Research & Development Income Tax Credit
The Research and Development (R&D) Tax Credit program provides an Arizona income tax credit for increased research and development activities conducted in this state, including research conducted at a state university and funded by the company. The goal of the program is to encourage Arizona businesses to continue investing in research and development activities.
Enacted in 1992 for corporations (currently, A.R.S. § 43-1168) and 1999 for individuals (A.R.S § 43-1074.01), the R&D tax credit program is been administered by the Arizona Department of Revenue (Revenue). Through 2009, the R&D tax credit was equal to 20% of the first $2.5 million in qualifying expenses plus 11% of the qualifying expenses in excess of $2.5 million. The program was modified by the Arizona legislative during 2009. The 2010 R&D tax credit is equal to 22% of the first $2.5 million in qualifying expenses plus 13% of the qualifying expenses in excess of $2.5 million. The 2011 through 2017 R&D tax credit will be equal to 24% of the first $2.5 million in qualifying expenses plus 15% of the qualifying expenses in excess of $2.5 million. For 2018 and thereafter, the tax credit rates will return to 20% of the first $2.5 million in qualifying expenses plus 11% of the qualifying expenses in excess of $2.5 million.
During the 2010 legislative session, Senate Bill 1254 provided for a partial refund of the R&D tax credit. The R&D refundable tax credit program is established by A.R.S. § 41-1507 and is administered by the Arizona Commerce Authority (ACA). Starting in 2010, a qualifying company may be eligible to claim a partial refund of its current year excess R&D credit. A company that is otherwise qualified for the R&D tax credit who employs less than 150 full-time employees can apply to the ACA for a partial refund of up to 75% of the excess credit amount.
In early 2011, Governor Jan Brewer signed into law HB2001 – Arizona's Competitiveness Package. This legislation marks a new level of Arizona commitment; making it easier for existing Arizona companies to be more prosperous and it establishes Arizona as one of the most desirable places for expanding companies to do business. HB2001 amended the R&D tax credit program to allow for an additional credit amount if the taxpayer made basic research payments during the tax year to an Arizona state university. Beginning in 2011, the additional credit amount is equal to 10% of the basic research payments that constitute excess expenses for the tax year over the base amount.
Additional information on the tax credit, can be found on the Arizona Department of Revenue's website.
To apply for a partial refund of the R&D tax credit program, please see below or direct questions to the ACA Program Manager.
ACA has been given the authority to approve refunds under this program not to exceed $5 million in any calendar year. Therefore, refunds are approved by ACA on a first come, first served basis, according to the date and time an application is filed with ACA. Download the R & D Tax Credit Allocation Table
to view the remaining amount of tax credits available.
Applications can be accepted by ACA beginning the first business day of January for the previous calendar year. Applications must be based on actual numbers, not estimates. For calendar year 2011 taxpayers, applications will be accepted by ACA on or after January 3, 2012. Fiscal year taxpayers may file applications on the first business day following the close of the previous fiscal year. ACA shall not accept applications for or approve tax credit refunds from a calendar year's cap until the first business day of that calendar year.
Policy update: Small businesses (under
150 employees company-wide) with excess R&D tax credits may apply for a partial
refund of their excess credits in the program (calendar) year following the year
in which their tax year ends. For example, a small business with a June 30, 2011
end of fiscal year could apply for a partial refund of R&D credits in 2012.
Please note, however, that the application for partial refund must be filed with
the Arizona Commerce Authority before a tax return is filed with Department of
Revenue.
ACA shall only accept original applications delivered via private delivery service or hand delivery. Any other form of delivery for an application, including mailed, emailed or faxed copies will not be accepted by ACA.
A company may be eligible for a partial refund of its R&D tax credit, if it:
- Meets the eligibility requirements of A.R.S. §41-1507 and 43-1074.01 or 43-1168 and the company's current year's Arizona R&D tax credit exceeds its current year's tax liability.
- Submits an application to ACA and receives a Certification of Qualification prior to filing a tax return with Revenue.
- Employs less than 150 full-time employees company-wide as of December 31st of the taxable year.
- Remits a non-refundable processing fee equal to 1% of the company's tax credit being refunded.
- Does not exceed the tax year refund limitations under A.R.S. § 41-1507 (E)
- Complies with employer and business sanctions set forth in A.R.S. § 23-214 (B) and A.R.S. § 35-393.
Questions regarding the refundable tax credit, can be directed to the ACA Program Manager.