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Taxes on Business Income in Arizona

Filed under State Taxes. Fact checked on February 12, 2013.

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Arizona imposes a tax on Arizona business income computed at 6.968 percent of corporate taxable net income. If you don't operate your business as corporation, your business income will be taxed on your personal income tax return. Personal income tax based on Arizona taxable income is a maximum of 4.54 percent.

In Arizona, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Income of Regular Corporation Is Taxed at Corporate Rates

Domestic corporations (corporations organized in Arizona) and foreign corporations (corporations organized in a state other than Arizona) are both subject to an Arizona income tax. The corporate income tax rate is 6.968 percent of taxable net income. The minimum tax is $50.

A corporate income tax return must be filed with the Department of Revenue. The return is due by the 15th day of the fourth month following the close of the taxable year for regular ("C") corporations. For "S" corporations, taxes imposed are due on the 15th day of the third month following the close of the taxable year.

S Corporation Income Is Taxed at Individual Rates

If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

In Arizona, the law extends this favorable tax treatment to state corporate income tax liability and S corporations will not be subject to the corporate income tax. However, the S Corporation itself can be subject to tax if it has excess net passive income, capital gains income, or certain built-in gains income subject to tax at the corporate level on federal Form 1120S. An S corporation must attach a copy of its federal Form 1120S, along with all applicable federal schedules and attachments, to its Arizona return. (Instructions, Form 120S, S Corporation Income Tax Return)

Partnership Income Is Taxed At Individual Rates

If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Arizona taxable adjusted gross income their distributive share of partnership income.

LLC Income Is Taxed At Individual Rates

Arizona law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Arizona are classified as either partnerships or corporations for Arizona tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership for federal tax purposes, then it will be treated as a partnership for Arizona tax purposes and it will not be taxed on its net income. Instead, members must include in their Arizona taxable adjusted gross income their distributive share of LLC income. If your LLC has elected to be taxed as a corporation for federal tax purposes, it will be taxed as a corporation for Arizona tax purposes.

If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Arizona tax purposes.

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