Arizona now offers the single most generous R&D credit in the nation. While most states have an R&D credit rate of about 5 percent, Arizona’s is at 24 percent, which even exceeds the maximum federal R&D credit rate of 20 percent. But Arizona holds another special distinction in the realm of R&D credits – it offers this benefit in the form of a refundable credit to qualifying businesses.
On Wednesday, January 15, Moss Adams will host a Webinar and discuss Arizona’s research and development tax credit and explain why the state offers the most generous R&D incentives in the nation. Most important, they will discuss if and how your company can take advantage of these lucrative incentives, which are within closer reach than most companies think.
The refundable credit presents a rare opportunity for companies that cannot currently utilize their full Arizona R&D credit because they are either in a loss position or their credit amount exceeds their Arizona tax liability. In such situations, qualifying businesses may elect to receive this excess credit amount in the form of an immediate cash payment in lieu of carrying the credit forward, up to a maximum of 15 years, to offset future tax liabilities. The refundable opportunity is limited to companies with fewer than 150 full-time-equivalent employees while the non-refundable credit has no such limit.
Timing is critical for the refundable credit. While there is no annual cap on total non-refundable R&D credit claims, refundable claims are limited to $5 million per year. These funds are allocated on a first-come, first-serve basis until the $5 million is exhausted. Since the refundable credit option was first offered in 2010, the $5 million cap has been substantially depleted by the end of April each year. However, it’s uncertain how quickly this reserve will go for the 2013 tax year.
Eligible refundable credit applicants must obtain preapproval by submitting an application prior to filing their tax return. A full R&D credit calculation needs to be submitted with this application. Therefore, R&D studies must begin immediately to allow for timely completion and submission of the preapproval process.
It’s a common misconception that R&D tax credits are limited to large high-tech companies that perform cutting-edge development. In actuality, the tax definition of R&D is far more expansive than most people assume. A wide range of businesses can qualify for the credit – from companies in the food and beverage, apparel, and agriculture industries to those involved in construction, manufacturing, and energy production. Both the refundable and non-refundable Arizona credits are available to individuals, corporations, and all types of pass-through entities.
Whether you’re interested in pursuing the refundable credit or the non-refundable credit, it is always helpful to consult a dedicated team of R&D credit specialists, such as those at Moss Adams, who can help you navigate the process.
Peter Henderson is manager, R&D tax credit team at Moss Adams. He is based in Irvine, Calif. and can be reached at peter.henderson@mossadams.com. Jose Tezanos is senior manager, state and local tax practice for Moss Adams. He is based in Phoenix and can be reached at jose.tezanos@mossadams.com.
