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Arizona R&D Tax Credit Summary

 

The Arizona R&D tax credit provides a tax credit for increasing qualifying research activities in the state of Arizona including research incurred at specified Arizona universities.

 

Arizona provides both nonrefundable (offset income tax liability) and refundable (cash refund in excess of income tax liability) credits: (1) General Research and Development Tax Credit and (2) University Research and Development Tax Credit.

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The Arizona legislature in 2010 created the refundable component of the R&D program. A taxpayer that is otherwise qualified for the nonrefundable R&D tax credit and who employs fewer than 150 full-time employees worldwide can apply to the Authority for approval of a refund of 75% of the current year’s excess credit amount (A.R.S. § 41-1507). For tax years beginning after December 31, 2009, the Authority may approve refunds under this program in an amount up to $5 million in any calendar year. Refunds are approved by the Authority on a first come, first served basis, according to the date and time stamp on the Application submitted to the Authority. Beginning in calendar year 2019, the maximum refund amount per taxpayer is $100,000 in a single tax year.

 

The nonrefundable R&D program was enhanced during the 2011 legislative session. An additional credit amount is allowed if the taxpayer made basic research payments during the tax year to a university under the jurisdiction of the Arizona Board of Regents. The additional credit amount is equal to 10% of the basic research payments that constitute excess expenses for the tax year over the base amount. The additional credit is not refundable. The increased university R&D tax credit is administered by Revenue for tax years beginning from and after December 31, 2010. However, before a taxpayer can apply to Revenue for University R&D tax credits or otherwise claim such tax credits, a taxpayer must first apply for a certification of research payments from the Authority.

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Arizona leverages the federal Internal Revenue Code (IRC) § 41 rules regarding the calculation and qualification of "qualified research expenses" (QREs) conducted in Arizona to calculate both credit benefits with some modifications (see below). Under current Arizona law, the University R&D tax credit collective with the general Arizona R&D tax credit may generate a potential combined R&D tax credit benefit of approximately 34% of QREs. 

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  • Eligible Entities: C-Corporation, S-Corporations, LLCs, Partnerships

  • Deadline for Tax Filing: Due with Arizona Tax Return. A taxpayer seeking a refund MUST submit an application to the Arizona Commerce Authority (ACA) PRIOR to filling out its tax returns. The refund must be claimed by the applicant on an original Arizona income tax return along with Revenue Form 308 (for corporations) or Arizona Form 308-I (for individuals).

  • Credit Carryforward: Unused credit may be carried forward for 5 or 15 years. For taxable years beginning before January 1, 2022 the R&D credit claimed that is not used to offset taxes may be carried forward 15-years. For taxable years beginning from and after December 31, 2021 the R&D credit claimed that is not used to offset taxes may be carried forward 10-years. If the taxpayer received a refund of 75% of the excess credit, the taxpayer does not have any excess amount to carryforward for this year. Any carryover amounts from previous taxable years must be carried over to the next taxable year, subject to the 15-year carryover period and annual limitations on the use of those carryovers. 

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(1) General R&D Tax Credit (non-refundable & refundable)

The General R&D Tax Credit in a taxable year is an amount equal to 24% of the first $2.5 million of “qualified research expenses” incurred by a taxpayer in the taxable year in excess of the applicable “base amount.”  The amount of the general R&D tax credit associated with QREs by a taxpayer greater than the $2.5 million excess threshold is currently 15%. 

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Computation of Credit: For the applicable tax years, the credit is based on the excess, if any, of the QREs for the taxable year over the base amount as defined in IRC § 41(c), and is computed as follows (see A.R.S. § 43-1168, Credit for increased research activity):

  • If the excess is $2.5 million or less:​

    • For taxable years beginning before December 31, 2030, the credit is equal to 24% of that amount.

    •  For taxable years beginning from and after December 31, 2030, the credit is equal to 20% of that amount.

  • If the excess is $2.5 million or more:

    • ​For taxable years beginning before December 31, 2030, the credit is equal to $600,000 plus 15% of any amount exceeding $2,500,000.​

    • For taxable years beginning from and after December 31, 2030, the credit is equal to $500,000 plus 11% of any amount exceeding $2,500,000.

  • Any amount of additional credit that exceeds taxes due is not refundable, but may be carried forward for five consecutive tax years.

  • The general R&D tax credit is administered exclusively by the Arizona Department of Revenue (“Revenue”).  [Arizona Form 308 or 308-I]

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A taxpayer may be eligible for a partial refund of its R&D tax credit, if it:

  • Meets the eligibility requirements of A.R.S. §§ 41-1507 and 43-1074.01 or 43-1168 and the taxpayer’s current year Arizona R&D tax credit exceeds the taxpayer’s current year's tax liability;

  • Submits an Application to the Authority and receives a Certificate of Qualification prior to filing a tax return with Revenue;

  • Employs fewer than 150 full-time employees worldwide on the last day of the taxpayer’s taxable year;

  • Remits a nonrefundable processing fee equal to 1% of the tax credit being refunded;

  • Complies with the employer requirement set forth in A.R.S. § 23-214 (B) (pertaining to enrollment in E-Verify) and A.R.S. § 35-393; and

  • Submits an Application to the Authority when sufficient cap is available under A.R.S. § 41-1507 (E)

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The R&D tax credit refund is the lesser of:

  1. 75% of the excess credit (the excess credit is the current year's R&D credit for increased research activities less the current year's tax liability). The remaining 25% is forfeited if a refund is issued; or

  2. $100,000 (the remaining balance of the otherwise non-refundable portion is forfeited if a refund is issued); or

  3. The maximum refund amount on the Certificate of Qualification from the Authority.

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(2) University Research and Development Tax Credit (non-refundable, aka "Basic Research Credit")

For taxable years beginning from and after December 31, 2011, an additional credit amount is allowed if the taxpayer made basic research payments during the taxable year to a university under the jurisdiction of the Arizona board of regents. The University Research and Development tax credit provides an additional nonrefundable individual and corporate income tax credit for qualifying basic research payments made during the taxable year toa university under the jurisdiction of the Arizona Board of Regents: Arizona State University, Northern Arizona University and the University of Arizona.

 

The additional credit amount is equal to 10% of the excess, if any, of the "basic research payments" made by a taxpayer in a taxable year over the taxpayer’s “qualified organization base period amount” for the taxable year. The additional tax credit is for taxpayers that qualify for the general Arizona Research and Development income tax credit that is claimed on Arizona Form 308 (or Arizona Form 308-I for individual taxpayers). Arizona Department of Revenue also administers the University R&D Tax Credit. For Revenue’s Guidelines pertaining to the University R&D tax credit, see https://azdor.gov/tax-credits/university-research-development-tax-credit.

 

However, before a taxpayer can apply to Revenue for University R&D tax credits or otherwise claim such tax credits, a taxpayer MUST first apply for a certification of research payments from the Arizona Commerce Authority (“ACA”) pursuant to A.R.S. § 41-1507.01.

  • See https://www.azcommerce.com/incentives/research-development/ for additional information on applying for certification from ACA.

  • After receiving a certification from ACA, the taxpayer must request final approval by submitting
    an Application for Approval to the Arizona Department of Revenue (ADOR).

  • Qualified applicant receives a Letter of Approval certifying the credit amount from ADOR.

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$10 Million Annual “CAP” on University R&D Tax Credit Certifications  

 The Arizona Department of Revenue (ADOR) cannot approve more than $10 million in income tax credits for a calendar year. The $10 million limit is for the individual and corporate income tax credit combined. Once the $10 million credit limitation is reached, no additional tax credits may be approved, even if the amounts that have been approved are not claimed. Only Applications for Approval that first received certification from ACA will be accepted.

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The Application should be submitted after receiving certification from ACA. The Application shall include:

1. Name, address, and social security number or employer identification number of the Applicant.

2. The business structure of the Applicant.

3. If this credit will be passed through to shareholders or partners, list the names of the shareholders or partners, with social security numbers or employer identification numbers and percent of expenses. The credit is passed through to shareholders or partners based on their proportionate share of expenses.

4. A contact person, with title, phone number and fax number. If this person is not a corporate officer, a Power of Attorney should be included for the contact. 

5. Additional tax credit amount certified by the ACA pursuant to A.R.S. § 41-1507.01. Attach a copy of the certification letter from the ACA.

6. An affidavit signed by an officer of the Applicant. For a sole proprietorship, the individual must sign the affidavit. By signing the affidavit, the officer agrees that the information contained in the Application is true and correct under penalty of perjury.

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If multiple applications have the same date and time, they will be put in order through a process of a random, blind draw. Moreover, if the application is reviewed and determined to be invalid or in some way not eligible for the credit, the Application will be denied. Applications that do not include all required information are invalid and will not be accepted. However, if an application is denied, the applicant may submit a second Application that corrects the problem for which the first application was denied, including potential subsequent appeals contesting the denial decision.

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In general, the ADOR will notify the Applicant of the amount of credit to which the Applicant is entitled. A Letter of Approval will be transmitted to the Applicant, certifying the approved tax credit amount. When the taxpayer files its income tax return, a copy of the Letter of Approval must be attached to the tax form with Arizona Form 346. If the credit is being passed through to partners or shareholders, each partner or shareholder must attach a copy of the Letter of Approval to their income tax return along with Arizona Form 346 to claim the credit.

 

This is a nonrefundable tax credit. If the tax liability is less than the credit amount approved, the unused portion of the credit can be carried forward for five years.

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$5 Million Refundable "CAP" (First-Come, First-Serve)

The ACA has been given the authority to approve refunds under this program up to $5 million in any calendar year. Therefore, refunds are approved by the ACA on a first-come, first-served basis, according to the date and time an application is filed with the ACA.  Beginning in calendar year 2019, the maximum refund amount per taxpayer is $100,000 in a single tax year.   

  • See the Arizona Commerce Authority - R&D Refundable Tax Credit Incentive Overview to view the remaining amount of tax credits available. 

  • Applications may be filed on or after the first business day of the applicable year via the ACA's Electronic Application System (also known as "EASY")

    • Applications must be based on actual numbers, not estimates.

    • A calendar year taxpayer may file an Application on or after the first business day following the close of the previous calendar year. A fiscal year taxpayer may file an Application on or after the first business day after the end of the fiscal year.

      • For example, a taxpayer with a June 30, 2021 fiscal year end could apply for a partial refund of R&D credits as early as July 2, 2021, if cap is still available.

      • If, however, the 2021 cap has been exhausted, the fiscal year end taxpayer may submit an Application on or after the first business day of 2022, provided said taxpayer has NOT filed its tax return with Revenue for the tax year in which the R&D credit was generated.

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Applying to ACA for Certification

  • Must submit an application to the ACA following the end of the taxpayer’s tax year.   

  • A taxpayer with a tax year that begins in one calendar year and ends in another calendar year must submit an application for certification for the calendar year’s ACA “cap” that the taxpayer’s tax year begins.  

  • If a taxpayer realizes that basic research payments occurred within a taxable year that would have made the taxpayer eligible to apply for the credit but the tax return for that taxable year has been filed, the taxpayer may still apply for the credit for that taxable year.

    • An application for a prior taxable year will be considered if there is still credit available under the credit “cap” for that calendar year.

    • Taxpayer will only be able to use a credit approved for a prior taxable year if an amended return can be filed for that taxable year within the statute of limitations period.

  • Applications for certification must be submitted electronically through the ACA’s Electronic Application System (See Apply for Incentives).  ​​​

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General Information

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Flow Through Entity

  • If two or more taxpayers, including partners in a partnership and shareholders of an S corporation, as defined in section 1361 of the internal revenue code, share in the eligible expenses, each taxpayer is eligible to receive a proportionate share of the credit.

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