income tax; subtraction; small businesses

HB2747 - 572R - I Ver

REFERENCE TITLE:
income tax; subtraction; small businesses

State of Arizona

House of Representatives

Fifty-seventh Legislature

Second Regular Session

2026

HB 2747

Introduced by

Representative
Rivero

AN
ACT

amending sections 43-1022 and 43-1122,
Arizona Revised Statutes; relating to income tax.

(TEXT OF BILL BEGINS ON NEXT PAGE)

Be it enacted by the Legislature of the State of Arizona:

Section 1. Section 43-1022, Arizona Revised
Statutes, is amended to read:

START_STATUTE
43-1022.

Subtractions from Arizona gross income

In computing Arizona adjusted gross income, the following
amounts shall be subtracted from Arizona gross income:

1. The amount of exemptions allowed by section 43-1023.

2. Benefits, annuities and pensions in an amount
totaling not more than $2,500 received from one or more of the following:

(a) The United States government service retirement
and disability fund, the United States foreign service retirement and
disability system and any other retirement system or plan established by
federal law, except retired or retainer pay of the uniformed services of the
United States that qualifies for a subtraction under paragraph 26 of this
section.

(b) The Arizona state retirement system, the
corrections officer retirement plan, the public safety personnel retirement
system, the elected officials' retirement plan, an optional retirement program
established by the Arizona board of regents under section 15-1628, an
optional retirement program established by a community college district board
under section 15-1451 or a retirement plan established for employees of a
county, city or town in this state.

3. A beneficiary's share of the fiduciary adjustment
to the extent that the amount determined by section 43-1333 decreases the
beneficiary's Arizona gross income.

4. Interest income received on obligations of the
United States, minus any interest on indebtedness, or other related expenses,
and deducted in arriving at Arizona gross income, that were incurred or
continued to purchase or carry such obligations.

5. The excess of a partner's share of income
required to be included under section 702(a)(8) of the internal revenue code
over the income required to be included under chapter 14, article 2 of this
title.

6. The excess of a partner's share of partnership
losses determined pursuant to chapter 14, article 2 of this title over the
losses allowable under section 702(a)(8) of the internal revenue code.

7. The amount allowed by section 43-1025 for
contributions during the taxable year of agricultural crops to charitable
organizations.

8. The portion of any wages or salaries paid or
incurred by the taxpayer for the taxable year that is equal to the amount of
the federal work opportunity credit, the empowerment zone employment credit,
the credit for employer paid social security taxes on employee cash tips and
the Indian employment credit that the taxpayer received under sections 45A,
45B, 51(a) and 1396 of the internal revenue code.

9. The amount of exploration expenses that is
determined pursuant to section 617 of the internal revenue code, that has been
deferred in a taxable year ending before January 1, 1990 and for which a
subtraction has not previously been made. The subtraction shall be
made on a ratable basis as the units of produced ores or minerals discovered or
explored as a result of this exploration are sold.

10. The amount included in federal adjusted gross
income pursuant to section 86 of the internal revenue code, relating to
taxation of social security and railroad retirement benefits.

11. To the extent not already excluded from Arizona
gross income under the internal revenue code, compensation received for active
service as a member of the reserves, the national guard or the armed forces of
the United States, including compensation for service in a combat zone as
determined under section 112 of the internal revenue code.

12. The amount of unreimbursed medical and hospital
costs, adoption counseling, legal and agency fees and other nonrecurring costs
of adoption.� The subtraction under this paragraph may be taken for the costs
that are described in this paragraph and that are incurred in prior years, but
the subtraction may be taken only in the year during which the final adoption
order is granted.� The amount subtracted may not exceed:

(a) In taxable years beginning before December 31,
2025, $3,000. In the case of a husband and wife who file separate returns, the
subtraction may be taken by either taxpayer or may be divided between them, but
the total subtractions allowed both husband and wife may not exceed $3,000.�

(b) In taxable years beginning from and after
December 31, 2025, $5,000 for a single individual or head of household.

(c) For taxable years beginning from and after
December 31, 2025, $10,000 for a married couple filing a joint return.� In the
case of a husband and wife who file separate returns, the subtraction may be
taken by either taxpayer or may be divided between them, but the total
subtractions allowed both husband and wife may not exceed $10,000.�

13. The amount authorized by section 43-1027
for the taxable year relating to qualified wood stoves, wood fireplaces or gas
fired fireplaces.

14. The amount by which a net operating loss
carryover or capital loss carryover allowable pursuant to section 43-1029,
subsection F exceeds the net operating loss carryover or capital loss carryover
allowable pursuant to section 1341(b)(5) of the internal revenue code.

15. Any amount of qualified educational expenses
that is distributed from a qualified state tuition program determined pursuant
to section 529 of the internal revenue code and that is included in income in
computing federal adjusted gross income.

16. Any item of income resulting from an installment
sale that has been properly subjected to income tax in another state in a
previous taxable year and that is included in Arizona gross income in the
current taxable year.

17. For property placed in service:

(a) In taxable years beginning before December 31,
2012, an amount equal to the depreciation allowable pursuant to section 167(a)
of the internal revenue code for the taxable year computed as if the election
described in section 168(k) of the internal revenue code had been made for each
applicable class of property in the year the property was placed in service.

(b) In taxable years beginning from and after
December 31, 2012 through December 31, 2013, an amount determined in the year
the asset was placed in service based on the calculation in subdivision (a) of
this paragraph. In the first taxable year beginning from and after
December 31, 2013, the taxpayer may elect to subtract the amount necessary
to make the depreciation claimed to date for the purposes of this title the
same as it would have been if subdivision (c) of this paragraph had applied for
the entire time the asset was in service. Subdivision (c) of this
paragraph applies for the remainder of the asset's life. If the
taxpayer does not make the election under this subdivision, subdivision (a) of
this paragraph applies for the remainder of the asset's life.

(c) In taxable years beginning from and after
December 31, 2013 through December 31, 2015, an amount equal to the
depreciation allowable pursuant to section 167(a) of the internal revenue code
for the taxable year as computed as if the additional allowance for
depreciation had been ten percent of the amount allowed pursuant to section
168(k) of the internal revenue code.

(d) In taxable years beginning from and after
December 31, 2015 through December 31, 2016, an amount equal to the
depreciation allowable pursuant to section 167(a) of the internal revenue code
for the taxable year as computed as if the additional allowance for
depreciation had been fifty-five percent of the amount allowed pursuant
to section 168(k) of the internal revenue code.

(e) In taxable years beginning from and after
December 31, 2016, an amount equal to the depreciation allowable pursuant to
section 167(a) of the internal revenue code for the taxable year as computed as
if the additional allowance for depreciation had been the full amount allowed
pursuant to section 168(k) of the internal revenue code.

18. With respect to property that is sold or
otherwise disposed of during the taxable year by a taxpayer that complied with
section 43-1021, paragraph 11 with respect to that property, the amount
of depreciation that has been allowed pursuant to section 167(a) of the
internal revenue code to the extent that the amount has not already reduced
Arizona taxable income in the current or prior taxable years.

19. The amount contributed during the taxable year
to college savings plans established pursuant to section 529 of the internal
revenue code on behalf of the designated beneficiary to the extent that the
contributions were not deducted in computing federal adjusted gross income.�
The amount subtracted may not exceed:

(a) $2,000 per beneficiary for a single individual
or a head of household.

(b) $4,000 per beneficiary for a married couple
filing a joint return. In the case of a husband and wife who file
separate returns, the subtraction may be taken by either taxpayer or may be
divided between them, but the total subtractions allowed both husband and wife
may not exceed $4,000 per beneficiary.

20. The portion of the net operating loss
carryforward that would have been allowed as a deduction in the current year
pursuant to section 172 of the internal revenue code if the election described
in section 172(b)(1)(H) of the internal revenue code had not been made in the
year of the loss that exceeds the actual net operating loss carryforward that
was deducted in arriving at federal adjusted gross income.� This subtraction
only applies to taxpayers who made an election under section 172(b)(1)(H) of
the internal revenue code as amended by section 1211 of the American recovery
and reinvestment act of 2009 (P.L. 111-5) or as amended by section
13 of the worker, homeownership, and business assistance act of 2009
(P.L. 111-92).

21. For taxable years beginning from and after
December 31, 2013, the amount of any net capital gain included in federal
adjusted gross income for the taxable year derived from investment in a
qualified small business as determined by the Arizona commerce authority
pursuant to section 41-1518.

22. An amount of any net long-term capital gain
included in federal adjusted gross income for the taxable year that is derived
from an investment in an asset acquired after December 31, 2011, as follows:

(a) For taxable years beginning from and after
December 31, 2012 through December 31, 2013, ten percent of the net long-term
capital gain included in federal adjusted gross income.

(b) For taxable years beginning from and after
December 31, 2013 through December 31, 2014, twenty percent of the net
long-term capital gain included in federal adjusted gross income.

(c) For taxable years beginning from and after
December 31, 2014, twenty-five percent of the net long-term capital gain
included in federal adjusted gross income.� For the purposes of this paragraph,
a transferee that receives an asset by gift or at the death of a transferor is
considered to have acquired the asset when the asset was acquired by the
transferor. If the date an asset is acquired cannot be verified, a
subtraction under this paragraph is not allowed.

23. If an individual is not claiming itemized
deductions pursuant to section 43-1042, the amount of premium costs for
long-term care insurance, as defined in section 20-1691.

24. The amount of eligible access expenditures paid
or incurred during the taxable year to comply with the requirements of the
Americans with disabilities act of 1990 (P.L. 101-336) or title 41,
chapter 9, article 8 as provided by section 43-1024.

25. For taxable years beginning from and after
December 31, 2017, the amount of any net capital gain included in Arizona gross
income for the taxable year that is derived from the exchange of one kind of
legal tender for another kind of legal tender. For the purposes of
this paragraph:

(a) "Legal tender" means a medium of
exchange, including specie, that is authorized by the United States
Constitution or Congress to pay debts, public charges, taxes and dues.

(b) "Specie" means coins having precious
metal content.

26. Benefits, annuities and pensions received as
retired or retainer pay of the uniformed services of the United States in
amounts as follows:

(a) For taxable years through December 31, 2018, an
amount totaling not more than $2,500.

(b) For taxable years
beginning from and after December 31, 2018 through December 31, 2020, an amount
totaling not more than $3,500.

(c) For taxable years beginning from and after
December 31, 2020, the full amount received.

27. For taxable years beginning from and after
December 31, 2020, the amount contributed during the taxable year to an
achieving a better life experience account established pursuant to section 529A
of the internal revenue code on behalf of the designated beneficiary to the
extent that the contributions were not deducted in computing federal adjusted
gross income.� The amount subtracted may not exceed:

(a) $2,000 per beneficiary for a single individual
or a head of household.

(b) $4,000 per
beneficiary for a married couple filing a joint return.� In the case of a
husband and wife who file separate returns, the subtraction may be taken by
either taxpayer or may be divided between them, but the total subtractions allowed
both husband and wife may not exceed $4,000 per beneficiary.

28. For taxable years
beginning from and after December 31, 2020, Arizona small business gross income
but only if an individual taxpayer has elected to separately report and pay tax
on the taxpayer's Arizona small business adjusted gross income on the Arizona
small business income tax return.

29. To the extent not already excluded from Arizona
gross income under the internal revenue code, the value of virtual currency and
non-fungible tokens the taxpayer received pursuant to an airdrop at the
time of the airdrop. This paragraph may not be interpreted as
providing a subtraction for any appreciation in value that occurs from holding
the virtual currency after the initial receipt of the airdrop. For
the purposes of this paragraph:

(a) "Airdrop" means the receipt of virtual
currency through a means of distribution of virtual currency to the distributed
ledger addresses of multiple taxpayers.

(b) "Non-fungible token" has the
same meaning prescribed in section 43-1028.

(c) "Virtual currency" has the same
meaning prescribed in section 43-1028.

30. The amount allowed as a subtraction by section
43-1028 for gas fees not already included in the taxpayer's virtual
currency or non-fungible token basis.

31. For taxable years beginning from
and after December 31, 2026, the amount of income the taxpayer received during
the taxable year that is derived from a small business that has been in
operation for five years or less. For the purposes of this
PARAGRAPH, "small business" means any of the following entities that
employs less than ten employees:

(
a
) A sole
proprietorship.

(
b
) A
partnership that is required to file a return under chapter 14 of this title.

(
c
) A limited
liability partnership that has filed a statement of qualification under section
29-1101.

(
d
) A limited
liability company formed under title 29, chapter 7.

(
e
) An S
corporation as defined in section 1361 of the internal revenue code.

(
f
) Any other
form of business where a distributive share of income of the business is
subject to tax under this chapter but only in the individual capacity of its
owners.
END_STATUTE

Sec. 2. Section 43-1122, Arizona Revised
Statutes, is amended to read:

START_STATUTE
43-1122.

Subtractions from Arizona gross income; corporations

In computing Arizona taxable income for a corporation, the
following amounts shall be subtracted from Arizona gross income:

1. The excess of a partner's share of income
required to be included under section 702(a)(8) of the internal revenue code
over the income required to be included under chapter 14, article 2 of this
title.

2. The excess of a partner's share of partnership
losses determined pursuant to chapter 14, article 2 of this title over the
losses allowable under section 702(a)(8) of the internal revenue code.

3. The amount allowed by section 43-1025 for
contributions during the taxable year of agricultural crops to charitable
organizations.

4. The portion of any wages or salaries paid or
incurred by the taxpayer for the taxable year that is equal to the amount of
the federal work opportunity credit, the empowerment zone employment credit,
the credit for employer paid social security taxes on employee cash tips and
the Indian employment credit that the taxpayer received under sections 45A,
45B, 51(a) and 1396 of the internal revenue code.

5. With respect to property that is sold or
otherwise disposed of during the taxable year by a taxpayer that complied with
section 43-1121, paragraph 4 with respect to that property, the amount of
depreciation that has been allowed pursuant to section 167(a) of the internal
revenue code to the extent that the amount has not already reduced Arizona
taxable income in the current taxable year or prior taxable years.

6. With respect to a financial institution as
defined in section 6-101, expenses and interest relating to tax-exempt
income disallowed pursuant to section 265 of the internal revenue code.

7. Dividends received from another corporation owned
or controlled directly or indirectly by a recipient corporation. For
the purposes of this paragraph, "control" means direct or indirect
ownership or control of fifty percent or more of the voting stock of the payor
corporation by the recipient corporation. Dividends shall have the meaning
provided in section 316 of the internal revenue code. This
subtraction shall apply without regard to section 43-961, paragraph 2 and
article 4 of this chapter.

8. Interest income received on obligations of the
United States.

9. The amount of dividend income from foreign
corporations.� For the purposes of this paragraph, gross up income as described
in section 78 of the internal revenue code, global intangible low-taxed
income as defined in section 951A of the internal revenue code and subpart F
income as defined in section 952 of the internal revenue code shall be
considered foreign dividends.

10. The amount of net operating loss allowed by
section 43-1123.

11. The amount of any state income tax refunds
received that were included as income in computing federal taxable income.

12. The amount of expense recapture included in
income pursuant to section 617 of the internal revenue code for mine
exploration expenses.

13. The amount of deferred exploration expenses
allowed by section 43-1127.

14. The amount of exploration expenses related to
the exploration of oil, gas or geothermal resources, computed in the same
manner and on the same basis as a deduction for mine exploration pursuant to
section 617 of the internal revenue code. This computation is
subject to the adjustments contained in section 43-1121,
paragraph 10 and paragraphs 12 and 13 of this section relating to
exploration expenses.

15. The amortization of pollution control devices
allowed by section 43-1129.

16. The amount of amortization of the cost of child
care facilities pursuant to section 43-1130.

17. The amount of income from a domestic
international sales corporation required to be included in the income of its
shareholders pursuant to section 995 of the internal revenue code.

18. The income of an insurance company that is
exempt under section 43-1201 to the extent that it is included in
computing Arizona gross income on a consolidated return pursuant to section 43-947.

19. The amount by which a capital loss carryover
allowable pursuant to section 43-1130.01, subsection F exceeds the
capital loss carryover allowable pursuant to section 1341(b)(5) of the internal
revenue code.

20. An amount equal to the depreciation allowable
pursuant to section 167(a) of the internal revenue code for the taxable year
computed as if the election described in section 168(k)(7) of the internal
revenue code had been made for each applicable class of property in the year
the property was placed in service.

21. The amount of eligible access expenditures paid
or incurred during the taxable year to comply with the requirements of the
Americans with disabilities act of 1990 (P.L. 101-336) or title 41,
chapter 9, article 8 as provided by section 43-1124.

22. For taxable years beginning from and after
December 31, 2017, the amount of any net capital gain included in Arizona gross
income for the taxable year that is derived from the exchange of one kind of
legal tender for another kind of legal tender. For the purposes of
this paragraph:

(a) "Legal tender" means a medium of
exchange, including specie, that is authorized by the United States
Constitution or Congress to pay debts, public charges, taxes and dues.

(b) "Specie" means coins having precious
metal content.

23. With respect to a public service corporation
operating a water system or sewage disposal facility, the amount of monies or
property received as a contribution in aid of construction.� For the purposes
of this paragraph:

(a) "Contribution in aid of construction"
means any amount of monies or other property contributed to a public service
corporation that provides water or sewage disposal services to the extent that
the purpose of the contribution is to provide for expanding, improving or
replacing the public service corporation's water system or sewage disposal
facilities, including any amount of monies or other property contributed to a
public service corporation for a water system or sewage disposal facility
subject to a contingent obligation to repay the amount, in whole or in part, to
the contributor.

(b) "Public service corporation" means a
public service corporation as defined in article XV, section 2, Constitution of
Arizona, that is regulated by the corporation commission.

24. For taxable years beginning from
and after December 31, 2026, the amount of income derived during the taxable
year from a small business that has been in operation for five years or
less. For the purposes of this PARAGRAPH, "small business"
means a corporation that employs less than ten employees.
END_STATUTE