A nonrefundable tax credit is available for expenses incurred in constructing a qualified environmental technology manufacturing, producing, or processing facility. The credit equals 10% of the amount spent during the taxable year to construct the facility, including land acquisition, improvements, building improvements, machinery, and equipment. The amount of credit used cannot exceed 75% of the Arizona income tax liability for the taxable year, determined without applying the credit.
Claiming the Credit
- C corporations, S corporations (claiming at the corporate level), or exempt organizations with UBTI: Complete this credit form and Arizona Form 300 – Nonrefundable Corporate Tax Credits and Recapture. Include both completed forms with your tax return.
- Partnerships passing this credit through to corporate partners: Complete this credit form and Form 305-P for each corporate partner. Provide each corporate partner a copy of its completed Form 305-P. Include Form 305 and one copy of each completed Form 305-P with the partnership return.
Restrictions:
- Taxable year 2019 was the last year an individual taxpayer could establish this credit.
- A partnership may not pass this credit through to individual partners; it may only pass it through to corporate partners.
- An S corporation may not pass this credit through to its shareholders.
Recapture Triggers
Recapture is required when any of the following occur under Arizona law:
- Disposition of the qualified facility before it is placed in service.
- Abandonment of construction before completion.
- Cessation of qualifying use within the first five years of operation.
- Failure to satisfy statutory requirements (e.g., environmental standards, recycled material thresholds).
- Other events specified by statute that disqualify the facility.
Recapture Percentages
If a facility ceases qualifying use within the first five years, a portion of the credit must be recaptured depending on how long the facility was operated. If the facility is abandoned or disposed of in less than one year, 100% of the credit must be recaptured. If it ceases qualifying use after one year but before two years, 80% of the credit is recaptured. If it ceases after two years but before three years, 60% is recaptured. If it ceases after three years but before four years, 40% is recaptured. Finally, if it ceases after four years but before five years, 20% of the credit is recaptured. After five years of qualifying use, no recapture is required.
Recapture Calculation Process
- Determine total credit claimed: Add all credits previously allowed for the facility.
- Apply the statutory recapture percentage: Multiply total credits by the applicable percentage based on years of qualifying use.
- Allocate to corporate partners: Partnerships must allocate recapture amounts to corporate partners based on the credit previously passed through.
- Report recapture: Enter recapture on Form 305 and, if applicable, Form 305-P for each corporate partner.
Example
A partnership passed $400,000 of credits to corporate partners.
- Recapture percentage: 25%.
- Total recapture: $100,000 ($400,000 × 25%).
- Each corporate partner reports its share of the $100,000 recapture amount based on credits previously received.
Source:
Form 305
Disclaimer: Always verify details with the current year’s Arizona Department of Revenue forms and instructions. Tax rules may change annually. For complex situations, consult a CPA or tax attorney.