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. The nonrefundable credit was enacted in 1992 and the refundable portion was added in 2010. Arizona leverages off of the federal section 41 rules regarding the calculation and qualification of qualified research activities with some modifications.

  • Applicable Arizona code sections are A.R.S. §41-1168 for the nonrefundable portion and A.R.S. §41-1507 for the refundable portion.
  • For tax years 2011 through 2017, the tax credit amounts to 24% for the first $2.5 million in qualifying expenditures and 15% for amounts in excess of $2.5 million.
  • Unused credits can be carried forward up to 15 years.
  • For 2018 and thereafter, the tax credit will be 20% for the first $2.5 million in qualifying expenditures and 11% for amounts in excess of $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.
  • Arizona has capped the refundable amounts to $5 million in any calendar year.

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 2011 – 2014. The Company qualified for the federal R&D Tax Credits of $233,800 and an additional $306,000 in Arizona state R&D Tax Credits. Summary of credits:

FEDERAL
ARIZONA
Year
Total QREs
Credit
Total QREs
Credit
2014
$750,000
$63,000
$750,000
$90,000
2013
700,000
62,767
700,000
84,000
2012
650,000
65,100
650,000
78,000
2011
450,000
42,933
450,000
54,000
Total $2,550,000 $233,800 $2,550,000 $306,000

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