Phoenix R&D Tax Credits

Innovation is a key part of keeping up with the competition in your industry. In order to achieve this, research and development are necessary. R&D tax credit is a great—but often overlooked—opportunity for savings. C-corporation, S-corporations, LLCs, and other partnerships are all eligible for R&D tax credits as long as they diligently track their qualified research expenses (also known as QREs).

Initially established in 1981, the research & development tax credit helps numerous businesses save money each year. The non-refundable R&D tax credit administered by the Arizona Department of Revenue was enacted in 1992 for corporations and in 1999 for individuals. Federal research and development tax credits became permanent with 2015’s “Protecting Americans from Tax Hikes Act,” also known as the PATH Act.

Benefits of R&D tax credits include:

• Reduces tax liability
• Increases cash flow and market value
• Increases earnings-per-share
• Lowers effective tax rate
• Results in higher profit retention
• Mitigates alternative minimum tax, Federal Insurance Contributions Act (FICA) payroll tax, etc.

At Haynie & Company, we have extensive experience calculating R&D tax credits for small and large businesses nationwide. We’re dedicated to saving you money and uncovering every tax credit you are entitled to. Read on below for more information about R&D tax credits in Phoenix, Arizona.

To evaluate your eligibility for the R&D tax credit in Phoenix and get the most out of your investments, contact our Phoenix CPA firm and speak with our R&D tax credit specialists today.

Are R&D Tax Credits Available in Phoenix, Arizona?

Yes, Arizona has both refundable and nonrefundable R&D tax credits. Under A.R.S. § 43-1168 and A.R.S § 43-1074.01, the state of Arizona offers a non-refundable R&D tax credit equaling 24% of the first $2,500,000 in qualifying expenditures and 15% of all expenses exceeding $2,500,000. (For 2031 and onward, the tax credit rates will be 20% of the first $2.5 million in qualifying expenses plus 11% of the qualifying expenses in excess of $2.5 million.)

Under Senate Bill 1254 and A.R.S. §41-1507, Arizona also offers a partial refund (up to 75% of the excess credit) to companies with less than 150 full-time employees and a Certificate of Qualification from the ACA.

In addition, there is an extra refund of 10% for companies that have made research payments to a university located in Arizona and who have a letter of approval from the Arizona Department of Revenue.

Here are some more quick facts about Arizona research and development tax credits:

• All refunds must be approved by the Arizona Commerce Authority (ACA).
• Refunds are processed on a first-come, first-served basis, according to the date and time an application is filed.
• The maximum refund amount per taxpayer per year is $100,000. (Arizona caps the refundable amounts for all taxpayers to $5 million in any calendar year.)
• For tax years prior to 2022, unused credits can be carried forward for the next 15 consecutive years.
• For tax years after 2021, unused credits can be carried forward for the next 10 consecutive years.
• The amount of any additional credit for university-related research is not refundable and may be carried forward for the next 5 consecutive years.

Ready to calculate your Phoenix R&D tax credits? To get an estimate of the potential value of your unclaimed tax credits, contact the tax professionals at Haynie & Company.

Who Can Claim R&D Tax Credit in Arizona?

R&D tax credit eligibility must be backed up by hard science. Most companies that engage in the following activities within the state of Arizona can claim the credit:

• Testing products
• Employing engineers
• Investing in data science and data analysis
• Outsourcing product research

These kinds of activities will, naturally, require expenses. So what counts as qualified research expenses?

• Wages
• Supplies
• Contractors
• Patent costs
• Computer costs and software development

(Note: As of 2022, the Tax Cuts and Jobs Act requires businesses to amortize their R&D costs over the course of five years instead of deducting them immediately.)

Even if the research project ultimately failed, you may still qualify for the tax credit. However, all qualified research activity must meet the criteria of the following four-part test:

1. Your purpose is to attempt to improve the functionality, performance, reliability, or quality of a new or existing business component
2. You are experimenting and evaluating possible alternatives (via testing, modeling, simulating, trial, error, etc.)
3. You are relying on hard sciences and technology
4. You aim to eliminate uncertainty during these processes

Beware: if a business does not engage in hard science and research but still tries to claim an R&D tax credit, they may be audited by the IRS. This is why it is vital to always keep proper documentation. Aside from thorough payroll information, you should also track detailed R&D expenses, progress reports and designs, lab results, copies of contracts and invoices paid to outsourced researchers, and any other proof of your R&D process.

If you need additional support determining which of your organizational activities could qualify for an R&D tax credit in Arizona, there’s no need to worry. To thoroughly evaluate your federal and state credit eligibility and maximize your savings, connect with the R&D tax credit specialists at Haynie & Company today!

Regular Research Credit Method

The Regular Research Credit Method, also known as the traditional credit method, is the original method for calculating R&D tax credits. It involves calculating the credit based on a percentage of the qualified research expenses (QREs) of a business. Under the Regular Research Credit Method, the credit is calculated as follows:

Credit = qualified research expenses x credit percentage

The credit percentage is generally equal to 20% of QREs over a base amount. The base amount is calculated as a fixed percentage of the average QREs for the previous four years. The base amount is meant to ensure that companies that consistently engage in R&D are not penalized for doing so.

Alternative Simplified Credit Method

The Alternative Simplified Credit Method, also known as the ASC Method, is a simplified method for calculating R&D tax credits. It was introduced in 2006 as an alternative to the Regular Research Credit Method. Under the ASC Method, the credit is calculated as follows:

Credit = 14% x (QREs – 50% of average QREs for the previous three years)

The ASC Method uses a fixed percentage of 14% instead of the variable 20% credit percentage used in the Regular Research Credit Method. Additionally, instead of using a base amount to calculate the credit percentage, the ASC Method subtracts 50% of the average QREs for the previous three years from the current year’s QREs.

Generally, the ASC Method is easier to use than the Regular Research Credit Method, but it may result in a lower credit amount for businesses with consistently high QREs. However, for businesses with fluctuating QREs, the ASC Method may result in a higher credit amount.

Haynie & Company’s R&D tax credit specialists understand every business is unique. We will take your specific circumstances into consideration as we determine which method is the best fit.

What is the “Startup Provision?”

To offset the FICA portion of their annual payroll taxes, startups could qualify for up to $1.25 million (or $250,000 each year for up to five years) in federal R&D tax credit. In order to be eligible, the start-up companies must not exceed the following:

• $5 million in gross receipts for the credit year
• 5 years of gross receipts

For Help with Payroll Taxes, R&D Tax Credits, and More, Contact Haynie & Company CPA Firm in Phoenix, AZ

Research and development tax credits are a great way to encourage innovation in a wide variety of industries. Unfortunately, fewer than one-third of the companies that qualify for R&D credits actually apply for them.

As a business owner, it’s important to stay informed about your state and federal income tax liability so you don’t miss out on opportunities like these. With audit defense, income tax preparation, financial planning, and much more, Haynie & Company is the CPA firm you can trust. With decades of experience and a thorough understanding of the internal revenue code and tax liability, we help you uncover every possible tax credit year after year.

Here’s how we can assist you and your staff in applying for the R&D tax credit:

• Identifying qualifying R&D activities
• Tracking qualified expenses
• Documenting related costs
• Organizing gross receipts
• Meeting important deadlines
• Preparing any required tax filings, including how to file Form 6765
• Federal audit support/Arizona state audit support 
• Performing look-back studies to find unclaimed credits for open tax years

To find out if you qualify for R&D tax credits in Arizona, contact Haynie & Company’s dedicated tax professionals today.