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Arizona's Competitive Research and Development Tax Credit

March 2, 2022


Strike Summary

  • There are certain restrictions when taking advantage of both Sections 174 deduction/capitalization and Section 41, which can be seen in Section 280C.
  • Businesses that choose to elect Section 280C for their federal taxes could also lower their state taxes as well.
  • Taxpayers that want to use Section 280C must plan ahead because it can only be used on an originally filed return.
  • The recent passage of the Tax Cuts and Jobs Act may have have affected whether a taxpayer should use Section 280C in their tax strategy.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

Strike Summary

  • The state of Arizona has a generous R&D tax credit, but an annual budget limit for the credit.
  • Arizona's R&D credit changed from 2011-2017, and then again after 2018. It is an active and substantive credit.
  • Filing on time in Arizona can mean the difference between getting all of the R&D credit you're owed, or none of it.

While well over half of the states in America offer R&D tax credits, the laws associated with these particular states differ slightly. Every state has unique qualifications, elements that separate them from federal law, and specifics that can either benefit or hinder entrepreneurs depending on how they are handled. By analyzing the tax credit law in your particular state and how it differs from federal law, you can be sure to file on time and accurately to get the most out of your state’s R&D tax credit system. 

Let’s take a deeper look at the Grand Canyon State and its highly competitive research and development tax credit laws below. 

Arizona’s R&D Tax Credit

The state of Arizona is known for its incredibly generous R&D tax credit within the innovation and research industries. Those that conduct research and development in Arizona are sure to receive excellent credits in exchange for their efforts towards advancing our society.

However, companies must be quick in filing for Research & Development tax credits due to the annual budgetary limit. It is among one of the most competitive states because of its annual cap on the maximum amount that can be credited each year under the R&D tax credits program. Because of its lucrative nature, only the most determined innovators and developers choose to bring their visions to life in this highly competitive market. 

Arizona has capped its refundable tax credit beginning 2019 for all R&D activities performed in the state, both on how much a company can claim and how much it annually sets aside as refundable R&D tax credits. The cap is set at $100,000 per recipient, which is still a significant amount for both small and medium enterprises. Arizona also sets aside up to $5 million in refundable tax credits each year likewise. By capping the refund amount, the state has created the opportunity for more companies to claim the credit instead of large companies staking claims on large portions of tax credit funds. 

Despite this consideration, it can still be difficult for companies to claim this state’s tax credit as the credit is competitive, complex, and time sensitive. Your punctuality during this process is key. The application process requires your documents to be sent on the first business day of the new year, and there is a finite amount of funds. 

In 2019, tax credits were depleted the same day the credit application was made available. In 2021, only the first 80 or so businesses that applied received any money. Therefore, it’s incredibly important that your company takes this into account and relies on the expediency of professionals such as the team at Strike when filing in Arizona. 

Now that we’ve broken down Arizona’s tax credit specifically, let’s take a look at how this state’s refundable tax credits are beneficial to startups specifically. 

How Arizona’s Refundable Tax Credits Entice Startups

The state of Arizona follows the federal guidelines for Qualified Research Expenses (QREs) for companies that pass the four-part innovation test. This credit is available for companies in countless industries including telehealth, manufacturing, robotics, software development, and agriculture. Since the tax credits are refundable, it is especially appealing to startups still in the red that don’t owe federal and state taxes yet. Therefore, a company does not need any tax liabilities to monetize the credits and wait until they finally become profitable. 

If a startup only employs under 150 full-time employees, they can apply for a partial refund from the Arizona Commerce Authority (ACA) up to 75 percent of the excess credit amount. The credits that aren’t used during these startup years will still carry forward for 15 consecutive years. This allows newer companies to perfect and progress with their research and development without receiving any tax credits whatsoever. On top of this, companies can also receive ‘basic research’ credits if the payments they make in cash to universities and scientific research organizations exceed a base period amount in Arizona. 

These are the ways that startups in Arizona can benefit greatly by keeping track of their research and development phases and claiming these processes yearly. Now that you can see why this tax credit is so enticing, you may still be wondering what the tax credit rate itself is in Arizona. Fortunately, for the final part of this informative article, we’ve broken down this aspect of Arizona’s R&D tax credit as well below. 

What Is the Tax Credit Rate?

Throughout the years, the tax credit rate in Arizona has changed and transformed significantly. Because of this, we’ve shared the rates from the last 10 years to help shine a light on how this tax credit could change in the future as well. 

2011 through 2017: Throughout this six-year period, the Arizona tax credit was equal to 24% of the first $2.5 million in QREs and 15% of the qualifying research expenses in excess of $2.5 million. 

2018 and after: The Arizona tax credit rate is 20% of the first $2.5 million in QREs as well as 11% of the qualifying expenses in excess of $2.5 million.

Additionally, the Arizona R&D program was further enhanced in 2018 with an additional credit return of up to 10% if the company made basic research payments during the tax year to a university under the jurisdiction of the Arizona Board of Regents, which includes Arizona State University, Northern Arizona State University, and the University of Arizona.

Arizona’s Research and Development tax credits are highly appealing and very difficult to receive at the same time. This is why it helps to have trusted and experienced advisors to guide you through the filing process to ensure that you are one of the lucky companies to be awarded one of these competitive state tax credits. By filing properly and on time, you can continue to advance your passions, revolutionize your industry, and tap into a source of non-dilutive funding. 

To learn more about how Strike can help you streamline the filing process and earn your R&D tax credit with ease, contact Strike today! We can’t wait to help you cross that ‘grand canyon’ to accomplish your innovation goals now and forever!

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

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