Arizona provides the refundable R&D tax incentive to businesses involved in increased research and development activities in their production. This includes companies that fund research-conducted activities at the state’s university. 

The main purpose of this tax incentive is to encourage businesses in Arizona to invest more in research and development. The A.R.S §41-1507 established the refundable R&D tax incentive, and the Arizona Commerce Authority (A.C.A.) administers it.

The Refundable R&D Overview

The legislative session in 2010 passed Senate Bill 1254 that allowed the refund of the R&D tax credit. The A.C.A. has the authority to approve up to 5 million dollars of the refundable R&D tax credit if you apply for it. A.C.A. will approve your refund based on your application’s date and time. The business that applies for the funds first is given first priority. When applying for the funds, you must use actual numbers and not estimates. 

Companies have been applying for the refundable R&D incentive in large numbers leading to a rapid depletion of credits. In 2019 the state of Arizona introduced a cap for each applicant. An applicant can receive up to 100,000 dollars in one year. You can apply for the funds on the first day or after the first day, which should be a business day that follows closing the previous calendar year.

Who is Eligible for a Refundable R&D Incentive?

Beginning 2010, your company may be eligible for the funds, and you can claim a partial refund of the current year’s excess R&D Tax credit. This is possible if your business employs less than 150 employees who work on a full-time basis. 

You can apply to A.C.A. a partial refund up to 75% of the excess amount. Your company must also meet the requirements of A.R.S §41-1507, §43-1074.01, or §43-1168. You will need to submit your application to A.C.A. and get a certification before filing your tax returns. Also, a refundable processing fee is required. The fee is 1% of what your company is being refunded. The business must also comply with employer and business A.R.S sanctions.

Development Activities for R&D 

Arizona businesses must conduct specific research and developmental activities that will qualify them for the tax credit. Here are the requirements of activities that qualify:

1. Technological

Businesses that are involved in the technology and experimentation process have to make sure they rely on engineering, biology, or computer science.

2. Qualified Purpose

The research intention must be to develop a new product or improved product or process.  The end result should improve quality, reliability, and performance.

3. Technical Uncertainty

The activities of the research must purpose to solve technical uncertainty regarding the ability, design, or method of a new process or product.

4. Process Experimentation

The research activities must involve developing a hypothesis, evaluating procedures, and conducting tests. The process experimentation should aim at the efficiency of a new process.

Qualified Expenses for Refundable R&D Tax

There are specific qualified expenses for the refundable R&D incentive. They include wages for your employees who perform research and development, including supervision duties and direct support activities. 

The materials and supplies that you used to conduct qualified research is another eligible expense. The consultant you hire for the research and outside facilities used for testing, including equipment, cloud services, and leased computers, also qualify.

The refundable R&D tax credit strives to encourage businesses to engage more in research and development and create more employment opportunities. Companies can use the tax incentive to offset some of their expenses, especially during difficult times, and keep their doors open. Business owners in Arizona can now divert capital into technology and research and improve their economic performance. For more information on the refundable R&D tax credit, contact our tax experts who employ proven, client-centric processes to maximize available tax credit for all types of businesses.