Arizona Credit for Increased Research Activities

Program overview

Arizona offers one of the more generous state research incentives. The credit is calculated on Arizona-based qualified research expenses in excess of a base amount and is tiered so that spending above a threshold earns a lower marginal rate. Companies with fewer than 150 full-time employees may apply to the Arizona Commerce Authority for a partial refund of the unused credit, which turns the incentive into cash for pre-profit businesses. An additional credit is available for basic research payments made to Arizona universities.

Eligibility

C corporations and pass-through entities with qualified research expenses incurred in Arizona that also qualify under IRC Section 41. Refund applications require Arizona Commerce Authority certification and fewer than 150 full-time employees.

Benefits

Non-refundable credit against Arizona income tax, with up to 75% of the excess credit refundable for qualifying small businesses.

Arizona IDR questions

What an examiner is likely to ask about this credit. S1–S7 apply to every state claim; the rest come from this program's own rules.

1. S1Confirm the research was physically performed within Arizona.
2. S2Provide the Arizona qualified research expense calculation and base amount.
3. S3Reconcile Arizona expenses to the federal Form 6765.
4. S4Show how wages and supplies were apportioned between Arizona and other locations.
5. S5Provide the Arizona return and credit schedule for each year claimed.
6. S6Show the carryforward schedule for unused Arizona credits.
7. S7Confirm the entity claiming the credit is the entity subject to Arizona tax.
8. AZ-1Show the Arizona refund eligibility tests (such as small business status) were met in each year refunded.

Draft questions for illustration, reviewed by a specialist before any engagement.