Can Companies Claim
R&D Tax Credits in Arizona?
Yes. Arizona offers an R&D Tax Credit for companies investing in research and development within the state, including research funded at state universities. The state follows federal Section 41 rules to determine qualifying activities. Arizona provides both refundable and nonrefundable credits.
Key Features of the Arizona R&D Credit
A refundable portion is available for companies with fewer than 150 full-time employees.
Companies must apply to the Arizona Commerce Authority (ACA) and receive a Certificate of Qualification. Refundable credit is 75% of the allowable credit exceeding tax liability. Excess is waived if refunded.
Refundable amounts are capped at $5 million per year and granted on a first-come, first-served basis.
Credits for university-related research are not refundable but can be carried forward for five years.
Unused credits can be carried forward 15 years for tax years before 2022, and 10 years for tax years after 2021.
The credit is based on the excess of qualified research expenses and basic research payments over a base amount.
For excess amounts up to $2.5 million:
– Tax years before 2030: 24% of the excess
– Tax years from 2030 onward: 20% of the excess.
For excess amounts over $2.5 million:
– Tax years before 2030: $600,000 plus 15% of the excess above $2.5 million
– Tax years from 2030 onward: $500,000 plus 11% of the excess above $2.5 million
Arizona Tax Credit Case Study
A Phoenix-based manufacturing company developing cylinders for chemical storage claimed R&D credits for multi-year engineering projects.
The company qualified for $255,000 in federal R&D credits and $306,000 in Arizona state credits.
FEDERAL | ARIZONA | |||
Year | Total QREs | Credit | Total QREs | Credit |
2024 | $750,000 | $75,000 | $750,000 | $90,000 |
2023 | $700,000 | $70,000 | $700,000 | $84,000 |
2022 | $650,000 | $65,000 | $650,000 | $78,000 |
2021 | $450,000 | $45,000 | $450,000 | $54,000 |
Total | $2,550,000 | $255,000 | $2,550,000 | $306,000 |
Federal R&D Tax Credit Summary
| Year | Total QREs | Federal Credit |
|---|---|---|
| 2024 | $750,000 | $75,000 |
| 2023 | $700,000 | $70,000 |
| 2022 | $650,000 | $65,000 |
| 2021 | $450,000 | $45,000 |
| Total | $2,550,000 | $255,000 |
Arizona R&D Tax Credit Summary
| Year | Arizona Credit |
|---|---|
| 2024 | $90,000 |
| 2023 | $84,000 |
| 2022 | $78,000 |
| 2021 | $54,000 |
| Total | $306,000 |
Criteria for Qualifying Research Activities
The four-part test below defines what counts as qualified research activities
Purpose of the Research
The activity should develop or improve a business component, such as a product, process, software, formula, technique, or invention, by enhancing functionality, performance, reliability, or quality.
Resolving Uncertainty
The work must address technical uncertainties, such as determining the optimal design, method, or approach to achieve the desired outcome. The results should not be known in advance.
Systematic Experimentation
Eligible research must follow a structured experimentation process, including trial and error, modeling, simulation, or testing alternatives to reach the intended improvement.
Technological Basis
The activity must rely on hard sciences such as engineering, physical or biological sciences, or computer science. Artistic, social science, or routine data collection work does not qualify.
Why the R&D Tax Credit Matters ?
Since 1981, the R&D Tax Credit has helped businesses save billions in federal and state taxes. The credit enables companies to hire more staff, expand R&D, invest in facilities, and drive innovation. Thousands of businesses across multiple industries take advantage of this benefit each year.