Research & Development: UNIVERSITY RESEARCH AND DEVELOPMENT TAX CREDIT

(ESTABLISHED PURSUANT TO A.R.S. § 41-1507.01)

SUMMARY

The University Research & Development (“R&D”) Tax Credit Program provides an additional Arizona nonrefundable income tax credit for qualifying basic research payments made during a taxable year to one or more of the three universities under the jurisdiction of the Arizona Board of Regents: Arizona State University, Northern Arizona University and the University of Arizona.  The credit is equal to 10% of the excess, if any, of the “basic research payments” made by a taxpayer in a taxable year over the taxpayer’s “qualified organization base period amount” for the taxable year.

 

BACKGROUND: ARIZONA R&D TAX CREDITS

The University R&D tax credit is a potential addition to the income tax credit for taxpayers qualifying for the general Arizona R&D nonrefundable income tax credit.  Currently, the general R&D tax credit in a taxable year is an amount equal to 24% of the first $2.5 million of “qualified research expenses” expended by a taxpayer in the taxable year in excess of the applicable “base amount.”  The amount of the general R&D tax credit associated with qualified research expenses by a taxpayer greater than the $2.5 million excess threshold is currently 15%. Thus, under current law, the University R&D tax credit, in conjunction with the general Arizona R&D tax credit, can generate a potential combined R&D tax credit of 34% of qualifying expenses. 

The general R&D tax credit is administered exclusively by the Arizona Department of Revenue (“Revenue”).  [Arizona Form 308 or 308-I]

Revenue also administers the University R&D Tax Credit.[1]  However, before a taxpayer can apply to Revenue for University R&D tax credits or otherwise claim such tax credits, a taxpayer must first apply for a certification of research payments from the Arizona Commerce Authority (“ACA”). 

$10 MILLION ANNUAL “CAP” ON UNIVERSITY R&D TAX CREDIT CERTIFICATIONS

The ACA cannot certify research payments representing more than $10 million in University R&D tax credits for a calendar year.  Once the $10 million certification “cap” is attained, no additional research payments may be certified by the ACA.  In administering the Program cap, the ACA will approve applications on a “first come, first served” basis.

 

APPLYING TO THE ACA FOR CERTIFICATION

A taxpayer seeking certification of research payments must submit an application to the ACA following the end of the taxpayer’s tax year.   A taxpayer with a tax year that begins in one calendar year and ends in another calendar year must submit an application for certification for the calendar year’s ACA “cap” that the taxpayer’s tax year begins with.   If a taxpayer realizes that basic research payments occurred within a taxable year that would have made the taxpayer eligible to apply for the credit but the tax return for that taxable year has been filed, the taxpayer may still apply for the credit for that taxable year. An application for a prior taxable year will be considered if there is still credit available under the credit “cap” for that calendar year. (The taxpayer will only be able to use a credit approved for a prior taxable year if an amended return can be filed for that taxable year within the statute of limitations period.)

Applications for certification must be submitted electronically through the ACA’s Electronic Application System (EASY).  EASY automatically dates and time stamps each application.


[1] For Revenue’s Guidelines pertaining to the University R&D tax credit, see https://www.azdor.gov/TaxCredits/UniversityResearchDevelopmentTaxCredit.aspx