The recently promulgated law (Az. Laws 2021, Ch. 425 (HB 2838)) sets an entity-level election tax for transfer companies. The new law allows Arizona taxpayers whose businesses are treated as a partnership or S corporation for federal income tax purposes (hereinafter an ETP) to receive a credit for their share of state and local taxes deducted by partnerships and S corporations at the PTE level. With this credit, taxpayers could exceed the $10,000 national and local tax deduction restriction imposed by Section 164(b)(6) of the IRC (the SALT deduction restriction), in accordance with IRS Communication 2020-75 (see Tax Advisory 2021-0092). NOTE: With the 2016 tax return filed in 2017 and beyond, the Arizona Department of Revenue no longer requires business partnerships to file Federal Form 1065, Federal Schedules K-1 (Form 1065), and all federal support plans with their Arizona tax return. Taxpayers are always required to have these supporting documents available upon request. As of January 1, 2022, a corporate level tax will be introduced for a partnership or S company, commonly referred to as flow-through entities (ETPs), and will allow partners or shareholders of an ETP to choose to be taxed at the company level at a rate of 4.5% of the applicable PTE taxable income for that TY. 4. States that the corporate-level election applies to partners and shareholders of a corporation that is treated as a partnership or S corporation for federal income tax purposes In 2020, the U.S. Department of the Treasury and the Internal Revenue Service announced their intention to pass draft regulations to clarify that state and local income taxes taxed and paid by A partnership or S corporation will be as a deduction in the calculation are taxable income or losses not reported separately for the TY (IRS Notice 2020-75). 11.
Determines the corporate-level income tax credit that is authorized in relation to personal income tax for a taxpayer who is a partner in a partnership or a shareholder in an S corporation who has elected to pay corporation-level tax. C. A partnership that has no income, deductions, or credits in Arizona for a tax year is not required to file a partnership statement for that year. 4. Requires that taxable income from an ETP be calculated in the manner used for personal income tax or a partnership if the ETP has chosen to be taxed at the corporate level. In November 2020, in Communication 2020-75, the IRS alluded to its intention to propose regulations clarifying that a partnership or S corporation that calculates taxable income or losses not separately reported for federal income tax purposes may deduct state and local government income taxes levied on its net income for the taxation year in question, regardless of the SALT deduction restriction (see Tax Alert 2020-2690). These rules have not yet been proposed. In light of the IRS announcement, some states have adopted a corporate-level tax to give PTE owners in their states the federal tax advantage.1 Arizona now joins those states. Other countries continue to propose similar legislation.2 B. An extra-State partnership which is temporarily in that State and whose sole income in that State comes from the performance of disaster recovery after a disaster declared during a period of disaster in accordance with Article 42-1130 shall not be required to file a declaration of partnership in that State.
7. Requires that a corporation that is treated as a partnership or S corporation for federal income tax purposes that elects to pay corporate-level tax and whose taxable income for the TY in the previous TY is $150,000 or more make estimated tax payments in the same manner as an individual taxpayer. One. Subject to the provisions of Subdivisions B and C of this Division, each partnership shall make a return for each taxation year indicating the taxable income calculated in accordance with Subchapter K of Subtitle A of Chapter 1 of the Internal Tax Code and the adjustments required under Chapter 14 of this Title. The tax return contains the names and addresses of the natural persons, resident or non-resident, who would be entitled to participate in taxable income if they were distributed, as well as the amount of each individual`s distribution share. The allocation and distribution of the income of a partnership with non-resident partners shall be carried out in accordance with Article 4 of Chapter 11 of this Title. The return must contain a written statement or be verified by a written statement that it was made under penalty of perjury and signed by one of the partners. 6. Allows ADOR, if the PTE does not pay the amount of tax due to ADOR, to collect the amount of tax owed by the partners or shareholders as a result of the corporate-level election based on the proportionate share of income attributable to each partner or shareholder for tax purposes in Arizona.
The financial note of the Joint Committee on the Legislative Budget indicates that HB 2838 would have no impact on the General State Fund. At the federal level, there would be a reduction in personal income tax revenues, as HB 2838 would allow members, partners and shareholders of FTEs to claim their full deduction for state taxes (JLBC tax bill).