The R&D Tax Credit Aspects of Arizona

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        Arizona local leaders and businesses are shifting the focus toward innovation as a key component in their economic strategy.  Both large and small companies are making increasing R&D investments in the state.  The Arizona economy has grown in line with the nation as a whole at about 2.5 percent in 2014, however, increasing exposure to a wide range of high tech manufacturing activities could help boost those numbers while the real estate market continues to gain steam recovering from the financial crises.
        General Motors Company is opening an IT Center in Chandler that should eventually bring 1,000 jobs to the area.  Comcast Corporation has announced that it is creating 1,125 new jobs at their customer support center in Tucson.  Northern Trust Corporation plans to add 1,000 workers to its office in Tempe over the next three years.   Revel Systems Inc., which creates platforms for merchants using iPads as their point of sale, is expanding in Scottsdale and a number of other merchant-based technology providers are also expanding in the state.  All of these companies share one thing in common: a commitment to innovation.

        Smaller companies throughout the state are innovating as well.  CampusLogic Inc. in Gilbert offers software to streamline the financial aid application process for students.  The program cuts costs and increases student and faculty satisfaction. eVisit, also of Gilbert, produces software that gives patients access to physicians online so they may receive treatment, billing, and e-prescriptions through high-resolution video conferences. RBar Energy LLC. of Tucson, makes easy to eat energy bars for athletes and food enthusiasts.  

        Public and private programs throughout the state are also available to help stimulate innovation.  The Arizona Innovation Accelerator Fund provides access to financing for innovative start-ups. In addition, the Arizona Innovation Challenge offers a business plan competition that awards qualified, innovative start-ups and early stage companies capital to grow their businesses in the state.

        State run programs and universities are also innovating.  The Arizona Department of Transportation recently integrated state-of-the-art facial recognition software into its facilities to aid in the process of issuing state credentials.   

        The University of Arizona recently formed a partnership with Uber Inc., the San Francisco ride hailing tech company, in order to improve optics used in the mapping technology which is central to automated cars.   Innovation is a central component of any successful business strategy.  Federal and state tax credits are available to support and stimulate this innovation in Arizona.

The Federal Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On December 19, 2014, President Obama signed the bill extending the R&D Tax Credit for the 2014 tax year.  A similar extension is expected for 2015.

Arizona State Research & Development Tax Credit

        The Arizona R&D Tax Credit was enacted in 1992 for corporations and in 1999 for individuals. The tax credit is equal to the following:

2011 - 2017: Credit is equal to 24% of the first $2.5 million in qualifying expenses and 15% of the qualifying expenses in excess of $2.5 million.

2018 and on: Credit is equal to 20% of the first $2.5 million in qualifying expenses and 11% of the qualifying expenses in excess of $2.5 million.  

        Companies are eligible for a refundable R&D credit if the credit exceeds its current year tax liability and the company employs less than 150 employees worldwide.  The Arizona Commerce Authority approves up to $5 million in refunds per year and applications for the refundable credit are on a first come first serve basis.


        Phoenix is the fastest growing technological area in Arizona. The diversity of industries expanding and relocating to the region is impressive.  Financial services, tech related industries, warehouse distribution facilities,  and life science companies all see the area as a beneficial center of operations.  

        As a result, an innovation cluster or technology hub is beginning to emerge. Some locals like to call it the “Silicon desert”.  So far, it is a collection of homegrown technology companies in the Phoenix area with some scattered well recognized names like Go Daddy Group Inc. and InfusionSoft.

        In addition, there are dozens of accelerators and incubators offering key resources and mentorship, not to mention a few angel investment groups like Arizona Tech Investors and Desert Angels that provide financing to cash strapped start-ups with innovative business ideas.  

        Some local leaders have a vision to reinvent the local economy and gear it towards advanced industries as opposed to its previous and current focus on real estate.  

        The Velocity organization is a new public-private partnership that is advancing a strategy to encourage growth and enhance STEM education.    The goal for the organization is to create thousands of jobs in these advanced industries. People in the Phoenix area that work in advanced industries earn on average over $90,000, compared to about $50,000 in other industries.
        Programs like Velocity help foster innovation by providing access to R&D centers, organizing collaboration efforts and linking innovative companies with financing options.  Some other Arizona innovation initiatives are discussed below.  

Arizona Innovation Accelerator Fund

        The Arizona Innovation Accelerator Fund is an $18.2 million loan participation program funded through the U.S. Department of Treasury’s State Small Business Credit Initiative (SSBCI) and managed by the Arizona Commerce Authority (ACA). The goal of the program is to stimulate financing of small businesses and manufacturers in order to create jobs. Innovative companies applying for financing packages through the program receive priority if they are in target industries such as aerospace and defense, semiconductor manufacturing, optics, bioscience and renewable energy.   

Arizona Innovation Challenge

        The Arizona Innovation Challenge (AIC), powered by the ACA, awards the most money in the country for a technology commercialization challenge – $3 million to the world’s most promising technology ventures. Awards range from $100,000 to $250,000 per company.

        With more than 1,400 applications received each year, the program is among the many opportunities available to innovators which have made Arizona their hub for entrepreneurial activity and startup success.  Typical companies that apply for the award are from various industries including IT software, IT hardware, advanced manufacturing, life sciences, advanced manufacturing, aerospace, and defense.

Arizona DOT & Facial Recognition Technology

        The Arizona Department of Transportation (DOT) recently integrated state-of-the-art facial recognition software into its facilities in order to aid in the process of issuing state credentials.  The award winning NeoFace technology by NEC Corporation uses a biometric solution through a cloud platform to help reduce identity theft.   

        The technology searches through photographs and images and compares driver’s licenses and identification cards contained in the database to live applicants and other photos.  The software analyzes applicants’ facial features and alerts workers if a new photo matches one that is already in the driver’s license database for a different person. Previously, employees compared new and old photos visually.  Since the program was implemented early in 2015, the Arizona DOT has increased the potential number of fraud cases it has detected by over 800 percent.

        Biometric facial recognition software is a quickly emerging technology that will likely be pervasive within the short term future.  Identity theft is a huge and growing problem worldwide.  R&D expenses associated with combating the phenomenon are well into the billions of dollars across a broad range of industries.  

Arizona State University (Tempe)

        Arizona State University (ASU) is a research oriented learning institution.  In 2013, ASU spent about $405 million on R&D expenditures despite the fact that they have no medical school.  That figure was more than well known national research institutions like Carnegie Mellon University and Tufts University.  

        Since 2003, ASU research, which spans across a wide range of technologies, has resulted in 2,000 plus inventions, over 80 start-ups, over 175 active license agreements, and at least $500 million in venture capital funding.  Commercial space is available for leasing at the university’s 145,000 square foot SkySong innovation center which is designed to create an ecology of collaboration and innovation among technology companies and other researchers.
        Core research strengths at SkySong and the larger university involve sustainability and renewable energy, advanced materials, flexible systems, biodesign and health, security and defense systems, earth and space exploration, and learning sciences.

The University of Arizona (Tucson)

        The University of Arizona (UA) spent even more on R&D efforts than ASU.  In 2013, UA had about $629 million in R&D expenditures.  That investment ranked them 32nd in the nation for R&D expenses among universities, ahead of other research oriented universities.

        The college recently formed a partnership with Uber Inc. to improve optics used in mapping technology which is so central to the self-driving car effort.  The partnership which includes a $25,000 donation to the university’s College of Optical Sciences center is attracting the attention of local politicians as well.   Governor Doug Ducey recently signed an executive order directing state agencies to take necessary steps to support the testing and operation of self-driving vehicles on public roads within Arizona. Governor Ducey said that “the administration of Arizona is ardently focused on helping 21st-century companies like Uber grow their footprint”.  Uber has similar partnerships with Carnegie Mellon which have so far resulted in autonomous vehicles roaming the streets of Pittsburgh.   


        The Arizona economy is shifting its focus towards one centered on technology and innovation.  Both large and small companies throughout the state are developing technologies that will make the local economy more competitive on both a national and global scale.  Federal and state Research and Development Tax Credits are available to stimulate and support these innovation efforts.

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