Arizona Boosts Research Credit

by Leroy Baker, Tax-News.com, New York

17 May 2010

Arizona Governor Jan Brewer has signed a bill into law which modifies the current research and development (R&D) tax credit to allow small technology companies to receive a refund of 75% of their eligible tax credit.

A discounted refund of 75 cents for each dollar of an R&D tax credit already earned is offered to taxpayers that employ less than 150 full-time employees.

Arizona has modified its existing R&D tax credit legislation to allow for the discounted refund as opposed to strictly just a tax credit. The bill, SB 1254, puts cash in the pockets of entrepreneurs who are often trying to move from research to prototyping and limited production. In return, the state actually reduces its liability by applying the 25% discount to its accrued tax credit obligation. Total refunds for all taxpayers are limited to USD5m per year.

“Senate Bill 1254 was truly one of the most important pieces of legislation we produced this session,” said Senator Barbara Leff, who together with Representative Lucy Mason worked with the Arizona Technology Council for years to promote this legislation successfully.

“This tax credit will ensure that Arizona remains competitive in attracting fast-growing, high tech companies,” Leff added.

Access to capital is the lifeblood of high-tech startup companies, especially in the critical early years when they are developing products but don't generate profits.

Venture Capital (VC) is often the major source of early-stage funding, but Arizona ranked 39th in growth in VC investment from 2002 to 2008, according to a Milken Institute report on Arizona high-tech development issued in December, 2009.

“In many ways this legislation is really a capital formation initiative,” said Howard Stewart, president, AGM Container Controls, who testified in favor of the legislation. “Arizona has become creative in how it is mobilizing funds in the private sector to grow our economy.”

The R&D tax credit is widely successful in Arizona, especially since its expansion in 2007. According to recent data from the Department of Revenue, in 2007 161 individual taxpayers claimed USD2.6m in credits while 185 corporate taxpayers claimed USD43.8m.

Evidence of success is demonstrated by Intel’s announcement in 2009 of their USD3bn investment in the state, reported to be partly due to Arizona ’s R&D tax credit.

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