Move Fast for the R&D Tax Credit Refund

Arizona keeps company with 36 other states in offering an R&D credit, with the distinction of not only offering the largest (24 percent) but also the unique attribute of having a refundable option.

It is the refundable aspect that adds an element of urgency to this information, according to Tom Sanger, leader of accounting firm Moss Adams’ R&D tax services practice — because it is capped at $5 million per tax year and allocated on a first come, first served basis. Intended to help small businesses, the refundable opportunity is limited to companies with fewer than 150 full-time equivalents.

“The refundable credit presents a rare opportunity for companies, such as tech startups, that cannot currently utilize their full Arizona R&D credit because they are either in a loss position or their credit amount exceeds their Arizona tax liability,” Sanger explains, noting that qualifying businesses in these situations may elect to receive the excess credit in the form of an immediate cash payment. Or the business may choose to carry the tax credit forward.

Even if they don’t make the cut for refund, businesses can use the nonrefundable form of the R&D credit, which is also available to corporations, individuals and all types of pass-through entities. The R&D credit can continue to be carried forward for 15 years, giving the business the opportunity to apply it when it has higher expenses or higher tax liabilities.

There is an application process for the refundable credit. Sanger explains that, while companies must file with the Arizona Department of Revenue to claim the nonrefundable credit, the refundable credit requires them to obtain a certificate of qualification from the Arizona Commerce Authority each year and complete a full R&D credit study, which is a required part of the Certificate of Qualification application. The study should capture all qualified expenditures for the entire year. It must be fact-specific, and the expenditures must be measurable, such efficiency on a production line as well as wages and supplies. “Businesses can do much of the study earlier and then complete it in January,” Sanger says.

In previous years, the $5 million was used up by March; last year, in January. “People are getting savvier,” Sanger says. “So the faster you get your study in, the greater your chance to get the refund.”