Arizona Research and Development 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 funded by taxpayers at state universities. Arizona has both a refundable and nonrefundable credit. Arizona leverages of the federal section 41 rules regarding the calculation and qualification of qualified research activities with some modifications. The amount of the credit is based on the excess, if any, of the qualified research expenses for the taxable year over the base amount as defined in section 41(c) of the internal revenue code and is computed as follows:

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 excess is over $2.5 million:

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

In order to qualify for the refundable portion of the tax credit, a company must qualify for the regular tax credit and employ less than 150 full-time employees.

  • The refundable amount is 75% of the excess of the allowable credit that exceeds the taxpayer’s tax liability. Any excess amounts of credits are waived if refund is elected.
  • Arizona has capped the refundable amounts to $5 million in any calendar year.

Unused credits can be carried forward up to 15 years.

Arizona R&D Tax Credit Case Study

A manufacturing company in Phoenix that creates cylinders for the extraction and storage of different coolants and chemicals qualified for a substantial credit. The company claims R&D credits each year for the development activities of its engineers. This project involved a multi-year study covering the tax years 2013 – 2016. The Company qualified for federal R&D credits of $391,000 and an additional $391,000 in Arizona credits, and expects its Arizona credit to exceed its federal credit in 2018 when the Arizona credit rate increases to 24%. The summaries of credits are as followed:

FEDERAL
ARIZONA
Year
Total QREs
Credit
Total QREs
Credit
2016
$1,068,000
$106,800
$1,068,000
$106,800
2015
1,002,000
100,200
$1,002,000
100,200
2014
947,000
94,700
947,000
94,700
2013
893,000
89,300
893,000
89,300
Total $3,910,000 $391,000 $3,910,000 $391,000

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