Arizona PTE Tax

Arizona PTE Tax allows individual partners and shareholders of a partnership/S corporation who make a PTE election to claim a credit against the entity-level income tax. This credit is applied to the individual's income and can be carried forward for five consecutive years.

A few states have implemented elective PTE taxes in an effort to help their residents avoid the $10,000 state and local tax (SALT) deduction limitation imposed by the federal Tax Cuts and Jobs Act. However, PTEs and their owners must evaluate the decision to make this entity-level tax election carefully based on each state’s rules and guidance. Arizona’s 2022 law requires an electing Arizona PTE to add back the amount of state tax deducted for federal purposes and any additional tax imposed by the Arizona Department of Revenue that is determined to be substantially similar to the Arizona PTE tax. Additionally, the law modifies the credit for income taxes paid to other states by allowing a PTE resident taxpayer to claim the credit when determining Arizona gross income.

Partners, members, and shareholders must consent to have their distributive share of an electing PTE’s income included in the tax calculation. Consent must be provided on or before the due date, or extended due date, of the PTE’s Arizona income tax return. Any unused credit may be carried forward for five consecutive years.

Arizona Pass-through Entity Tax Election
Arizona PTE Tax 1

Arizona Pass-through Entity Tax Election

If a pass-through entity elects to pay the Arizona PTE tax, it must add the amount paid in the year of the election to its partners’ and shareholders’ Arizona gross income. In addition, the entity must adjust its taxable income by adding back any state taxes deducted at the federal level and other taxes ADOR determines are substantially similar to its Arizona PTE tax.

Before making the PTE election, partnerships and S corporations must notify all of their partners or shareholders that they intend to do so and allow them 60 days to exercise the right to opt out of the PTE election. All partners or shareholders that do not opt-out are assumed to agree with the election.

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