Arizona offers one of the more generous and flexible state R&D tax credits in the U.S., especially for active technology and engineering companies — but like most state incentives, the details matter and misunderstandings are common.

Let’s break down how it works today, what’s changed recently, and what companies need to check before filing.

What the Arizona R&D Credit Is

Arizona’s R&D tax credit — formally the Credit for Increased Research Activities — is a state income tax credit that rewards businesses for qualified research and development conducted within the state of Arizona.

At its core, the credit mirrors federal R&D rules by tying benefits to the amount by which this year’s qualified research expenses (QREs) exceed a historical base.

How the Credit Is Calculated

For taxable years before 2031, the core rate structure is:

• 24% of excess qualifying expenses up to $2.5 million

• 15% of excess qualifying expenses above $2.5 million

After 2030, Arizona plans to reduce those rates slightly (to 20% / 11%) — but for now, the current structure remains in effect.

This is one of the more lucrative state credit structures, especially for companies with modest QREs.

The credit applies only to Arizona-sourced research, so activities outside the state don’t count — even if they would qualify federally.

Refundable vs. Non-Refundable Components

Arizona has both non-refundable and refundable aspects to its R&D credit:

Non-refundable portion

• Reduces Arizona income tax liability

• Can be carried forward if unused (often over multiple years)

Refundable portion

• Available to companies with fewer than 150 full-time employees worldwide

• Allows a partial refund of up to 75% of the excess credit (after offsetting tax)

• Refunds are capped per taxpayer (often $100,000 per year) and subject to an annual statewide cap on refunds

This refundable feature can deliver real cash sooner, which matters for founders and startups navigating growth or runway planning.

A Notable Change: ASC Is Available in Arizona

In recent years (effective starting for tax year 2023 claims and continuing into 2025/2026), Arizona authorized use of the Alternative Simplified Credit (ASC) method — a calculation option adapted from federal R&D rules.

The ASC can be very valuable for companies that:

• don’t have a long or reliable historical R&D base,

• want a simplified calculation approach,

• or lack strong data for the regular base-period method.

Under the ASC:

• The credit is based on the excess of current-year Arizona QREs over the average of the previous three years’ QREs.

• If there are no QREs in any one of the prior three years, the ASC may not be available — another important checklist item.

Because this change is still relatively new, companies that previously didn’t qualify under the old base-period method may now find an opportunity through ASC.

University R&D Credit: Another Layer

Arizona also offers an additional tax credit tied to basic research payments made to in-state universities such as Arizona State University, Northern Arizona University, or the University of Arizona.

This can provide an additional incremental benefit equal to 10% of certain basic research payments above a base amount.

It’s a small but worthwhile boost for companies that partner with academic institutions or fund research initiatives.

Key Things Companies Should Check Before Filing

Before claiming the Arizona R&D credit, here are important items to verify:

✔️ Arizona Sourced Research
Only QREs tied to work conducted in Arizona qualify — make sure your project mapping and workforce location reflects this.

✔️ Choose the Right Calculation Method
Evaluate both the regular method and the ASC method — the ASC may benefit companies with uneven historical R&D or recent spikes in activity.

✔️ Refundability Eligibility
If your company is under the employee threshold, prepare and apply early for a refundable credit certificate — supply timing matters and refund allocations can exhaust.

✔️ University Research Payments
If you make payments to qualifying universities in Arizona, check whether those can be included for the additional 10% credit.

✔️ Understand Carryforward Rules
Unused non-refundable credits may carry forward, but timing and limits vary — plan accordingly.

✔️ Stay Ahead of Cap Changes
Refundable credits are subject to annual caps on total refund amounts and may require early action for eligible years.

Why It Still Matters — Especially in 2025

With federal changes (like immediate expensing of U.S. R&D under Section 174) increasing the cost-effectiveness of domestic innovation, stacking state credits like Arizona’s makes good financial sense.

Arizona’s credit structure and its new ASC option spark two practical points:

• Even if your federal credit is strong, don’t overlook state layering potential that could significantly boost overall benefit.

• The presence of both non-refundable and refundable pathways means smaller companies can see cash value, not just tax reductions.

But you have to check eligibility and mechanics upfront — these aren’t automatic.

The Takeaway

Arizona’s R&D tax credit remains one of the more competitive state incentives for innovation-driven companies — especially those investing in research in Arizona or partnering with in-state universities.

With the addition of the ASC method, refundable credit options, and generous tiered rates through 2030, it’s worth actively evaluating eligibility rather than assuming your company won’t qualify.

Before you file, double-check:

• how much of your R&D activity actually happened in Arizona,

• whether the ASC method is advantageous for you,

• and whether you can apply for refundable benefits if eligible.

Arizona’s rules are nuanced — but companies that navigate them proactively can unlock meaningful state-level benefits in addition to federal credits.