Arizona R&D tax credit: 24% of in‑state research spending
Arizona Department of Revenue
24% / 15% of AZ R&D
Researched for this program: 5 rejection traps · 7 required documentsWhat decides this award ↓
Arizona credits 24% of your in-state research spending above your base amount, up to $600,000 on the first $2.5M, plus 15% of anything above that. Unused credit carries forward 10 years.
Arizona's R&D tax credit gives 24% on the first $2.5 million of incremental qualified research expenses for research done in Arizona — one of the highest rates in the US — plus 15% above that threshold. Arizona repealed its small-business cash refund (75% of excess credit for companies under 150 employees) in 2026, so credit beyond your Arizona tax now carries forward for up to 10 years. The rates drop to 20%/11% for taxable years beginning after December 31, 2030.
- Funding type
- Tax Credit
- Level
- State
- Amount
- 24% of incremental Arizona-located qualified research expenses up to $2.5M above base period; 15% on amounts above $2.5M (through Dec 31, 2030). Rates drop to 20%/11% from 2031 onward. Additional 10% credit on basic research payments to Arizona Board of Regents universities (subject to a combined $10M annual statewide cap). Credit above your AZ tax liability carries forward up to 10 years; the former 75% cash refund for businesses under 150 employees was repealed in 2026.
- Realistic amount
- A 30-person Arizona software company with $600K of incremental Arizona-located R&D wages would generate a credit of approximately $144,000 (24% × $600K).
- Deadline
- Rolling — claimed annually on Arizona state income tax return
- Status
- active
- States
- AZ
- Payment model
- tax offset
Who qualifies
- Must conduct qualified research activities physically located within Arizona — research follows federal §41 four-part test but must be Arizona-located
- Qualified research expenses (QRE) include: wages for AZ-based employees performing, supervising, or supporting research; AZ-located supply costs; 65% of AZ contract research payments
- Basic research payments to Arizona Board of Regents universities qualify for an additional 10% credit — must be certified by the Arizona Commerce Authority post-2014
- No cash refund: Arizona repealed the 75% small-business refund (fewer than 150 employees) in 2026; credit above your Arizona tax liability carries forward instead
- Unused credits carry forward: 10 years for credits arising in taxable years beginning on or after January 1, 2022; 15 years for older credits. Each year, carryforward use is capped at your Arizona tax minus that year's new research credit
- All entity types qualify: C-corporations, S-corporations, LLCs, partnerships, sole proprietors — must file an Arizona return
- No minimum revenue, minimum employees, or minimum project size
What it covers
Eligible expenses
- Wages of Arizona-based employees directly performing qualified research activities
- Wages of Arizona-based employees directly supervising or directly supporting qualified research
- Supplies and materials consumed or destroyed in Arizona-located qualified research
- 65% of payments to Arizona contractors performing qualified research on the company's behalf
- Basic research payments to Arizona Board of Regents universities (eligible for additional 10% credit with ACA certification)
Ineligible expenses
- Research conducted outside of Arizona — even by Arizona-domiciled employees working remotely in another state
- Research funded or reimbursed by a third party (government contracts, client-funded R&D)
- Research in social sciences, arts, humanities, cosmetic design changes, or seasonal adaptations
- Market research and consumer surveys
- Post-production quality assurance testing and routine data collection
- Capital equipment purchases (though rental of equipment used in AZ research may qualify)
- Management and administrative time not directly tied to qualified research activities
- University research payments to non-Arizona institutions (no 10% university credit; may still qualify at standard incremental rate if they satisfy §41 requirements)
How to apply
-
1
Identify and document Arizona-located qualified research expenses
Start from your federal §41 QRE calculation but carve out only expenses for research conducted physically in Arizona. Wages for employees performing research remotely from other states, out-of-state contractor costs, and supplies consumed outside Arizona do not qualify. Build a location-by-project allocation table — this is the primary audit focus.
~8 hrs
-
2
Calculate your base amount and incremental QRE
Arizona uses the same base-period methodology as federal §41. The credit applies only to QRE above the base amount. For companies with an established history, the base is the fixed-base percentage × current-year AZ gross receipts (capped at 50% of QRE). For startups without base-period history, Arizona follows the federal startup rules. The incremental amount is what the credit rates apply to.
~4 hrs
-
3
Apply the tiered credit rates
Apply 24% to incremental QRE up to $2.5M (for taxable years beginning before December 31, 2030). Apply 15% to incremental QRE above $2.5M. If you made basic research payments to an Arizona Board of Regents university, apply an additional 10% credit to those amounts (subject to the $10M statewide annual cap). Total your credit.
~2 hrs
-
4
Plan how you will use any excess credit
Arizona repealed the small-business cash refund in 2026, so credit above your Arizona income tax liability carries forward for up to 10 years (credits from 2022+). Each year, carryforward use is capped at your Arizona tax liability minus the current year's research credit. If your Arizona tax bill is small, model how many years it will take to use the balance.
~2 hrs
-
5
Complete Arizona Form 308 or 308-I
Corporations and partnerships file Form 308; individual taxpayers file Form 308-I (Credit for Increased Research Activities) with the Arizona income tax return. The form walks through the base-period calculation, incremental QRE and the credit amount; the additional 10% university credit needs its own certification first. Attach to Form 120 (C-corporations), Form 140 (individuals/sole props), Form 165 (partnerships), or Form 120S (S-corps).
~3 hrs
-
6
Maintain supporting documentation
Keep records demonstrating that each qualifying activity occurred in Arizona: employee location records, project timesheets by work location, Arizona-address supply invoices, and university research contracts with AZ Board of Regents certification. Arizona DOR audits of this credit request location evidence separately from federal documentation. Retain records for at least 4 years from the return due date.
~5 hrs
Industry & certifications
NAICS codes: 541511, 541512, 541330, 325412, 336411, 541714, 541715
Many guides still describe Arizona's 75% cash refund for companies under 150 employees. Arizona repealed it in 2026; plan on carrying unused credit forward and using it against future Arizona tax.
Deadline & timing
File Arizona Form 308 (corporations and partnerships) or Form 308-I (individuals) with your Arizona income tax return. C-corporations file Form 120. Credit you cannot use this year carries forward for up to 10 years. The 2030 rate sunset is a planning cliff: companies with large carryforward balances from pre-2031 years retain those balances at the higher-rate value.
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