Claiming research and development (R&D) tax credits is one of the most cost-effective ways to boost your capital and lower your tax bill.
In Arizona, the R&D tax credit equals 24% of the first $2.5 million in qualifying expenses, plus 15% of any qualifying expenses above $2.5 million. For a company with a $5 million R&D budget, that could mean up to $975,000 in tax credits. That kind of credit can make a real difference in reducing your annual tax burden.
Arizona’s R&D tax credit rules, like in most states, are complex. To make sure your business gets the most out of these credits, it’s best to work with experts who can guide you through the process. This way, you maximize your benefit and ensure your documentation meets IRS and state requirements if you’re ever audited.
What is an R&D tax credit?
The R&D Tax Credit is a federal business tax credit under Internal Revenue Code section 41, designed for companies that incur research and development expenses in the United States. This program has been available since 1981.
Through the R&D Tax Credit program, the U.S. government provides billions of dollars each year to innovative companies that develop new or improved technologies, products, materials, or processes.
Refundable vs. Non-refundable R&D Tax Credits in Arizona
Arizona R&D tax credits come in two forms: refundable and non-refundable.
Non-refundable credits are used to reduce your tax bill, but they don’t result in a cash refund. These are managed by the Arizona Department of Revenue and calculated as follows:
- Until December 31, 2030: the corporate state tax credit is 24% for the first $2.5 million in qualifying expenses, and 15% for expenses above $2.5 million.
- After December 31, 2030: the corporate state tax credit is 20% for the first $2.5 million and 11% for qualifying expenses in excess of $2.5 million.
You can earn additional non-refundable credits by making basic research payments to Northern Arizona University, the University of Arizona, or Arizona State University. You’ll receive a credit equal to 10% of those payments.
Refundable tax credits are paid out as cash refunds and are managed by the Arizona Commerce Authority (ACA) on a first-come, first-served basis. To qualify for the refundable portion, your company must first qualify for the non-refundable credit and have fewer than 150 full-time employees. Applications open on the first business day of the year, and you can receive up to $100,000.
The total pool for refundable credits is capped at $5 million per year for all applicants. For the 2022 tax year, taxpayers requested $6,759,095 in refunds. Even though demand exceeded the available funds, most applicants still received the credit they applied for.
Which expenses qualify for the R&D tax credit?
Four broad categories define research and development work, also known as qualified research activities (QRAs). They include:
- Permitted purpose – Efforts to develop new or improved products or processes
- Technological uncertainty – Work to solve problems or develop methods not previously resolved with publicly available knowledge
- Process of experimentation – Systematic work to evaluate one or more alternatives
- Technological in nature – Activities in physical sciences, biology, engineering, or computer science
Expenses that fall into one or more of these categories, known as qualified research expenses (QREs), and that can be applied toward the tax credit include:
- Brevets
- Fournitures de R&D
- Salaires des employés américains
- Salaires des sous-traitants américains
- Frais d’hébergement (location de serveurs ou d’autres technologies hors site)
Frequently asked questions about R&D Tax Credits
What can you recover with R&D tax credits?
R&D tax credits are available at both the federal and state levels. The federal credit is about 10% of eligible expenses and can be used to offset up to $250,000 per year in Social Security taxes, as well as income taxes or the alternative minimum tax (AMT). State credits vary by state.
What are the benefits of R&D tax credits?
You can use R&D tax credits to offset the employer portion of Social Security taxes, up to $250,000 per year.
The Social Security tax offset lets eligible small businesses benefit from their research activities, even if they aren’t profitable. R&D tax credits can also be used to reduce income taxes if you owe them, based on your previous tax returns.
R&D tax credits can also offset the alternative minimum tax (AMT) if your average revenue for the past three years is under $50 million and you owe AMT this year.
How do you prepare documents for R&D tax credits?
While the R&D Tax Credit program can help your business recover a significant portion of your R&D spending, claiming these credits is complex. You’ll need to provide receipts and invoices as proof of your QREs.
The IRS and state revenue agencies have their own requirements, but many follow the federal guidelines for their state credits. Required documentation includes:
- Documents must be contemporaneous, meaning you need to record R&D expenses as they happen. The larger your claim, the more documentation you’ll need.
- You must prove the work was performed in the fiscal year you’re claiming. All supporting documents for QREs must be dated.
- Your claim should highlight technical challenges and provide evidence of the R&D work performed. These challenges should fit one of the four main categories (as defined by the IRS) that qualify as R&D.
Tax professionals with industry expertise can ensure your R&D tax credit claim is well-supported and provide clear explanations of your R&D activities in case of an IRS audit.
Boast finds your credits — with no upfront fees
Boast combines AI-powered software that uncovers credit opportunities with the expertise of our in-house R&D tax specialists. We help your business secure bigger refunds, faster, and with less effort.
Our team includes engineers and finance professionals with over 20 years of experience. We stay connected with your business year-round to help you identify eligible R&D activities and share information about other technology grants and funding options.
If the IRS reviews your R&D claim, we’ll stand by you throughout the process to help ensure your claim succeeds. Contact us today for a free assessment and to get started on your next R&D claim.
Use our R&D tax credit calculator to estimate your refund.
