Article
Taking advantage of the Arizona refundable R&D tax credit
Aug. 24, 2022 · Authored by Peter Henderson, Austin Arcala
Arizona is one of the only states that offers a true refundable R&D tax credit. Being refundable refers to the taxpayer not needing any state tax liability to monetize the credit. The state simply would send the taxpayer a tax refund reflecting the credit amount.
Under the R&D refundable tax credit program, the Arizona Commerce Authority (ACA) has been given the authority to approve up to $5 million in refunds each year. The refund is allocated on a first-come, first-served basis, with applications available the first business day in January. All submitted applications must be based on actual numbers and not estimates.
Refundable tax credit cap
Beginning in 2019, the ACA began capping its refundable tax credit for R&D activities performed in Arizona at $100,000 per taxpayer. Despite the authorized $5 million in refundable credits, available funds have been known to deplete rapidly after the credit application opens. With companies looking to increase cash flow, this program becomes more competitive each year.
To help navigate the highly competitive and complex refund application process, it’s important to work with essential business advisors who have extensive knowledge and experience with this program.
The Arizona refundable R&D credit is especially beneficial when used in conjunction with the federal R&D credit or the Employee Retention Tax Credit (ERTC, sometimes referred to as the ERC credit).
The federal R&D credit currently allows certain companies to use up to $250,000 of their credit to offset payroll taxes, which was increased by the Inflation Reduction act to $500,000 for tax years beginning after Dec. 31, 2022. While not a true refundable credit, it allows companies with losses to monetize the credit by using it to offset payroll taxes that are incurred regardless of profitability. In addition, companies that don’t meet the qualification criteria for the payroll credit offset may still use R&D credits against income tax liability, with unused credits carrying forward.
Between the federal and Arizona incentives, many eligible companies could see their combined credits amount to upwards of 19% of their qualified development costs for the year.
R&D credit overview
Arizona allows companies to elect to treat 75% of the state R&D credit as refundable, forfeiting 25%, or carry forward the credit for up to 15 years until it’s utilized.
Companies that wish to apply for the Arizona Refundable R&D Credit must have fewer than 150 full-time equivalent employees.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.