Alternative Simplified Credit (ASC) Election

Arizona State Specific Glossary of Terms and Meanings

The following glossary provides detailed definitions and context for the terminology used in the administration and calculation of the Arizona Research and Development Tax Credit. These terms are essential for taxpayers filing Forms 308, 300, and related schedules.

This is the primary statutory authority establishing the Research and Development Tax Credit for corporations in Arizona. It aligns the state credit eligibility with the federal definition of qualified research under Internal Revenue Code Section 41, with the specific requirement that the research must be conducted within Arizona. It outlines the calculation methods, the tiered rate structure, and the limitations regarding the nonrefundable nature of the base credit.

This statute serves as the counterpart to the corporate code, establishing the Research and Development Tax Credit for individual taxpayers, including partners in partnerships and shareholders in S Corporations. It mirrors the corporate provisions regarding the determination of qualified expenses and credit generation but applies to the personal income tax liability of the individual owners.

The state agency responsible for the administration, collection, and enforcement of taxes in Arizona. Regarding the R&D Tax Credit, ADOR oversees the filing of the nonrefundable portion of the credit (Form 308) and conducts audits to ensure compliance with state and federal research tax laws. ADOR issues the final approval for University R&D credits after initial certification by the Commerce Authority.

The state's leading economic development organization with a streamlined mission to grow and strengthen Arizona’s economy. The ACA administers the Refundable Research and Development Tax Credit program. Taxpayers seeking the refundable portion of the credit must submit an application to the ACA to receive a Certificate of Qualification before claiming the refund on their tax return.

The official tax form titled Credit for Increased Research Activities, used by taxpayers to calculate the amount of the Arizona R&D tax credit. The form requires the input of Qualified Research Expenses (QREs), the calculation of the Base Amount, and the determination of the allowable credit using either the Regular or Alternative Simplified Credit methods.

The Nonrefundable Corporate Tax Credits and Recapture summary form. While Form 308 calculates the R&D credit specifically, Form 300 aggregates all nonrefundable credits claimed by a corporation to apply them against the tax liability, ensuring the liability is not reduced below the mandatory minimum.

An official document issued by the Arizona Commerce Authority (ACA) to a taxpayer who has successfully applied for the refundable R&D tax credit. This certificate validates that the taxpayer meets the employment limits (under 150 full-time employees) and other criteria, authorizing them to claim a partial refund of their excess credit.

A provision allowing qualified small businesses to convert a portion of their unused R&D tax credits into a cash refund. To qualify, a taxpayer must employ fewer than 150 full-time employees worldwide. The refundable amount is limited to 75% of the excess credit (the amount by which the credit exceeds the tax liability), and the remaining 25% is forfeited.

The standard operation of the Arizona R&D credit where the credit amount can only be used to offset Arizona income tax liability down to the minimum tax. Any unused credit amount that cannot be utilized in the current tax year is carried forward to future tax years. It does not result in a cash payment from the state unless the specific refundable election is made.

An additional credit incentive for taxpayers who make basic research payments to an Arizona university under the jurisdiction of the Arizona Board of Regents. This credit is equal to 10% of the excess basic research payments and is separate from the standard R&D credit calculation. It requires certification from the ACA.

Expenses that qualify for the credit, specifically wages paid to employees performing qualified services, supplies used in the conduct of research, and a percentage of contract research expenses. To constitute an Arizona QRE, the research activity must be performed within the state of Arizona.

A percentage used in the Regular Credit calculation method to determine the Base Amount. It represents the ratio of aggregate qualified research expenses to aggregate gross receipts for a specific historical period (typically 1984-1988 or the first five years the company had QREs and gross receipts).

The baseline amount of research spending that a company must exceed to generate a credit under the Regular Method. It is calculated by multiplying the Fixed-Base Percentage by the average annual gross receipts for the four preceding tax years. The credit is generated only on the QREs that exceed this base amount.

The unique calculation method used by Arizona, which applies different rates based on the volume of research spending. For taxable years through 2030, the rate is 24% for the first $2.5 million of excess QREs and 15% for any excess QREs above $2.5 million.

The Tier 1 credit rate applied to the first $2.5 million of the excess qualified research expenses. This is one of the highest statutory state R&D credit rates in the United States.

The Tier 2 credit rate applied to any excess qualified research expenses that exceed the $2.5 million threshold. This ensures that larger R&D spenders still receive a significant benefit, albeit at a reduced marginal rate for higher volumes.

The statutory cap on the refundable portion of the credit. If a taxpayer elects to receive a refund, they receive only 75% of the value of their excess credit. The remaining 25% of the credit value is waived and cannot be carried forward or used in future years.

The aggregate annual limit on the total amount of refundable R&D tax credits approved by the Arizona Commerce Authority. Refunds are granted on a first-come, first-served basis until this statewide cap is reached for the calendar year.

The length of time unused nonrefundable credits can be saved for future use. For credits generated in taxable years beginning before January 1, 2022, the carryover period is 15 consecutive taxable years. For credits generated in taxable years beginning after December 31, 2021, the carryover period is 10 consecutive taxable years.

A calculation method available to Arizona taxpayers that parallels the federal ASC. This method does not require gross receipts data from the 1980s. Instead, it calculates the credit based on the excess of current-year QREs over 50% of the average QREs from the three preceding tax years.

Expenses that may be eligible for both the standard R&D tax credit and the University R&D tax credit. However, Arizona statute generally prevents double-dipping; expenses used to calculate the University credit often cannot be used to calculate the regular research credit.

Records and evidence created at the time the research was performed. This is the gold standard for substantiating an R&D tax credit claim, including project notes, lab results, payroll records, and emails that prove the research activities met the four-part test.

Final Thoughts

Understanding the terminology associated with the Arizona Research and Development Tax Credit is critical for maximizing the benefit and ensuring compliance. The bifurcated nature of the credit—split between the Department of Revenue and the Commerce Authority—adds a layer of complexity not found in many other states. Taxpayers should carefully distinguish between refundable and nonrefundable processes and adhere strictly to the definitions provided in the Arizona Revised Statutes to withstand potential audits.