Arizona implements flat tax and elective small business income tax

Your Guide to State, Local, Federal, Estate + International Taxation

The Arizona House and Senate have come together to get a bill to Governor Doug Ducey for signature. Included in the bill is the implementation of a flat tax, which isn’t really flat until at least three years out.

For 2021, there will be a total of four tax brackets: 2.59%, 3.34%, 4.17% and 4.5%. For 2022, the four brackets will be reduced to two brackets – 2.55% and 2.98%. A later year, after certain thresholds of tax collection are met, the two tax brackets will be 2.53% and 2.75%. Finally, again after certain thresholds are met, the tax bracket will be a flat tax of 2.5%. It appears that this will occur no earlier than 2024.

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The above thresholds are in place to ensure that enough tax is collected to meet the demands of the State of Arizona.

Arizona Small Business Income Tax

Beginning in 2021, a small business taxpayer may elect to file a separate return for the taxable year to report the small business share of gross income. This is an annual election, and it may be revoked on a timely filed Arizona amended income tax return.

Similar to other return types, if the tax liability is expected to exceed $1,000, then estimated tax payments shall be made.

When the small business owner prepares their individual return, there will be a subtraction for the amount of small business adjusted gross income separately reported and taxed on the Arizona Small Business Income Tax Return.

The tax rates for this separate return will 3.5% in 2021, 3% in 2022, 2.8% in both 2023 and 2024 and 2.5% after 2024.

Items to be included in Arizona small business income come from Federal Schedules B, C, E, F, 4797, 4835 and certain items on Schedule D (only as it relates to business activities, such as sale of business interests or capital assets, including goodwill).

As more information becomes available, we will keep you updated. Please contact us with any questions.

Donna H. Laubscher, CPA