Arizona offers an R&D Tax Credit for businesses incurring qualified expenses within the confines of the state. The state’s definition of qualified research expenses (QREs) is aligned with the federal government’s definition of QREs found in section 41 of the IRC. The state has both a refundable and a nonrefundable credit program. To qualify for the refundable portion of the tax credit the taxpayer must have less than 150 employees and must receive a certificate of qualification.
The AZ R&D Credit is equal to:
- 24% of the first $2.5 million in research expenses in excess of the AZ base amount PLUS
- 15% of research expenses over $2.5 million in excess of the AZ base amount.
To claim the AZ R&D Credit, taxpayers will need research expenses in the current year and gross receipts for the prior four years. Taxpayers must complete AZ Form 308 to be attached with AZ tax returns. The credit can be passed through for Partnerships and S-Corporations. To pass credits through to owners, taxpayers must complete AZ Form 308-S. Any unused credits can be carried forward for 15 years.