Does Your Business Qualify for Arizona Tax Incentives?


	Jeff Bither

August 2009

Does Your Business Qualify for Arizona Tax Incentives?

The State of Arizona offers a variety of credits, grants, loans, guarantees, interest rate subsidies and tax waivers

Because most Arizona income tax credits and other incentives do not apply to many businesses in a given tax year, it is important that you are alert to those tax saving opportunities when circumstances allow them.

Businesses in a broad range of industries may qualify for one or more state tax credits, and the greatest likelihood of eligibility exists for small businesses with an orientation toward technological innovation and growth.

Following are just a few of the available Arizona tax credits and incentives.

Renewable energy. In 2009, Arizona enacted a tax incentive program that includes corporate and personal income tax credits and property tax incentives for businesses and individuals expanding or locating qualified renewable energy operations in the state.

Renewable energy operations are limited to manufacturers of and headquarters for systems and components that are used in manufacturing renewable energy equipment for the generation, storage, testing, and research and development or distribution of electricity from renewable resources.

Taxpayers may apply for credits for tax years beginning after December 31, 2009, through December 31, 2014, and special property tax classifications may be granted through December 31, 2014.

Eligibility. To participate in the program, a renewable energy business must apply to the Department of Commerce to be certified as a qualifying business. To be eligible for the tax incentives, a taxpayer must make a new capital investment in a renewable energy manufacturing facility or a new regional, national or global renewable energy business headquarters facility in Arizona, where (a) at least 51% of the net new full-time employees at the facility are paid a wage that equals or exceeds 125% of the median annual wage, and (b) all new full-time employees are afforded health insurance coverage for which the applicant pays at least 80% of the premium (or an equivalent percentage of the cost for alternative models that offer standard comprehensive coverage).

Corporate and personal income tax credits. If a manufacturer creates at least 1.5 new full-time employment positions for each $500,000 of capital investment, or a headquarters creates at least one new full-time employment position for each $200,000 of capital investment, the amount of income tax credit is up to 10% of the taxpayer's total capital investment.

The total amount of the credit cannot exceed 10% of the amount of the applicant's total capital investment. The credit must be claimed in five equal installments over five consecutive tax years. The aggregate amount of credits that may be granted to taxpayers is limited to $70 million per taxable year. If less than the maximum dollar amount is claimed in any fiscal year, the unused credit amount may be carried over to the following year.

Taxpayers who utilize this credit cannot claim an enterprise zone, military reuse zone, or qualified defense contractor credit with regard to the same employment positions.

Property tax incentives. Qualifying manufacturing facilities or headquarters will be categorized as Class Six property, which has an assessment ratio of 5%, rather than Class One property, which currently has an assessment ratio of 22%. To qualify, a taxpayer must make a capital investment of $25 million or more in land, buildings, machinery and fixtures for a renewable energy manufacturing facility or headquarters in the state. The Class Six property classification is permitted for either 10 or 15 years, depending on whether a percentage of net new full-time employees are paid a wage that equals either at least 125% or at least 200% of the median annual wage in the state, as determined by the most recent annual Department of Commerce Occupational Wage and Employment estimates.

‘Angel Investment’ Small Business Capital Investment Tax Credit. These tax credits are available to small businesses in designated sectors and to investors in Arizona businesses. The credits are based on the amount of the investment, up to 30% over three years (the credit climbs to 35% for rural or bioscience companies). The minimum investment is $25,000, and the investment must be made in the form of cash. Tax credits may be claimed on up to $250,000 of eligible investments per year, and – this is important – investments must be reported to the Arizona Department of Commerce within 30 days after the investment is made.

Enterprise Zone Tax Incentives. These tax credits are available to for-profit, non-retail businesses or insurers located in an Enterprise Zone. The credits are up to $3,000 over three years for each net quality job created. Arizona has 19 Enterprise Zones, including portions of Phoenix, Glendale, Tempe, Mesa and Chandler.

In addition, businesses in an Enterprise Zone can qualify for real property and personal property reclassification, which can result in substantial property tax reductions. Applications for initial certification and renewal of reclassification are due on October 1 of each year.

Research and Development Tax Credit. These tax credits are available to companies conducting qualified research (as defined in Internal Revenue Code Section 41) in Arizona, including research conducted at a state university and funded by the company. If you qualify, you can take a 20% credit on up to $2.5 million of allowable expenses.

Commercial and Industrial Solar Tax Credit. These tax credits are available to taxpayers that manufacture, install or finance solar energy devices. The credits may equal up to 10% of the cost of the solar devices, not to exceed credits of $25,000 per location in one tax year. The credits have a ceiling of $50,000 per taxpayer per year. Businesses must apply to the Arizona Department of Commerce for initial certification.

Other Incentives

The State of Arizona offers other incentives in the form of credits, grants, loans, interest rate subsidies, loan guarantees, tax reductions and tax waivers, all subject to certain eligibility criteria.

As noted earlier, fledgling technology companies are often candidates for a number of the financial incentives. For example, the Arizona Commerce and Economic Development Commission offers grants, loans and loan guarantees to qualifying technology-oriented businesses, including bioscience, industrial machinery, high tech instruments and other export-oriented industry sectors.

You can read about most of the available incentives at the Arizona Department of Commerce.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.