Tax Insights

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AZ S Corp shareholders can beat (MAYBE) SALT limit

S Corp shareholders, SALT, tax reformOne of the results of tax reform is the new $10,000 limit to the deduction of state and local taxes (including real estate taxes) on an individual’s Schedule A. Since many high-income taxpayers far exceed the $10,000 limit, taxpayers, their advisors and many state legislatures are looking for new ways to help taxpayers, like S Corp shareholders, still claim a tax deduction under this new tax regime.

Enter Arizona’s Corporate STO credit. In 2015, the Arizona legislature established a dollar for dollar Arizona tax credit for S Corporations who donate at least $5,000 to a School Tuition Organization (STO). Arizona STOs provide private school scholarships for low-income and disabled children within the state of Arizona.

The Arizona STO tax credit for corporations and S Corporations, which has a minimum donation requirement of $5,000 but no upper limit, can be passed out to S Corporation shareholders for use on their Arizona individual tax returns. Best of all, this donation qualifies as a charitable deduction on the shareholder’s federal and state tax returns.

All Arizona S Corp shareholders who may be affected by the new $10,000 SALT limit should at least consider having their S Corporation apply for this credit each year. Why? Instead of having a nondeductible state tax payment, you have made a charitable donation instead.

In 2018, Arizona will allow a maximum of $94,161,006 in Arizona tax credits for donations to STOs by S Corporations and C Corporations. Since there is an annual cap, the credit must be pre-approved by Arizona and is doled out on a first come-first served basis. When the corporate STO credit pool is gone, that’s it for the year.

So, how do you get your S Corporation in the program? You need to contact an Arizona School Tuition Organization (STO) directly to apply for pre-approval. Only an STO can file the application with Arizona Department of Revenue on your behalf. The application due date this year is July 1st and the credits will go fast, so you want to act as soon as possible!

If approved, the S Corp shareholders may each claim a pro rata share of the credit based on their ownership interest. Unused credits may be carried forward for up to five years.

Arizona has smaller individual dollar for dollar tax credits for donations to STOs as well as tax credits to public schools and certain qualified charities that work similarly. You can help schools and charitable organizations while transforming a potential state tax payment into a charitable donation. See our blog for additional information.

Late breaking news

The IRS just issued Notice 2018-54 saying that guidance will be coming regarding the various states’ attempts to “circumvent the new statutory limitation on state and local tax deductions.” How will this affect the Arizona Corporate STO program remains to be seen so be sure to talk to your tax advisor!

Melinda Nelson, CPA