Beginning in calendar year 2019, Arizona capped its refundable tax credit for R&D activities performed in the state at $100,000 per recipient. By capping the refund amount, the state has created an opportunity for more companies to claim the credit. Despite the expanded opportunity for more applicants to claim the credit, the process is still highly competitive and complex, so it helps to have a trusted advisor guide you through the process.
Unfortunately, the credit is allocated on a first-come-first-serve basis with applications becoming available in early January. Though the state authorizes up to $5 million in refundable credits each year, in the past, credits have been depleted the same day the credit application is made available. Application submissions should take place immediately upon availability, with all proper documentation and materials prepared well in advance.
The state’s R&D credit is available to companies across a variety of industries, however, because it’s refundable, it may be especially appealing to start-ups that are yet to be profitable and don’t have state income tax liability. Being refundable refers to the taxpayer not needing any state tax liability to monetize the credit—the state simply sends the taxpayer a tax refund reflecting the credit amount.
Refundable 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 must have fewer than 150 full-time employees and meet a four-part test that proves the R&D activities adhere to the following standards:
- Technological in nature. Experimentation processes must rely on physical, biological, or computer sciences or engineering.
- Qualified purpose. Research must intend to create a new or improved product or process that increases performance, reliability, or quality.
- Technical uncertainty. Activities must aim to overcome technical uncertainty concerning capability, method, or appropriate design of a new product or process.
- Process of experimentation. Activities must include developing hypotheses, designing and conducting tests, and evaluating alternatives.
Business can include several cost categories when applying for the credit including the following:
- Employee wages for those who spend time performing R&D, including supervision or direct support of activities
- Supplies and materials used in the conduct of qualified research
- Contract research for hired consultants, outside testing facilities, equipment designers and manufacturers, and more
- Contracts for cloud services and use of leased computer servers
We’re Here to Help
Our professionals have guided many Arizona refundable credit applicants through the process and helped them collectively claim more than $5 million in Arizona credits in the past five years because we submitted their completed applications immediately upon availability. We can help your company thoroughly complete all necessary steps and streamline the process to submit as early as possible.
Our professionals can assist with the credit application process by stepping into the role of business representative. By doing so, we’ll relieve the burden of the complex requirements so you can feel confident the application steps are completed properly. Filing for the credit requires multiple steps—the business must register with the Arizona Commerce Authority (ACA) and file for a certificate of qualification. This requires completing an application for the certificate, providing estimated tax liabilities without the R&D credit, and accurate completion of an R&D credit calculation on Arizona application forms.
If approved, businesses must then include the certificate of qualification with their tax forms when filing with the Arizona Department of Revenue.
The credit application process requires a significant amount of complex documentation, so it’s important to make sure all documents are properly accounted for and organized. Applicants often incorrectly complete or omit required documentation, disqualifying their application and allowing credits to be claimed by other applicants before an applicant has the opportunity to make corrections.
Even with opportunity for more companies to claim the credit this year, the application process will remain extremely competitive and the first-come-first-serve policy is strictly enforced by submission timestamps.
To learn more about how your business can benefit from the Arizona refundable R&D credit or for help with starting the application process, contact your Moss Adams professional.