Arizona R&D Tax Credit

The qualified research expenditure tax credit is a way for the government to incentivize research and development. The IRS and 30 states, including Arizona, offer this credit.

The nonrefundable Arizona R&D tax credit is:

• Valued at 24% of the first $2,500,000 in qualified research expenditures, and 15% of all qualified research expenditures above $2,500,000.

• Eligible for carryforward over 15 years

Arizona also has a partially refundable R&D credit. If a qualifying company has excess credit that otherwise would be unused or carried forward, up to 75% of the excess credit can be refundable. This refundable credit is only available to small companies that employ less than 150 people and have received a Letter of Certification from the Arizona Commerce Authority (ACA).

A small amount of refundable credit is also available to companies that paid a state university to do research work for them. If your business paid money up to $10 million for research work to Arizona State University, Northern Arizona University, or the University of Arizona, you may be eligible for an extra 10% research refund. In order to qualify for this, you must have a certification letter from the ACA as well as an approval letter from the Arizona Department of Revenue.

For more information about the Arizona R&D credits, read more here.

Does your business qualify for the Arizona research and development tax credit?

• Does your business conduct research and development activities in Arizona? If so, you may be eligible for the Arizona R&D tax credit.

• Your business must be a C or S corporation or an LLC to qualify. Sole proprietorships do not qualify.

• Are your business expenses qualified research expenditures (QRE’s)? The baseline requirements for QRE’s is the four-part test. Note that these are the federal requirements. Arizona also has the additional requirement mentioned above that businesses must have Arizona Commerce Authority approval to claim the Arizona R&D credit.

  • Your business expenses must have a qualified purpose – the expenses must be for creating a new business product or improving on a current one. Note that this product does not have to be something new to the industry in question, but merely to the company conducting the research.

  • Elimination of uncertainty means that the company must have a roadmap for their improvement, innovation, or inventing process.

  • Process of experimentation shows that the company is testing alternatives in their creative process. Rather than simply creating something new, there must be proof of different iterations of the research process.

  • The research and development in question must be technological in nature – it must be based on a hard science such as earth science for oil and gas exploration, chemistry, biology, or technology such as computer science.

Please note that the research in question does not have to be done in a specific way to qualify as R&D. It does not have to be done in-house by employees or by qualified scientists. So long as the company is funding the research, it can be done by employees, independent contractors, or, as mentioned above, state university researchers.

If your business’s expenses meet all four of these criteria, you have met the federal requirements and can continue on to meet the Arizona requirements. This involves submitting proof of the expenditures and their purpose to the Arizona Commerce Authority and to the Arizona Department of Revenue with Arizona Form 308 to claim the credit.

The proof of expenditures is records from your business that show that the expenses in question meet the four-part test, and can include:

• general ledger detail

• payroll records

• project notes

• lab results

• emails and other business communications.

Ready to claim your credit? Call us to speak with one of Endeavor Advisor’s R&D tax credit professionals to get started with the process.