Arizona has become a magnet for advanced manufacturing, semiconductors, and technology investment over the past decade, and its R&D tax credit is designed to keep that momentum going. The program stands out for its tiered rate structure and a refundable option that smaller, earlier stage companies don’t always find at the state level.
How the Credit Works
Arizona’s Credit for Increased Research Activities is based on qualified research expenses incurred within the state. The nonrefundable portion of the credit is administered by the Arizona Department of Revenue under A.R.S. Section 43 1168, while a separate refundable portion is administered by the Arizona Commerce Authority for qualifying small businesses. Corporations and partnerships claim the credit using Form 308, with individuals using Form 308 I.
Credit Amount
Arizona uses a tiered rate structure. The credit equals 24% of the first 2.5 million dollars in excess qualified research expenses, and 15% of any excess above that threshold. These rates are scheduled to hold through 2030 before adjusting.
For small businesses that meet eligibility requirements, a portion of the credit can be refundable through the Arizona Commerce Authority rather than only offsetting tax liability, which helps startups and early stage companies benefit even before they’re consistently profitable.
Program Cap and Carryforward
The Arizona Department of Revenue cannot approve more than 10 million dollars in income tax credits statewide in a calendar year, combining both individual and corporate claims. If a business’s credit exceeds its current year tax liability, the unused portion can be carried forward for up to 15 consecutive tax years.
Who’s Claiming It
Arizona’s research base spans several fast growing sectors. Common claimants include:
- Semiconductors, supported by major fabrication investment across the state
- Aerospace and defense, particularly concentrated around Tucson and Phoenix
- Biotech and medical devices, with Southern Arizona building a strong niche in diagnostics and personalized healthcare
- Advanced manufacturing, including companies developing specialized industrial equipment and materials
- Electric vehicles and technology more broadly
What This Means for Your Business
Arizona’s combination of a tiered rate, a meaningful statewide cap, and a refundable option for small businesses makes careful planning worthwhile, especially for companies whose qualified expenses may approach the 2.5 million dollar threshold or whose current tax liability doesn’t fully absorb the credit in a given year.
CSSI is dedicated to helping businesses identify and defend tax savings through detailed, engineering based studies. If you’d like to know whether your Arizona operations qualify, request a free analysis to get started.
FAQ: Arizona R&D Tax Credit
How is Arizona’s R&D credit structured?
It uses a tiered rate: 24 percent on the first 2.5 million dollars of excess qualified research expenses, and 15 percent on any amount above that.
Who administers the credit?
The Arizona Department of Revenue administers the nonrefundable portion under A.R.S. Section 43 1168. The Arizona Commerce Authority administers a separate refundable portion for qualifying small businesses.
Can I get a refund if I don’t owe enough tax to use the full credit?
Small businesses that meet eligibility requirements may qualify for a refundable credit through the Arizona Commerce Authority, which is not common among state R&D programs.
Is there a statewide cap on the credit?
Yes. The Arizona Department of Revenue cannot approve more than 10 million dollars in combined individual and corporate income tax credits per calendar year.
How long can I carry forward unused credit?
Up to 15 consecutive tax years.
What form do I use to claim the credit?
Corporations and partnerships use Form 308. Individuals use Form 308 I.
Which industries typically claim this credit in Arizona?
Semiconductors, aerospace and defense, biotech and medical devices, advanced manufacturing, and electric vehicle related companies are especially active claimants.
How do I know if my business qualifies?
The best way to find out is through a professional analysis of your research activities and expenses. CSSI offers a free analysis to help determine eligibility and estimate potential savings.
