Arizona companies that create products that are more reliable, lighter, faster or less expensive, may qualify for a dollar-for-dollar reduction of their income tax liability. But, Arizona business need to start preparing early if they hope to take advantage of this opportunity.
Arizona’s research and development (R&D) tax credits are available to companies that bear the financial risk of developing new or improved products or processes, said Tom Sanger, partner at Moss Adams LLP.
The R&D tax credit gives qualifying companies additional money to reinvest into the business, rather than pay out to the IRS or state. Arizona offers the most generous R&D tax credit in the nation. While most states have an R&D credit rate of 5 percent to 10 percent, Arizona’s is at 24 percent.
“Businesses are doing these activities regardless of the tax credit,” Sanger said, “but additional credit is a bonus to profits.”
Arizona holds another notable distinction in terms of R&D credits: a refundable credit to qualifying small businesses, Sanger added. Refundable claims are limited to $5 million per year and funds are allocated on a first-come, first-serve basis.
Eligible businesses must first obtain pre-approval for the credit by submitting an application to the Arizona Commerce Authority prior to filing their tax return. It is critical to begin preparing early for the pre-approval process because last year’s funds were depleted by the end of January. The application period opens on January 1.