Maximize Your Arizona R&D Tax Credit: A Guide for Businesses

The Arizona Research and Development Tax Credit is a financial incentive for business owners that is designed to encourage innovation among different sections. Rewarding this investment in research and development activities through a reduction in overall tax liability can free up resources for businesses to either further invest in research and development or to reallocate to other vital operations.

This article will provide a comprehensive guide to what Arizona research tax credit programs can offer your business, how to qualify, and how to maximize the benefits long-term.

What are Arizona R&D Tax Credits?

The Arizona tax credit purpose is to provide a financial incentive on a state level that aims to encourage businesses to engage in research.

This works by allowing for a significant reduction in the business’s overall tax liabilities that are related to that research. This lowers the cost of research conducted, which can be very beneficial for businesses that would like to contribute to their overall field.

Some of the key benefits include savings for the taxable year through a reduction in liability, an improvement in overall cash flow, and a competitive advantage in their industry due to the research that is conducted. The Arizona Department of Revenue administers this credit and it has undergone a lot of modifications in order to ensure that it is the most attractive option for businesses.

This includes ACA’s electronic application system, partial refund options, and additional credits for potential collaboration with state university researchers.

Arizona also provides additional development tax credit support for small companies and startups that participate in garner development and research activities. Companies with less than 150 full-time employees are also eligible for a partial refund, capped at $100,000 per taxpayer.

Does Arizona have an R&D credit?

Yes! The Arizona Research and Development tax credit was established in 1992, and it has changed a lot since its passage. Improvements in 2010 and 2011 allowed for more accessibility and benefits than ever before, which led to more resources being available for companies all over the state.

This emergency tax credit is closely aligned with the federal Section 41 rules, but it offers a refundable option, which goes beyond what the federal credit offers. This alignment ensures consistency in the application process and simplifies the process for businesses looking for reductions on both the state and federal levels.

Eligibility Criteria for Arizona R&D Tax Credits

To qualify for the Arizona research and development tax credit, businesses must accumulate qualified research expenses within the state of Arizona. These qualified expenses must be related to approved qualified research activities, which are put through a four-part test for qualifying activities.

Four-Part Test for Qualifying Activities

The four-part test for qualifying activities consists of this criterion:

Technological in Nature

Research that would apply to the development of tax credit qualifications would rely on principles of physical or biological sciences, computer science, chemistry, or engineering.

Permitted Purpose

The research should aim to create a new or improved product instead of focusing on principles that have already been established. Making sure to highlight the significance of your research is important to claim this credit for the tax year.

Eliminate Uncertainty

The activity should aim to clear up certain questions regarding the method, design, or capability. Having an established research hypothesis for your field will assist in meeting this criterion.

Experimentation

Your research project must include official experimentation, which is the pass-or-fail method of testing whether your improved product or process works in the way that it is intended. Making sure to keep track of the changes you’re making after failed tests as well as the testing itself will prove that there is a process of experimentation.

Calculating the Arizona R&D Tax Credit

Calculating the credit can be really difficult for people who are looking to claim this credit for the first time, but it can be made simpler by consulting with a certified public accountant.

For the first $2.5 million in qualified expenses, businesses are able to claim a 24% credit. For any expenses that surpass this number, you’re able to claim a 15% credit. However, these aren’t always going to stay the same! At the beginning of 2031, these rates will decrease to 20% for expenses under $2.5 million and 11% for all purchases above that baseline.

There are also additional credits that are available for research payments that are made to universities in Arizona, allowing research to be collaborative between industry and academic efforts.

This credit program does offer refunds for up to 75% of excess credit and is capped at $100,000 per taxpayer in the taxable years following 2019. The maximum refund amount that is offered for the entire state of Arizona is $5 million, with no refunds available after that fact.

Selling or Transferring the Arizona R&D Tax Credit

Businesses can sell or transfer their research and development tax credit. These are subject to a cap and are entirely allocated on a first-come, first-served basis. Non-refundable portions of the credit are carried forward for up to 15 years but change to 10 on taxable years after 2021.

This can be a very strategic way to maximize the amount of financial gain that you can get from this program, as well as a way to account for fluctuations in the amount of research spending that you choose to pursue.

Arizona Qualifying Research Expenditures 

Here is a breakdown of the qualifying exposes that you can claim:

Wages

Claiming the credit on wages paid to employees must be for employees who perform research. supervise research, or support other qualified activities. This is important as it means that you should be keeping track of employee hours that are dedicated to research versus normal business operations.

Supplies

Supplies that you use in research can also be claimed against your tax liability. this excludes capital items and general administrative supplies, so ensure that you set the expenditures for everything else aside to see what you can qualify for. As with other expenses, this must be used to qualify for the research project.

Contracted Research

Contracted research, or allowing qualified professionals to take up certain aspects of the research, is a great way to reduce the costs of supplies or pursue research if you need more space. These can also be claimed against your overall tax liability, which can be very useful for those looking to pursue research for the first time.

2023 Changes to Arizona R&D Tax Credits

The new changes to the original credit system include a lot of different accessibility measures. These include ACA’s electronic application system, the alternative simplified calculation method, and certain future rate decreases.

Starting in 2023, Arizona introduced the alternative simplified calculation method to create an easier process for businesses that are interested in research. However, new businesses with no qualified research expenses in the past three years won’t be eligible to calculate using the new method.

Another important change was the credit rate decrease, which is set to happen in tax years beginning in 2030. This is an important part of your tax planning, as you should focus on taxable years that will maximize your overall return.

How to Claim the Arizona R&D Tax Credits?

Properly claiming the Arizona research tax credits is a complex and often frustrating process to tackle alone. Make sure to contact a certified public accountant or legal professional once you start to claim your credit to ensure that you have the proper documentation and calculations before submitting.

In order to claim the most out of your credit, you should submit it with your overall tax return while also applying for any refundable portions if you’re eligible. [Come back to this].

Applying for the Refundable Portion

When you have your preemptive application filled out, you should apply for a refundable portion of your excess tax credit. To do this, you should:

• Submit your application to the Arizona Commerce Authority, or the ACA. Their online application system requires you to submit before filing your tax return, and they open their applications on the first business day of the year.
• Pay the ACA processing fee: There is a 1% non-refundable processing fee that is associated with your application for a refund on your tax credit.
• Get your Certificate of Qualification: When your official request is approved, the ACA will give you a certification of qualification, which you’ll include with your tax return.

After going through this process, you should be able to receive your refund without any further issues. There is a cap of $100,000 per taxpayer that you should take into consideration during your initial application.

Filing Your Tax Return

When you finish applying with the ACA and have received your certificate of eligibility, you can file your tax return for your credit. To do this, there are a few steps you need to take:

• Finding your form: There are a lot of different forms that you will need to look through to find the appropriate one. For corporations, you should look for Arizona Form 308. For individuals, your correct form would be to look for Form 308-I. If you also claim a refund, you should look for Form 3082.
• Attach the Certification of Qualification: You should attach your certificate of qualification issued by the ACA in order to claim your refund.
• Watch your deadlines: While the deadline for these tax forms is usually April 15th, you must apply for the certification of qualification before submitting your tax return. This means that you should be filing long before the deadline, in order to ensure that processing times don’t interfere with that deadline. If you need an extension, make sure you file for it well in advance. This is only an extension on the filing itself, rather than an extension on paying any taxes owed.

Make sure to file your tax return according to these guidelines to get the most out of your tax credit. It will also make the process as hassle-free as possible.

Handling Excess Credits

With a maximum refund of $100,000 per year, refunds can seem like an appealing option! However, this can vary heavily on eligibility and approval from the application process. If you find yourself with excess credits, you have two options.

The first option is to carry forward the excess. With a duration of 15 years, 10 if they’re claimed after 2021, this allows businesses to utilize the credit against their future tax liabilities, which can be an amazing option for long-term tax strategy. When filing tax returns in future years, you can apply for the carryforward credit. Make sure to keep records of the amounts that you choose to carry forward every year.

The second option is to apply for a partial refund. This is the option that requires eligibility. Partial refunds are available for companies with less than 150 full-time employees, as it is meant to be for smaller businesses that need immediate cash flow improvements to continue researching.

Next Steps

While Arizona’s research and development tax credit offers a lot of benefits for businesses that want to invest in innovation, our qualified certified public accountants can help you understand eligibility criteria, calculate your credit accurately, and navigate the complicated application process.

To get the full benefits of this research credit program, you should always consult expert help! TaxCredits offers industry experts for businesses looking to get the most out of the research expenses.

FAQs

How does the Arizona tax credit work?

Arizona’s research and development provides a percentage of your research expenses as a credit against your overall tax liabilities. The credit can be refunded to certain businesses, which allows for more investment in research long-term.

What is the tax credit for Arizona in 2024?

Currently, the credit for taxes is 24% on the first $2.5 million in your qualifying research expenses, and 15% on any of these qualifying expenses over that $2.5 million baseline.

Are Arizona tax credits refundable?

They are refundable for eligible companies with fewer than 150 full-time employees! You will be able to establish eligibility through the Arizona Commerce Authority.