Arizona R&D Tax Credits

State and Federal Credits Available

24%

Rate on ≤ $2.5M Excess

15%

Rate on > $2.5M Excess (until 2030)

10 yrs

Carryforward (post-2021)

75%

Partial Refund (qualified small businesses)

$5M

Statewide Refund Cap

The Arizona Research & Development (R&D) Tax Credit incentivizes businesses to invest in qualified research within the state, offsetting Arizona income tax. Enacted in 1994 and updated through 2030, it supports innovation in technology, aerospace, biotechnology, and manufacturing sectors.

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24%

Rate on ≤ $2.5M Excess

15%

Rate on > $2.5M Excess (until 2030)

10 yrs

Carryforward (post-2021)

75%

Partial Refund (qualified small businesses)

$5M

Statewide Refund Cap

Key Highlights

Tiered rates: 24% up to $2.5M, 15% above (reduces post-2030)
75% partial refund for businesses <150 employees (ACA cert required, $5M cap)
10-year carryforward (15 years pre-2022, 5 years university)
Offsets Arizona income tax with no effective cap
Available to all entity types; Arizona research only
Alternative Simplified Credit (ASC) option available

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Who Qualifies for the Arizona R&D Tax Credit

Eligibility requires performing qualified research activities (QRAs) in Arizona, with expenses tied to innovation. Businesses must meet IRC §41 standards, adapted to state rules.

Eligible Entities

C Corporation May claim both the regular and basic research credit
S Corporation Limited entity-level use; can pass credits to shareholders
Partnerships / LLCs Credits pass through to owners via Schedule K-1

Qualified Research Expenses (QREs)

How to Calculate the Arizona R&D Tax Credit

Arizona offers two methods: regular (incremental) and Alternative Simplified Credit (ASC). Both use Arizona-sourced QREs only.

Regular Method

Determine total Arizona QREs for the tax year.
Compute base amount = fixed-base percentage × average Arizona gross receipts for prior 4 years (minimum 50% of current QREs).
Calculate excess QREs = current QREs - base amount.
Apply tiered credit: 24% on excess ≤$2.5M; 15% on excess >$2.5M (until 2030).

Example Calculation

QREs = $3M;

Base = $500K;

Excess = $2.5M

→ Credit = (24% × $2.5M) + (15% × $0) = $600K

If excess = $4M:

→ (24% × $2.5M) + (15% × $1.5M) = $600K + $225K

= $825K

Alternative Simplified Credit (ASC)

Simplifies base to 50% of average QREs over prior 3 years (or 0% if no prior QREs). Credit = tiered percentage of excess (same as regular).

Calculation Steps:

1.Calculate average Arizona QREs from prior 3 years
2.Base = 50% of that average (or 0% if no prior QREs)
3.Excess = Current year QREs - Base
4.Apply tiered rates: 24% on first $2.5M excess, 15% above

Important: Election is irrevocable without approval.

Gross Receipts for Base Calculation

Use Arizona-sourced gross receipts only (exclude returns, allowances).
Startups: Fixed-base starts at 3% for first 5 years, phases to 16% by year 10.
No Arizona gross receipts? Base defaults to 50% of current QREs.

Estimate Your Credits

Arizona-Specific Rules

Arizona's R&D credit includes tailored provisions for refunds, startups, and entity types to maximize benefits.

Partial Refund Conditions

Available to businesses with 150 employees and ACA certification. Refund = 75% of excess credit over liability (statewide $5M cap; first-come basis via application).
High utilization in tech sectors, with $100M+ total claims annually.

Tiered High Rate

24% on first $2.5M excess drives top utilization for mid-sized firms; 15% above supports large-scale projects (reduces post-2030).
No effective cap on nonrefundable credits, enhancing value with carryforward.

Startup Fixed-Base Rules

3% fixed-base for first 5 years (phases to 16% by year 10). Uses Arizona receipts only, benefiting early-stage companies in aerospace and biotech.

Pass-Through Entities

Credits flow via K-1; unitary groups share for optimized reporting. No entity-level refund for S corps.

University Portion Nonrefundable

Separate calculation for university collaborations; 5-year carryforward, no refund option.

Partial Refund Conditions

Tiered High Rate

Startup Fixed-Base Rules

3% fixed-base for first 5 years (phases to 16% by year 10). Uses Arizona receipts only, benefiting early-stage companies in aerospace and biotech.

Pass-Through Entities

Credits flow via K-1; unitary groups share for optimized reporting. No entity-level refund for S corps.

University Portion Nonrefundable

Separate calculation for university collaborations; 5-year carryforward, no refund option.

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Frequent Asked Questions

The statewide refund cap is $5 million total for all qualified small businesses on a first-come, first-served basis. Per-taxpayer maximum is $100K annually.

Your business must have fewer than 150 employees and obtain ACA certification before filing your tax return. The refund equals 75% of credit exceeding your tax liability.

ASC simplifies the base calculation to 50% of average QREs over the prior 3 years. The same tiered rates apply (24% and 15%), and the election is irrevocable without approval.

Activities must meet the IRC §41 four-part test, be performed within Arizona, and improve a product/process through experimentation.

Yes. Rental or lease costs for computers and equipment used directly in qualified research can qualify as QREs.

New businesses start at 3% for their first 5 years and phase to 16% by year 10. Only Arizona gross receipts are used in the calculation.

Arizona applies 24% on the first $2.5M of excess QREs and 15% on amounts above $2.5M (until 2030, when rates reduce to 20% and 11%).

Credits generated after 2021 carry forward for 10 years. Credits from before 2022 carry forward for 15 years. University-related credits carry forward for 5 years.

Keep detailed records for at least four years after filing (preferably seven).

No. Only research conducted physically within Arizona qualifies for the state credit.

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