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 the Arizona Department of Revenue (ADOR) to report that small business taxpayer’s share of Arizona small business gross income.
Arizona Small Business Income (SBI) Tax
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. “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, 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.
Beginning with tax year 2021, individuals may elect to report their small business income on Arizona Form 140-SBI, Small Business Income (SBI), for the small business income included in their federal adjusted gross income. The SBI tax return must be filed timely with the regular income tax return to be accepted.
2021 Tax Surcharge for Public Education – Proposition 208
Proposition 208, passed by voters in the 2020 election, applies to tax year 2021 and requires individuals with taxable income of more than $250,000 (single and married filing separate) and more than $500,000 (married filing joint and head of household) to pay an additional tax surcharge. However, Arizona estimated tax payments are not required to be made in 2021 to account for the new 3.5% surcharge tax added by Proposition 208. Pursuant to Arizona Revised Statutes § 43-581, taxpayers will not incur a penalty for the underpayment of estimated taxes, provided the amount of estimated tax or withholding paid by the taxpayer equals or exceeds the taxpayer’s 2020 income tax liability. There are no estimated payments on the surcharge per Arizona Revised Statutes (A.R.S.) § 43-581 as amended by Senate Bill 1828.
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.