The Arizona Department of Revenue (ADOR) administers Arizona’s tax system based on laws passed and signed by the governor. Like other initiatives, ADOR analyzes the legislation and the administrative and technical impact to the Department.
As it pertains to new tax laws, the Department of Revenue is committed to working with individual taxpayers to provide a smooth experience filing and paying income tax.
Senate Bill 1783 - Small Business Income
Senate Bill 1783 allows individual taxpayers to elect to have their “Arizona small business adjusted gross income” removed from their regular individual income tax return and taxed on a separate “Arizona small business income tax return.”
For taxable years beginning from and after December 31, 2020, a small business taxpayer may elect to file a return for the taxable year with ADOR to report that small business taxpayer’s share of Arizona small business gross income.
A “small business taxpayer” means any individual taxpayer who reports on their federal income tax return any income that constitutes Arizona small business gross incomes as defined below:
“Arizona small business gross income” of a resident taxpayer means the sum of the amounts, whether positive or negative, that are included in a taxpayer’s federal adjusted gross income for the taxable year, computed according to the internal revenue code, and that are reported on the following schedules and forms or on equivalent successor schedules and forms designated by the Internal Revenue Service:
- Schedule B, interest and ordinary dividends.
- Schedule C, profit or loss from business.
- Schedule E, supplemental income or loss.
- Schedule F, profit or loss from farming.
- Form 4797, sale of business property.
- Form 4835, farm rental income and expenses.
Includes any amount reported on Schedule D, capital gains and losses, that is recognized concerning either the taxable disposition of an ownership interest in any entity other than a publicly-traded entity, or the taxable disposition of capital assets used in connection with a trade or business activity, including goodwill and going concern value.
The Arizona small business return is subject to most of the additions and subtractions provided in the individual income tax chapter to the extent the adjustments directly relate to the small business income.
Deductions claimed on the federal return are only included in the Arizona small business return if they are already included in the net amounts reported on the federal schedules listed in the definition of “Arizona small business gross income.”
Business credits that would normally be allowed on the individual income tax return will instead be allowed on the Arizona small business return. Any excess business credits remaining after offsetting the Arizona small business return will be allowed to offset tax on the individual income tax return. Credits not derived from business activities remain with the regular individual income tax return.
If an Arizona small business taxpayer makes the election under section Arizona Revised Statutes (A.R.S.) § 43-302, there shall be levied, collected, and paid for each taxable year on the Arizona small business taxable income an amount equal to 3.5% of the Arizona small business taxable income.
Top Rate on Individual Income Tax Return Capped at 4.5%
The top combined rate of the Proposition 208 surcharge and the regular income tax on the individual income tax return is 4.5%, regardless of whether or not the small business election is made. Taxpayers may want to reduce their estimated payments and withholding accordingly.
Proposition 208 - Income tax surcharge for public education
There are no estimated payments on the surcharge per Arizona Revised Statutes (A.R.S.) § 43-581 as amended by Senate Bill 1828.
Currently, the agency is working on system requirements and developing communication for the agency’s websites, news releases, and social media posts to assist customers.
ADOR is developing dedicated web pages that provide information on the legislation, filing requirements, frequently asked questions, and other necessary guidance.
The Department will post additional guidance soon. ADOR suggests waiting for direction to determine how to file for tax year 2021.