AZ Expands School Tuition Organization Credit to S Corps

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

The Arizona legislature has established a pro rata income tax credit for an S corporation that donates to a school tuition organization (STO) for tax years beginning on or after 1/1/2015.

To qualify for the credit, the aggregate amount of the contribution in the tax year must be at least $5,000 and the statutory requirements regarding tax credits for contributions by corporations to STOs must be met. These instructions can be found on the Arizona Department of Revenue website at CorporateTuitionTaxCredits.

Co-owners of the S corporation may each claim a pro rata share of the credit based on their ownership interest, but the total amount of credits allowed to all owners may not exceed the amount that would have been allowed to a sole owner of the corporation.

Unused credits may be carried forward for up to five years.

The credit is not allowed if: (1) the S corporation or a shareholder designates the contribution to the STO for the direct benefit of any dependent of a shareholder of the S corporation claiming a credit or if the S corporation or a shareholder designates a student beneficiary as a condition of the contribution to the STO; and (2) the S corporation or a shareholder, with the intent to benefit a shareholder’s dependent, agrees with one or more other taxpayers to designate reciprocal contributions to STOs for the direct benefit of the other taxpayer’s dependent.

By Melinda Nelson, CPA