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 a nonrefundable credits (1) General Research and Development Tax Credit - i.e. offset income tax liability, and refundable (2) University Research and Development Tax Credit - i.e. cash refund in excess of income tax liability.

Arizona leverages the federal Internal Revenue Code (IRC) Sec. 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

  • 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 (see below). Taxpayers with qualified research expenses to carry forward from tax years starting before January 1, 2001, may only carry forward 20% of the carry forward expenses.

(1) General R&D Tax Credit (non-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%.

Computation of credit for 2011–2017: For tax years 2011 through 2017, 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:

  • If the total is $2.5 million or less, the credit will be 24% of that amount

    • If the excess is $2.5 million or less:

      • For taxable years through December 31, 2017, the credit is equal to 20% of that amount.

      • For taxable years beginning from and after December 31, 2017 through December 31, 2021, the credit is equal to 24% of that amount.

      • For taxable years beginning from and after December 31, 2021, the credit is equal to 20% of that amount.

  • If the total is over $2.5 million, the credit will be $600,000 plus 15% of any amount exceeding $2.5 million except that

    • ​(1) For taxable years beginning from and after December 31, 2000 through December 31, 2001, the credit cannot exceed $1.5 million, and

    • (2) For taxable years beginning from and after December 31, 2001 through December 31, 2002, the credit cannot exceed $2.5 million

    • (3) For taxable years December 31, 2003 through December 31, 2017, the credit is equal to $500,000 plus 11% of any amount exceeding $2.5 million.

    • (4) For taxable years beginning from and after December 31, 2017, through December 31, 2021, the credit is equal to $600,000 plus 15% of any amount exceeding $2.5 million.

    • (5) For taxable years beginning from and after December 31, 2021, the credit is equal to $500,000 plus 11% of any amount exceeding $2.5 million.

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

The University R&D tax credit is a potential addition to the income tax credit for taxpayers qualifying for the general Arizona R&D nonrefundable income tax credit. This credit provides an additional Arizona nonrefundable income tax credit for qualifying basic research payments made during a taxable year to one or more of the three universities under the jurisdiction of the Arizona Board of Regents: Arizona State University, Northern Arizona University and the University of Arizona.

The credit 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.

  • 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://www.azdor.gov/TaxCredits/UniversityResearchDevelopmentTaxCredit.aspx

  • 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”).

  • $10 Million Annual “CAP” on University R&D Tax Credit Certifications & $5 Million Refundable "CAP" (First-Come, First-Serve) 

    • The ACA cannot certify research payments representing more than $10 million in University R&D tax credits for a calendar year.  Once the $10 million certification “cap” is attained, no additional research payments may be certified by the ACA.  In administering the Program cap, the ACA will approve applications on a “first come, first served” basis.

    • 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.   

      • Download the R & D Tax Credit Allocation Table to view the remaining amount of tax credits available. NOTICE: CALENDAR YEAR 2019 CAP

      • See Link Calendar Year 2019 Allocation Table: Calendar Year 2019 Applications may be filed on or after the first business day of 2019 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, 2012 fiscal year end could apply for a partial refund of R&D credits as early as July 2, 2012, if cap is still available.

          • If, however, the 2012 cap has been exhausted, the fiscal year end taxpayer may submit an Application on or after the first business day of 2013, provided said taxpayer has NOT filed its tax return with Revenue for the tax year in which the R&D credit was generated.

  • 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 (EASY see link).  EASY automatically dates and time stamps each application.

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  • Basic Refundable Tax Credit Eligibility Requirements

    • A company 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 company’s current year’s Arizona R&D tax credit exceeds its current year’s tax liability.

      • Submits an application to the ACA and receives a Certification of Qualification prior to filing a tax return with Revenue.

      • Employs less than 150 full-time employees world-wide as of the last day of the taxpayer's taxable year.

      • Remits a non-refundable processing fee equal to 1% of the company’s tax credit being refunded.

      • Does not exceed the tax year refund limitations under A.R.S. § 41-1507 (E)

      • Complies with employer and business sanctions set forth in A.R.S. § 23-214 (B) and A.R.S. § 35-393.

General Information

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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