that the definitions for qualified research activities (QRAs) and qualified research expenses (QREs) are generally imported from the federal standards.7 This minimizes complexity regarding the technical definition of research but maximizes the administrative difficulty of complying with state-specific modifications.

The Arizona Nexus Requirement

The most critical state-specific adaptation is the strict nexus requirement: the term “qualified research” for the purpose of the Arizona tax credit means qualified research, as defined in IRC § 41, that is conducted in Arizona.7 This local research restriction is applied to QREs, requiring multi-state companies to implement advanced tracking mechanisms to isolate and allocate expenditures solely to activities performed within Arizona borders. ADOR requires that only expenses meeting this in-state nexus requirement are included in the Form 308 calculation.

Mandatory Calculation Method

Furthermore, ADOR explicitly mandates the calculation method used. Arizona law requires the credit amount to be based on the federal regular credit computation method.7 Taxpayers are expressly prohibited from using the federal alternative simplified credit (ASC) computation method.7 This requirement ensures consistency and adherence to the methodology based on historical research activity, though it imposes a higher administrative burden on taxpayers who must track historical Arizona gross receipts and QREs for the base period calculation.

Entity Eligibility and Pass-Through Rules

ADOR Form 308 is utilized by C corporations, S Corporations, exempt organizations with unrelated business taxable income (UBTI), and partnerships.7 In compliance with state law, partnerships must pass the credit through to their partners, who subsequently use Form 308-I. S Corporations have the option to claim the credit at the corporate level against income taxed by Arizona or to make an irrevocable election to pass the credit through to their shareholders.7

2.3 The Tiered Incentive Structure and Sunset Provisions

The value of the Arizona R&D credit is structured using a tiered system based on the magnitude of the taxpayer’s increase in research activities above the calculated base amount. This structure is intended to provide a greater proportional incentive for the initial investments.

Favorable Current Rates (Pre-2031)

For tax years beginning before December 31, 2030, the rate structure is highly favorable 4:

  1. 24% of the first $2.5 million of qualifying expenses (QREs plus Excess Basic Research Payments) that exceed the base amount.
  2. 15% of the qualifying expenses that exceed $2.5 million.2

For amounts exceeding $2.5 million, the statute confirms the calculation is equal to a fixed amount of $600,000 (24% of $2.5 million) plus 15% of the excess amount over the $2.5 million threshold.14

Future Rate Phase-Down (Post-2030)

Arizona law includes a scheduled rate reduction for future investments, necessitating long-term tax planning. For taxable years beginning from and after December 31, 2030, the rates decrease 4:

  1. 20% of the first $2.5 million of qualifying expenses over the base amount.
  2. 11% of the qualifying expenses that exceed $2.5 million.14

The fixed credit amount for the second tier drops to $500,000 (20% of $2.5 million) plus 11% of the amount exceeding the $2.5 million threshold.14 The impending reduction in 2031 creates a clear incentive for businesses to maximize qualified investments prior to the sunset date, as the differential in rates significantly impacts the potential credit value on substantial R&D spending.

Table 2: Non-Refundable Arizona R&D Credit Tiered Rate Structure (A.R.S. § 43-1168)

Taxable Year Start Date First $2.5 Million in Excess QREs QREs in Excess of $2.5 Million Corresponding Statutory Credit Calculation (Above $2.5M)
Before Dec 31, 2030 24% 15% $600,000 + 15% of the amount over $2.5M
From and After Dec 31, 2030 20% 11% $500,000 + 11% of the amount over $2.5M

Section 3: ADOR Guidance and the Mechanics of Form 308

3.1 Form 308 as Official Calculation Guidance

ADOR’s primary mechanism for enforcing R&D compliance is through the instructions and required calculation flow of Form 308 (for corporations and flow-through entities) and Form 308-I (for individual taxpayers).8 Taxpayers are required to complete and include the relevant Form 308 with their tax return.17

For flow-through entities, such as S Corporations and partnerships, the tax credit is calculated at the entity level, but the benefit must often be passed through to the owners.7 When a partnership passes the credit through to its partners, the entity must provide the partners with the necessary information on Form 308-P, which the partners then use to claim their proportionate share of the credit on their individual returns.7 This requirement adds administrative complexity in ensuring that the credit allocation aligns with the ownership structure and that partners receive the proper documentation to support their claim filed with ADOR.

3.2 Defining Arizona Qualified Research Expenses (QREs)

The calculation required on Form 308 mandates a granular breakdown of expenses paid or incurred during the tax year, strictly limiting them to research conducted in Arizona.7 The four key categories of QREs defined in the form instructions include:

  1. Wages for Qualified Services (Line 11): This includes salaries paid for employees engaged in qualified research, or those who directly supervise or directly support qualified research activities within Arizona.7 This tracking must exclude wages used in the calculation of the federal work opportunity credit.7
  2. Cost of Supplies (Line 12): This covers the cost of tangible property consumed in conducting qualified research in Arizona. Supplies explicitly exclude land, improvements to land, and property subject to depreciation allowance.7 It is necessary to distinguish these expenditures from items eligible for R&D sales tax exemptions, which have a separate and specific state definition for machinery and equipment.18
  3. Rent or Lease of Computers (Line 13): This category includes amounts paid to rent or lease the right to use computers directly in conducting qualified research in Arizona.7
  4. Contract Research Expenses (Line 14): This expense category covers amounts paid to third parties for performing qualified research on the taxpayer’s behalf in Arizona.7 The amount recognized is generally 65% of the total payment. However, the recognition percentage increases to 75% for amounts paid to a qualified research consortium.7 Prepaid contract research expenses are only considered paid in the year the research is actually performed.7

The rigorous requirement for identifying QREs that satisfy the Arizona nexus necessitates implementing comprehensive, defensible time and cost tracking systems. ADOR compliance review often focuses on the allocation of these expenses, particularly for wages and supplies that may cross state lines or involve both qualified and non-qualified activities.

Section 4: Computation Methodology: Base Amount and Credit Generation

The calculation of the non-refundable Arizona R&D credit relies entirely on the federal Regular Credit calculation structure, designed to reward increased research activity over a historical baseline. The fundamental goal of the computation is to identify the excess qualified research expenditures above a defined base amount.

4.1 Mandatory Calculation Method: Exclusion of Alternative Simplified Credit (ASC)

As stipulated in the statute and Form 308 instructions, Arizona tax law permits the use of only the federal Regular Credit method.7 This method requires the historical calculation of a fixed-base percentage. The prohibition of the federal Alternative Simplified Credit (ASC) means that Arizona taxpayers cannot rely on the simplified calculation based on prior-year QREs, reinforcing the requirement for detailed historical record-keeping of Arizona-specific receipts and QREs.

4.2 Step-by-Step Base Amount Calculation (Form 308, Lines 16-21)

The calculation of the base amount uses Arizona QREs and Arizona gross receipts from the four taxable years preceding the credit year. The steps are derived directly from Part 2 of ADOR Form 308 instructions 7:

  1. Total Arizona QREs (Line 15): The sum of all qualifying expenses calculated in the current taxable year (Lines 11 through 14).7
  2. Average Annual Arizona Gross Receipts (Line 16): The arithmetic average of Arizona gross receipts for the four taxable years immediately preceding the credit year.7 For new businesses operating for less than four preceding years, the total receipts for the applicable period are divided by the number of years. If it is the first year of business, this amount is zero.7
  3. Fixed-Base Percentage (Line 17): This percentage is computed using the same formulas as the federal fixed-base percentage, but critically, it must use only Arizona QRE and gross receipts amounts from the base period. The resulting percentage must be rounded to four decimal places and cannot exceed the statutory maximum of 16% (0.1600).7
  4. Base Amount Component (Lines 18 and 19): This is calculated by applying the fixed-base percentage (Line 17) to the Average Annual Arizona Gross Receipts (Line 16).
  5. Minimum Base Amount Rule (Line 20): A critical safeguard is implemented to ensure taxpayers demonstrate substantial recent R&D activity. The base amount cannot be less than 50% of the current year’s Total Arizona QREs (Line 15).7 This 50% floor prevents companies with historically low R&D spending from claiming a massive credit in a single year unless they maintain a significant level of current QREs.
  6. Final Base Amount (Line 21): The final base amount used in the calculation is the lesser of the fixed-base percentage calculation (Line 19) or the 50% minimum QRE threshold (Line 20).7

4.3 Calculating Excess Basic Research Payments (Lines 8-10)

Basic Research Payments (BRPs) are payments made under written contract to qualified research organizations (such as state universities).7 BRPs are subject to a separate calculation that determines the BRP base period amount.7 The amount eligible for the general credit calculation is the excess of current-year BRPs (Line 8) over the BRP base period amount (Line 9), resulting in the Excess Basic Research Payments (Line 10).7

The amount of BRPs equal to or below the base period amount is not included in the BRP credit calculation, but those amounts may be treated as contract research expenses (65% or 75%) under Line 14 of Form 308, thereby potentially contributing to the QRE calculation.7

4.4 Final Credit Calculation and Tiered Application (Lines 22-27)

  1. Total Amount Subject to Credit Percentage (Line 22): This is the total increase in qualified research activity, calculated by adding the Excess Basic Research Payments (Line 10) and the Excess QREs (Line 15 minus Line 21).7
  2. Applying Tiered Rates: The total amount from Line 22 is then applied to the tiered rate structure (pre-2031 rates used here):
  • If Line 22 is $2,500,000 or less, the current year credit is 24% of that amount (Line 23).7
  • If Line 22 is greater than $2,500,000, the credit is calculated as $600,000 plus 15% of the amount exceeding $2,500,000 (Lines 24-26).7

The necessity of accurately calculating the base amount and managing the dual threshold—the 50% QRE floor on the base amount and the $2.5 million threshold for the credit rate—is paramount. Maximizing the credit requires not only robust current QREs but also a significant increase relative to the historical base to minimize the final base amount and maximize the excess QREs subject to the 24% rate.

4.5 Case Study Example: Calculating the Non-Refundable Arizona R&D Credit

The following example illustrates the calculation required by ADOR using the mandatory Regular Credit method for a taxpayer operating in 2024 (pre-2031 rates).

Scenario: TechCorp Inc. (Calendar Year Taxpayer)

TechCorp Inc. incurred $4,000,000 in Arizona QREs in 2024. Its historical Arizona gross receipts averaged $50,000,000 over the preceding four years. The calculated fixed-base percentage is 4.0000% (based on historical Arizona QREs divided by historical Arizona gross receipts). TechCorp also had $50,000 in Excess Basic Research Payments.

Table 3: Example Calculation Summary (Based on ADOR Form 308 Instructions)

Line Item (Form 308 Ref.) Description Calculation Amount ($USD)
L.15 Total Arizona QREs Direct Input $4,000,000
L.16 Avg. Annual Arizona Gross Receipts Direct Input $50,000,000
L.17 Fixed-Base Percentage (Max 16%) Direct Input 4.0000% (0.0400)
L.19 Base Amount Component (Fixed-Base %) $50,000,000 * 0.0400 $2,000,000
L.20 Minimum Base Amount (50% QREs) $4,000,000 * 50% $2,000,000
L.21 Base Amount (Lesser of L.19 or L.20) Lesser of $2.0M or $2.0M $2,000,000
Subtotal Excess QREs (L.15 – L.21) $4,000,000 – $2,000,000 $2,000,000
L.10 Excess Basic Research Payments Direct Input $50,000
L.22 Total Amount Subject to Credit Excess QREs + L.10 $2,050,000
L.23 Current Year Credit (Tier 1: 24%) $2,050,000 * 24% $492,000

The calculation shows that the Total Amount Subject to Credit (Line 22) is $2,050,000, which is below the $2.5 million threshold. Therefore, the applicable rate is 24%, yielding a total non-refundable Arizona R&D credit of $492,000 for TechCorp Inc.

Section 5: Advanced ADOR Tax Credit Programs and Compliance

5.1 The University R&D Tax Credit (The 10% Additional Credit)

Arizona offers an additional, non-refundable income tax credit designed specifically to incentivize cooperation between corporate taxpayers and public education institutions. This credit applies to taxpayers that make basic research payments (BRPs) to a university under the jurisdiction of the Arizona Board of Regents (Arizona State University, Northern Arizona University, or the University of Arizona).2

Calculation and Dual Agency Oversight

This additional credit is equal to 10% of the excess, if any, of the basic research payments over the taxpayer’s qualified organization base period amount.14 Because this credit is an enhancement to the general R&D credit, the taxpayer must first qualify for the general credit claimed on Form 308.19

Crucially, claiming this credit requires a stringent, two-step authorization process involving both state agencies 19:

  1. The taxpayer must first receive certification from the Arizona Commerce Authority (ACA).19
  2. Following ACA certification, the taxpayer must submit an Application for Approval to ADOR. ADOR provides the final “Letter of Approval certifying the credit amount”.19

The $10 Million Aggregate Cap

ADOR is responsible for managing the statutory aggregate annual cap for this specific credit. The department is legally restricted from approving combined corporate and individual income tax credit amounts exceeding $10,000,000 in any calendar year.14 This cap applies to the amount approved, not necessarily the amount claimed, meaning securing approval early in the calendar year is critical, as once the limit is reached, no further credits may be approved for that year.20

5.2 Credit Utilization and Carryforward Rules

Non-refundable tax credits, by definition, can never exceed the taxpayer’s state income tax liability.5 If the calculated credit amount exceeds the tax owed, ADOR administers rules governing the carryover of the unused credit to future tax years.7

The complexity of carryover management lies in the statutory changes based on the credit’s vintage year:

  • Pre-2022 Carryforward (15 Years): For R&D credits claimed in taxable years beginning before January 1, 2022, the amount of the credit not used to offset taxes may be carried forward for 15 consecutive taxable years.11
  • Post-2021 Carryforward (10 Years): For R&D credits claimed in taxable years beginning from and after December 31, 2021, the carryforward period has been reduced to 10 consecutive taxable years.15
  • University Credit Carryforward (5 Years): The specific additional credit claimed for university basic research payments may be carried forward for only five consecutive years.15

The phased reduction in the carryforward period mandates highly sophisticated tracking systems. Taxpayers must segregate unused credit balances based on the year they were generated to ensure they apply the correct expiration date, preventing the unintended loss of credit value due to statutory limitations. If a taxpayer receives a partial refund of the excess credit (via the ACA program), the amount refunded does not constitute an excess amount eligible for carryforward.21

Table 4: Arizona R&D Credit Carryforward Rules Administered by ADOR

Credit Type Tax Year Vintage Carryforward Period
General R&D Credit Before January 1, 2022 15 consecutive taxable years
General R&D Credit From and After December 31, 2021 10 consecutive taxable years
University R&D Credit All Years 5 consecutive taxable years

Section 6: ADOR Audit and Substantiation Standards

ADOR’s role as the administrator of the non-refundable credit includes vigorous compliance checks and audits. The audit standards are intrinsically linked to federal law and focus heavily on proving the Arizona nexus and the technical eligibility of the research.

6.1 Nexus Documentation: ADOR’s Reliance on Federal Standards

Because A.R.S. § 43-1168 incorporates IRC § 41, the substantiation requirements for ADOR mirror the demanding standards set by the IRS, particularly concerning the four-part test: proving qualified purpose, technical uncertainty, process of experimentation, and technological nature.22

Recent federal Tax Court rulings, emphasizing the need for contemporaneous documentation, reinforce ADOR’s expected standards. Taxpayers must clearly identify the specific technical challenges (technical uncertainty) that necessitated the research and demonstrate a systematic process of experimentation used to resolve those uncertainties.23 Routine work, such as standard code compliance or aesthetic design, is disqualified.

In addition to federal standards, ADOR places primary scrutiny on documenting the Arizona nexus. Documentation must explicitly link all claimed QREs—wages, supplies, and contract expenses—to activities physically performed within Arizona.7 This state-specific requirement demands that taxpayers maintain detailed internal records such as:

  • Project meeting minutes detailing technical roadblocks.24
  • Design and development documentation, including technical drawings and test data.24
  • Time-tracking records demonstrating that employee hours included in the wage QRE calculation were spent on qualified research in Arizona.24

The ability to link personnel and costs (linking nexus) to the qualified research projects is paramount to successfully defending the claim during an ADOR audit.

6.2 ADOR Audit Procedures and Taxpayer Obligations

The ADOR Taxation Division determines the correct amount of tax and employs established audit procedures designed to be fair and cooperative.25

Information Exchange and Initiation

ADOR operates under an Exchange of Information Agreement with federal taxing authorities.25 This agreement means that an audit adjustment or denial of the federal R&D credit by the IRS will likely trigger a review or audit of the corresponding Arizona claim filed with ADOR.

The audit process begins with a formal letter requesting documentation or clarification of the tax return.25 Taxpayers are typically given 30 days to respond. If more time is required to gather the extensive documentation needed to substantiate the Form 308 calculation, the taxpayer should contact the assigned auditor to request an extension, which is typically granted.25

Assessment and Non-Response

Failure to respond to the initial inquiry or provide the requested documentation can result in the issuance of a “Notice of Proposed Assessment”.25 This notice outlines the adjustments made by ADOR, the statutory authority for those adjustments, and any applicable penalties and interest. Because this notice carries legal consequences, taxpayers are strongly advised to engage with the auditor promptly or through their designated representative (provided a valid Power of Attorney, AZ Form 285, is on file).25 Upon review of the submitted information, ADOR will issue either a “no adjustment/thank you” letter, a Notice of Proposed Assessment (for tax due), or a “Notice of Proposed Determination” (for a refund or credit owed).25

Section 7: Conclusion and Strategic Recommendations

The Arizona Department of Revenue holds a definitive and specialized role within the state’s R&D tax credit framework, acting as the primary compliance and calculation authority for the substantial non-refundable component (A.R.S. § 43-1168). ADOR’s mandate ensures the integrity of the state incentive by requiring strict adherence to the complex federal Regular Credit Method and enforcing the essential requirement that all qualifying expenditures maintain a physical nexus within Arizona.

The analysis confirms that the foundation of any successful Arizona R&D claim—whether the non-refundable credit, the refundable component, or the university research enhancement—rests upon the accurate and defensible calculation performed on ADOR Form 308.

Strategic Compliance Recommendations:

  1. Prioritize Arizona Nexus Tracking: Multi-state corporations must invest in systems that precisely track and allocate employee wages, contract research, and supplies to activities demonstrably conducted in Arizona. This is the single most critical state-level audit defense point, differentiating the Arizona claim from its federal counterpart.
  2. Maintain Historical Data for Regular Method: Since ADOR prohibits the Alternative Simplified Credit (ASC), tax directors must ensure that all necessary historical data (Arizona QREs and Arizona gross receipts) are retained and available to accurately compute the fixed-base percentage required for Form 308.
  3. Optimize Against the 2031 Rate Reduction: Given the substantial reduction in credit rates scheduled for taxable years beginning after 2030, corporate planning should strategically maximize qualified investments in the years preceding the rate phase-down to secure the current 24%/15% benefit.
  4. Manage Credit Carryover Vintages: Due to the varying carryforward periods (15 years pre-2022, 10 years post-2021, and 5 years for the University credit), meticulous year-by-year tracking of unused credit balances is mandatory to prevent the expiration of valuable tax assets.

Ensure Contemporaneous Technical Documentation: Preparation for an ADOR audit must begin with technical documentation that aligns with stringent IRC § 41 standards, clearly articulating the technical uncertainty and the process of experimentation. Reliance solely on financial records is inadequate; documentation supporting the technical eligibility criteria must be robust and contemporaneous to successfully mitigate audit risk.

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What is the R&D Tax Credit?

The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.

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