Arizona revises, extends income tax credits


Dana Lance
San Jose
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Mike Eickhoff
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Laura Gourley
San Francisco
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Luke Nestler
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Clayton Adamson
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On March 13, 2020, Arizona Gov. Doug Ducey signed legislation which extended several state-level corporate and individual income tax credits to Dec. 31, 2030. In addition to extending the sunset date of these credits, additional revisions were included that could significantly impact taxpayers’ ability to maximize and utilize these credits, including limiting the lookback periods for qualifying activities and reducing credit carryforwards.1

Qualified facility tax credit In place since 2012, the qualified facilities tax credit is a refundable state income tax credit that seeks to incentivize businesses to relocate or expand manufacturing facilities, including manufacturing-related research and development and corporate headquarters within the state.2 The amount of credit that can be claimed is the lesser of (i) 10% of qualifying capital investments; (ii) $20,000 per new job created at the facility; or (iii) $30 million per project per taxable year, for eligible businesses.3 Businesses must apply for pre-approval status,4 and after operations begin, the business can be granted post-approval status upon review of compliance with project milestones by a third-party public accountant.5 Once a business completes the certification requirement, a business is eligible to claim state income tax credit in five equal annual installments.6 The program was scheduled to sunset on Dec. 31, 2022.7

Historically eligible businesses were able to “look-back” and consider all capital investment made at the qualified facility after July 1, 2012, for purposes of computing the eligible credit amount.8 However, H.B. 2771 now limits that lookback period to no more than 36 months before submitting an application for pre-approval status.9

In addition, H.B. 2771 has extended the sunset date to Dec, 31, 2030, by which taxpayers claim five annual installments of the credit.10 H.B. 2771 also redefines the term new employment, for purposes of determining eligibility and computing credit amounts, as those employees “with job duties associated with the qualified facility” instead of just those employees “at the qualified facility.”11

Renewable energy investment and production credit The legislation also revises a significant tax credit seeking to incentivize the generation and self-utilization of renewable sources of energy by large-scale international businesses.12 Businesses meeting certain investment requirements in excess of $100 million in one or more new self-generating renewable energy facilities may be eligible to claim a credit of $5 million annually, for five years. Therefore, the maximum credit amount a business is eligible to take over the life of the certification is $25 million.13 The credit is non-refundable, but unused amounts may be carried forward for up to five consecutive years.14

The minimum investment requirement must be completed within a three-year period, and originally, this investment had to be completed no later than Dec. 31, 2018.15 H.B. 2771 extended this deadline to Dec. 31, 2030.16 The initial credit for each facility may be claimed in the year that the facility becomes operational, but not after Dec. 31, 2025.17 H.B. 2771 did not extend this credit sunset date, despite extending the investment period to Dec. 31, 2030. More significantly, the bill excludes any international operations centers certified after Dece. 31, 2018, from claiming the credit.18

Research & development credit The Arizona research and development tax credit was enacted in 1992 and is an income tax credit that aims to incentivize continued investment in the improvement and innovation in technologies and processes in the state. The eligible credit amount is equal to 24% of the first $2.5 million of qualified research expenses and 15% of the excess over $2.5 million for expenses incurred prior to Dec. 31, 2021.19 Beginning in 2022, the credit was to be reduced to 20% of the first $2.5 million of qualified research expenses and 11% for any expenses exceeding that amount.20 The credit is generally nonrefundable with a 15-year carryforward.21 However, under certain circumstances, a business with under 150 employees can apply to become eligible for a partial refund.22

H.B. 2771 did not alter the credit amounts previously mentioned above, but did delay the phase-out which now begins after Dec. 31, 2030.23 The bill also reduces the allowable carryforward of unused credit from 15 years to 10 years, for credits claimed in tax years beginning after Dec. 31, 2021. For credits claimed in taxable years beginning before Jan. 1, 2022, the allowable credit carryforward remains at 15 years.24

Commentary Arizona has a reputation for fostering a favorable environment for businesses to operate. Several counties across the state have boasted fast-paced growth in recent years, no doubt with help from business-friendly economic development incentives like the ones addressed in this new legislation. While the extension of these tax credits signal Arizona’s continued willingness to incentivize businesses to relocate and expand, many of the revisions to these three programs suggest an inclination to moderate the magnitude of these potentially lucrative business incentives.

The reduction in the qualified facilities tax credit lookback period from eight to three years will, in effect, dramatically limit the potential credit available for existing qualifying facilities that may have been unaware of the program’s existence. However, it should be noted that the new legislative changes do not go into effect until 91 days after the end of the current legislative session. As such, businesses with existing facilities may still be able to take advantage of the extended lookback period if they are able to submit an application for pre-approval status prior to the implementation date.

1 H.B. 2771, effective March 13, 2020.
2 ARIZ. REV. STAT. § 41-1512; See Program Rules & Guidelines, Qualified Facility Tax Credit Program, Arizona Commerce Authority (ACA).
3 ARIZ. REV. STAT. § 41-1512.F, .J.
4 ARIZ. REV. STAT. § 41-1512.B.
5 ARIZ. REV. STAT. § 41-1512.O.
6 ARIZ. REV. STAT. § 41-1512.G.2.
7 ARIZ. REV. STAT. § 41-1512.H.
8 ARIZ. REV. STAT. § 41-1512.A.
9 Id.
10 ARIZ. REV. STAT. § 41-1512.H.
11 ARIZ. REV. STAT. § 41-1512.B.5, .C.2, .F.2.
12 ARIZ. REV. STAT. § 43-1164.05; see Program Rules & Guidelines, Renewable Energy Investment and Production for Self-Consumption by International Operations Centers Tax Credit Program, Arizona Commerce Authority (ACA).
13 ARIZ. REV. STAT. § 43-1164.05.C.
14 ARIZ. REV. STAT. § 43-1164.05.M.
15 ARIZ. REV. STAT. § 43-1164.05.B.1.
16 Id.
17 ARIZ. REV. STAT. § 43-1164.05.C.
18 Id.
19 ARIZ. REV. STAT. § 43-1168.A.(1)(b), (c).
20 Id.
21 ARIZ. REV. STAT. § 43-1168.B.
22 ARIZ. REV. STAT. §§ 41-1507; 43-1168.D.
23 ARIZ. REV. STAT. § 43-1168.A.1.(b), (c).
24 ARIZ. REV. STAT. § 43-1168.B.

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