Arizona offers one of the higher state rates on the first tranche of excess qualified research expenses, an additional credit for basic research payments to Arizona universities, and a route to cash for smaller companies: a partial refund of unused credit administered by the Arizona Commerce Authority within an annual statewide cap. The credit is computed on Form 308 with the Arizona return and administered by the Department of Revenue.
Overview
| Item | Arizona rule |
|---|---|
| Statute | A.R.S. section 43-1168 (corporations) and section 43-1074.01 (individuals) |
| Rate | 24% of the first US$2,500,000 of excess qualified research expenses over the base amount, and 15% of the excess above US$2,500,000 |
| Later years | Rates reduce to 20% and 11% for taxable years beginning after 2030 |
| University research | An additional credit of 10% of basic research payments to an Arizona university above a base, subject to annual approval and a cap |
| Base | Computed under the federal section 41 method applied to Arizona figures |
| Location | Research conducted in Arizona |
| Carryforward | Unused credit can be carried forward; credits from taxable years beginning before 1 January 2022 carry forward for 15 years, and the period for later credits depends on the year the credit was earned. |
| Refund | Companies with fewer than 150 full-time employees may apply to the Arizona Commerce Authority for a refund of 75% of the credit in excess of their tax, within a statewide cap of US$5,000,000 a year |
| Form | Form 308 (corporations) or 308-I (individuals), with the Arizona return |
| Administering agencies | Arizona Department of Revenue; Arizona Commerce Authority for the refund programme |
Who can claim
Corporations and individuals, including owners of pass-through entities, with qualified research expenses for research conducted in Arizona. Arizona adopts the federal definitions of qualified research and qualified research expenses in section 41. The basic credit is self-assessed on the return. Refund applications are made to the Arizona Commerce Authority, which issues a certificate of qualification; refunds are approved first come, first served until the annual cap is reached..
Rate and calculation
Compute Arizona QREs and the base amount under the federal regular method using Arizona figures. Apply 24% to the first US$2,500,000 of excess and 15% to the rest. Add any approved university basic research credit. Apply the credit against Arizona income tax; carry forward the balance, or, for a company with fewer than 150 employees, apply for the partial refund.
Illustrative example. Saguaro Robotics, a hypothetical company with 60 employees, has Arizona QREs of US$3,000,000 and a base amount of US$1,000,000, so excess QREs of US$2,000,000. Its Arizona income tax is US$50,000.
| Step | Amount |
|---|---|
| Credit: 24% of US$2,000,000 (all within the first US$2,500,000 tranche) | US$480,000 |
| Used against Arizona tax | US$50,000 |
| Excess credit | US$430,000 |
| Refund applied for: 75% of the excess | US$322,500, subject to the statewide cap and approval |
| Forfeited if the refund is taken | US$107,500 |
| Alternative: carry forward the whole US$430,000 | Carried forward for the period that applies to the year the credit was earned |
The choice between a 75% refund now and a 100% carryforward later depends on when the company expects to pay Arizona tax; a loss-making company usually takes the refund.
How to claim
- Filter the federal workpapers for research conducted in Arizona and compute the base amount on Arizona figures.
- For the university credit, obtain certification of the basic research payments before claiming.
- If seeking a refund, apply to the Arizona Commerce Authority for a certificate of qualification before claiming the refund on the return..
- Complete Form 308 or 308-I and attach it, with any certificate, to the Arizona return.
- Track the carryforward, separately for pre-2022 and post-2021 credits because their periods differ.
Working with the federal claim
The state claim is built from the federal workpapers, not alongside them. Each business component in the Section G schedule carries a location, and the state qualified research expenses are the federal QREs for components, employees and contractors located in Arizona. Two points of difference need their own working. The state base uses state figures, so prior-year Arizona QREs and, where the method needs them, Arizona gross receipts must be kept as a separate series from the federal ones. Where Arizona adopts the Internal Revenue Code as of a fixed date, federal changes after that date, including the section 174 and 174A deduction rules, may not apply for Arizona purposes, and the state deduction for research expenses may differ from the federal one.
Examinations are separate. The Department of Revenue can examine the state credit under its own procedures and limitation period whether or not the IRS examines the federal claim, and it will ask for the same things: the business components, the evidence for each part of the four-part test, the basis of the wage allocations and the location of the work. A single set of records, organised by business component with a location field, answers both.
Common questions
Can we claim the Arizona credit without claiming the federal credit? Yes, where the state computation stands on its own, although the definitions are federal and the workpapers are the same, so claiming one without the other is unusual.
Our researchers work remotely from several states. Which state's QREs are they? Wages are allocated by where the employee performs the research, so remote staff need location records as well as project time records. Work performed outside Arizona is outside the Arizona credit even if the employee is on Arizona payroll.
Can an amended return add the Arizona credit for a past year? Generally yes within the state refund period, which is noted above; elections that the state requires on the original return cannot be added later.
Does a state credit affect the federal payroll tax offset? No. The federal payroll tax election is independent of any state credit, and a qualified small business can use both.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.