Many entrepreneurs assume that research and development tax credits are reserved solely for the biggest, most innovative operators in their industry. It's true that the R&D tax credit program initially offered its most significant benefits to larger enterprises. However, recent federal legislative and regulatory updates have empowered smaller businesses to tap into the innovation tax benefit as a lucrative way to drive cash flow across all levels of operations.
Of course, R&D tax credit changes aren't only made at the federal level. Many states have also recalibrated their specific innovation tax credit legislation to increase the opportunity for smaller businesses to leverage the benefit. The state of Arizona is a recent example of a local government adjusting its regulations to level the research and development benefit playing field for small to mid-sized organizations.
Arizona Cap on Refundable Tax Credit Helps Small Business Owners Claim Benefit
Each year, the state of Arizona authorizes up to $5 million in refundable research and development tax credits on a first-come-first-serve basis. However, Arizona recently updated its local program, placing a cap on its refundable tax credit for qualifying R&D operations conducted in the state. Beginning in the 2019 calendar year, the state's refundable tax credit was capped at $100,000 per credit recipient.
Does Your Arizona Business Qualify for Research and Development Tax Credit?
Arizona's benefit cap is excellent news for smaller enterprises. Limiting the refund amount reduces the threat of large organizations stealing the lion's share of the state's allocated funds. Instead, all eligible companies have equal opportunity to claim the credit as long as they can demonstrate qualifying operations that meet the program's required standards:
- Technological in nature
- Serve a qualified purpose
- Attempt to eliminate technical uncertainty
- Follow a process of experimentation
Additionally, Arizona businesses can apply for a credit on qualified research expenses across a multitude of cost classifications. These categories may include employee wages, supplies and materials, contract research, leased computer servers, and even the costs of outside testing facilities.
What Qualifying Arizona Business Owners Should Known
The latest updates to Arizona's R&D tax credit program makes it highly accessible to businesses of every size and across dozens of industries. However, like any incentive, it's essential to go into the process knowing a few fundamental policies and practices. Even with the tax credit cap, Arizona's research and development tax program is still a first-come-first-serve program with a total of $5 million in available credits.
The state pays applicants from the designated pool based on the date and time an application is filed with the Arizona Commerce Authority. Once those funds are depleted, no further credits will be approved, regardless of whether a business can demonstrate qualifying activities. As a result, it's imperative to apply for R&D tax credits in Arizona once the applications are released in January. Qualifying business owners must complete the online application as soon as it becomes available on January 2 to ensure they don't miss out on the credits available to their business.
Do you have questions about applying for research and development tax credits for your business? Acena Consulting can help. Contact us today.