by Phil Williams
In 2024, 35 states will have some version of a research and development tax credit available, with the intention that the preferential tax treatment will help both attract new businesses to the state as well as incentivize current businesses to stay. Empirical data shows that these incentives have been critical to the economies of the states that offer them, allowing employers to increase their R&D spend and in turn attract highly skilled workers to work on cutting-edge technologies. With this being said, not every state-level credit is the same.
Of the states that have a credit, only a small number allow for the credit to be refundable, meaning that even if a company doesn’t have a tax liability they can still benefit financially from the credit in the near term. While some states like Virginia, Maryland, and Iowa have followed to a lesser extent, Arizona has led the way on refundable credits, both in terms of funding as well as size of the credit. Initially codified during the 2010 legislative session, Arizona provides funding on an annual basis for up to $5 Million in refundable credits which are administered through the Arizona Commerce Authority.
While following a calculation that mimics the Section 41 federal credit, there are some key differences and requirements for the program, namely:
- The qualifying expenses must be incurred within the State of Arizona.
- The taxpayer claiming the credit must not have more than 150 worldwide employees as of December 31 of the year for which the expenses are being claimed.
- The employer must participate in eVerify in the screening of new hires.
- The base credit rate is 24% on the first $2.5M of qualifying expenses (above a base amount)
- 75% of the total credit can be requested to be refunded (if utilized as an income tax offset, the full amount can be benefited from)
- The taxpayer must register with the Arizona Commerce Authority, submit an application on the first business day of the year, and receive part of the $5M allocation (see more on this below).
Several key changes have been made to the credit since 2019, including:
- In 2019, the state imposed a $100,000 limit on the size of credit each taxpayer could claim. While this significantly shrunk the benefit for some taxpayers, it did free up funds to include more businesses within the allocation.
- In 2023, the state first authorized an alternative simplified credit calculation. This was significant for historic companies (those in existence in the 1980’s or prior) that were otherwise unable to establish base amounts.
- The most significant change will happen for tax year 2024 claims, where it is no longer a “first come, first serve” program. To explain, from 2010-2023, taxpayers who submitted an application were given a time stamp, with traditionally only the first 70-80 taxpayers receiving a portion of the allocation. Beginning in tax year 2024, timing is still critical, but all applications received on the first day will be placed in a lottery, with the allocation determined via random draw.
While this has taken some of the stress out of January 2, this program still requires much in the way of up-front planning to make sure companies are appropriately registered, have the correct credentials, and have all of the information necessary to successfully submit an application. Arizona requires that the filed numbers be accurate and states that estimates may not be used, so accelerating the R&D study work into November and December is highly recommended.
Tri-Merit has assisted clients in the successful acquisition of more than 75 of these credits, worth in excess of $6,000,000 since 2010. If you would like to discuss further, please don’t hesitate to reach out to myself or any of our Arizona Refundable R&D Credit team.
Eric Mueller – eric.mueller@tri-merit.com
Chris Bird – chris.bird@tri-merit.com
Phil Williams – phil.williams@tri-merit.com
