Key Takeaways
- Arizona now conforms to federal changes allowing domestic R&E expenditures to be fully expensed rather than capitalized and amortized over five years.
- The refundable portion of Arizona’s R&D tax credit is eliminated for tax years beginning on or after January 1, 2026.
- Taxpayers with Arizona R&E expenditures should review prior filings to determine whether an amended or superseded return may be needed.
House Bill 4168 was recently passed in Arizona, which includes several changes to Arizona’s tax framework. Several changes help align the state with the One Big Beautiful Bill Act (OBBBA), thus removing the requirement to capitalize and amortize domestic research and experimental (R&E) expenditures over five years.
The bill also eliminates the refundable component of the Arizona Research and Development (R&D) credit (beginning with taxable years starting on or after January 1, 2026) and reduces the state R&D credit rate beginning in 2030.
Changes to State Section 174 Capitalization
With HB 4168, Arizona’s conformity to the Internal Revenue Code has been updated to include federal provisions in effect as of January 1, 2026, including retroactively effective changes applicable to the 2025 tax year. Arizona is now conforming to the changes in the OBBBA. This allows domestic R&E expenditures to be fully expensed instead of being capitalized and amortized over five years.
Elimination of the Arizona Refundable R&D Credit
Historically, Arizona allowed certain taxpayers to elect to receive a cash refund of excess R&D credits through a program administered by the Arizona Commerce Authority. With HB 4168, this refund option has now been repealed, and the Arizona R&D credit becomes fully nonrefundable going forward. Despite this change, the underlying structure of the Arizona R&D credit remains largely intact. Taxpayers may continue to carry forward unused credits in accordance with existing carry-forward provisions.
Next Steps
If a taxpayer with R&E expenditures in Arizona has already filed its 2025 tax return, it will be important to consider amending or superseding it. Our R&D Tax Incentives team can help you navigate these changes and answer any questions regarding Section 174 capitalization and R&D credits.
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