Arizona — Personal Income Tax

Arizona imposes a personal income tax on the entire taxable income of every Arizona resident and on the entire taxable income of every nonresident that is derived from sources within Arizona. A "resident" includes every individual in Arizona for other than a temporary or transitory purpose, every individual domiciled in Arizona who is outside the state temporarily, and every individual who spends more than nine months of the taxable year in Arizona (rebuttable by showing a temporary or transitory purpose). A "nonresident" means every individual other than a resident. Residents are taxed on all income regardless of source; nonresidents are taxed only on Arizona-source income.

Source: A.R.S. § 43-1011; A.R.S. § 43-104

Arizona imposes a flat personal income tax rate of 2.5 percent on the taxable income of residents and nonresidents. This flat rate replaced Arizona's previous graduated rate structure and became effective for taxable years beginning on or after December 31, 2022 (tax year 2023). The 2.5 percent rate applies uniformly to all levels of taxable income and to all filing statuses—single, married filing jointly, married filing separately, and head of household. The flat tax took effect after the Arizona General Fund met statutory revenue thresholds established by the legislature in 2021; those thresholds were met in September 2022, triggering implementation of the 2.5 percent rate for the 2023 tax year and thereafter.

Arizona may further reduce the individual income tax rate in future years based on structural budget surpluses, as authorized by separate legislation that directs the Department of Revenue to reduce the rate when specified revenue conditions are met. However, as of tax year 2023 through the present, the operative rate remains 2.5 percent.

Source: A.R.S. § 43-1011

Arizona individual income tax returns made on a calendar year basis are due on or before April 15 following the close of the calendar year. Returns made on a fiscal year basis are due on or before the fifteenth day of the fourth month following the close of the fiscal year. Taxpayers granted a federal extension of time to file are automatically granted the same extension for Arizona if at least 90 percent of the tax liability has been paid; the extension may not exceed six months from the initial due date.

Source: A.R.S. § 43-325; A.R.S. § 42-1107

Beginning with tax year 2026, Arizona will couple its standard deduction for individuals directly to the federal basic standard deduction under Internal Revenue Code § 63, abandoning the previous Arizona-specific inflation-adjusted fixed-dollar amounts. This statutory change was enacted with the passage of SB 1638 (57th Legislature, 2nd Regular Session), effective retroactively for tax year 2026 (see SB 1638 Summary and Bill Text).

Pre-2026 Standard Deduction (Tax Year 2025 and Prior):

• Arizona set its own fixed, inflation-adjusted amounts keyed to statutory baselines (A.R.S. § 43-1041(A)), with 2025 SD values being:
• Single or married filing separately: $15,750
• Head of household: $23,625
• Married filing jointly: $31,500

2026 and Onward — Coupling to Federal:

• For tax years beginning January 1, 2026 or later, the Arizona standard deduction equals the federal standard deduction for the taxpayer’s filing status, as determined under IRC § 63(c), as amended and in effect for that tax year.
• The Department of Revenue will use the values published by the IRS for the applicable tax year.
• The separate Arizona-specific inflation-adjusted amounts are no longer operative beginning in 2026.

Charitable Contribution Boost: Arizona continues to allow a charitable deduction boost, but for tax year 2026 onward, SB 1638 increases the allowable boost cap: the additional standard deduction for charitable contributions is the lesser of (a) the total amount of charitable contributions that would have been allowed as itemized deductions, or (b) $1,000 for a single filer or married filing separately/Head of Household, or $2,000 for married filing jointly.

Caution on Guidance Availability: The Arizona Department of Revenue will need to update official forms (Form 140 Booklet and instructions) to reflect this policy change. Practitioners should use the federal standard deduction figures for Arizona purposes beginning with tax year 2026, pending formal DOR publication.

Source: SB 1638 — Arizona Legislature Bill Text Source: SB 1638 Fact Sheet (2026 SD changes)

Not yet human confirmed.

Arizona allows exemptions that reduce taxable income for qualifying taxpayers. A $1,500 exemption is allowed for a blind taxpayer (central visual acuity not exceeding 20/200 in the better eye with correcting lenses, or visual acuity greater than 20/200 accompanied by a field of vision limitation not exceeding twenty degrees). A taxpayer who has attained age 65 before the close of the taxable year may claim a $2,100 exemption if not claimed as a dependent by another taxpayer. A $2,300 exemption is allowed for each person age 65 or older if the taxpayer pays more than one-fourth of the cost of maintaining that person in a nursing care institution, residential care institution, or assisted living facility licensed under Arizona law. A $2,300 exemption is also allowed for each stillborn child (only in the year of stillbirth) if a certificate of birth resulting in stillbirth has been issued. A resident taxpayer may claim a $10,000 exemption for each parent or ancestor of a parent age 65 or older who requires assistance with activities of daily living, lives in the taxpayer's principal residence for the entire taxable year, and for whom the taxpayer pays more than one-half of total support and maintenance costs.

Dependent exemption eliminated; replaced by dependent tax credit. Prior to tax year 2019, Arizona allowed a $2,300 exemption for each dependent as defined in A.R.S. § 43-1001 (which adopts the Internal Revenue Code § 152 definition incorporating qualifying children and qualifying relatives). Beginning with tax year 2019, Arizona eliminated the $2,300 dependent exemption and replaced it with a nonrefundable dependent tax credit. The credit amount is $100 for each dependent under age 17 and $25 for each dependent age 17 or older, subject to phaseout for taxpayers with federal adjusted gross income exceeding $200,000 (single, married filing separately, or head of household) or $400,000 (married filing jointly). The dependent definition for purposes of the credit remains the IRC § 152 definition incorporated by reference in A.R.S. § 43-1001(3). Taxpayers must provide dependent information on the front of Arizona Forms 140, 140A, or 140PY to claim the credit. See the "Definition of 'dependent' for Arizona personal exemptions and credits" section of this guide for the detailed dependent definition and IRC § 152 conformity framework.

Source: A.R.S. § 43-1023; A.R.S. § 43-1001

Nonresidents are taxed only on income from sources within Arizona. Arizona statutory law defines "income derived from or attributable to sources within this state" to include income from tangible or intangible property located or having a situs in Arizona and income from any activities carried on in Arizona, regardless of whether carried on in intrastate, interstate, or foreign commerce.

Important update (2024): Effective for tax years beginning on or after January 1, 2024, Arizona amended A.R.S. § 43-1092 to clarify the sourcing rules for income from intangibles (e.g., stocks, bonds) for nonresidents. Under the amended statute, income from intangibles is sourced to Arizona only if the intangible property has a business situs in the state or if the nonresident conducts trading activities in Arizona that rise to the level of conducting a business here (as further defined by a six-month threshold for trading activity). This narrows Arizona's previous practice. Practitioners should be aware of this change when attributing portfolio income of nonresidents to Arizona.

The Arizona Administrative Code regulation R15-2C-601 provides detailed sourcing rules for specific income categories:

Wages and salary. Nonresident employees who are employed continuously in Arizona for a definite portion of the taxable year include in Arizona-source income the total compensation for the period employed in Arizona. Nonresident employees employed in Arizona at intervals throughout the year (e.g., operating trains, boats, planes, motor buses, or trucks between Arizona and other states) apportion their compensation based on the ratio of working time or mileage in Arizona to total working time or mileage. Nonresident professional service providers (attorneys, physicians, accountants, engineers) and entertainers (actors, singers, performers, wrestlers, boxers) must include in Arizona-source income the entire amount of fees or compensation for services performed in Arizona, even if not regularly engaged in carrying on their profession or business in Arizona.

Real and tangible personal property. Income of a nonresident from sources within Arizona includes rents from real or tangible personal property in Arizona, gains realized from the sale or transfer of such property (regardless of where the sale or transfer is consummated), and any other type of income derived from the ownership, control, or management of real and tangible personal property located in Arizona, irrespective of whether a trade, business, or profession is carried on within the state.

Business, trade, or profession conducted partially in Arizona. If a nonresident's business, trade, or profession is carried on entirely outside Arizona, no portion of gross income from that activity is Arizona-source income. Conversely, if conducted wholly within Arizona, the entire gross income must be reported. If carried on both within and without Arizona, the nonresident must apportion income using statutory formulas based on the ratio of property, payroll, and sales within Arizona to total property, payroll, and sales everywhere.

Disaster recovery exemption. Income of a nonresident from wages or salary received by the nonresident employee who is in Arizona on a temporary basis for the purpose of performing disaster recovery from a declared disaster during a disaster period as defined in A.R.S. § 42-1130 is not considered Arizona-source income. A similar exemption applies to income earned by a nonresident who is a sole owner of a qualifying out-of-state business from performing qualified disaster recovery work during a disaster period.

Source: A.R.S. § 43-1091; A.R.S. § 43-104; A.R.S. § 43-1092; A.A.C. R15-2C-601

An individual who moves into or out of Arizona during the tax year with the intent of establishing or abandoning Arizona residency is treated as a part-year resident and must file Arizona Form 140PY. Arizona does not define "part-year resident" as a distinct category in the statutes; instead, A.R.S. § 43-1097 addresses the tax year in which a taxpayer "changes" residency status, and the Department of Revenue operationally treats such individuals as part-year residents for filing purposes.

Moving out of Arizona (resident to nonresident). During the tax year in which a taxpayer changes from a resident to a nonresident, Arizona taxable income includes (1) all income and deductions realized or recognized during the period the individual was a resident (depending on the taxpayer's method of accounting), plus any income accrued by a cash-basis taxpayer prior to becoming a nonresident, and (2) all income and deductions earned in Arizona or derived from Arizona sources after the taxpayer became a nonresident.

Moving into Arizona (nonresident to resident). During the tax year in which a taxpayer changes from a nonresident to a resident, Arizona taxable income includes (1) all income and deductions realized or recognized during the period the individual was a resident (depending on the taxpayer's method of accounting), except any income accrued by a cash-basis taxpayer prior to becoming a resident, and (2) all income and deductions earned in Arizona or derived from Arizona sources prior to the time the taxpayer became a resident.

In both scenarios, the part-year resident's Arizona taxable income combines two distinct pieces: income from the entire period of Arizona residency (all-source income as a resident), plus Arizona-source income from the portion of the year when the individual was a nonresident of Arizona. Pension income, for example, is taxed only on the portion received during the period of Arizona residency. The Department of Revenue confirms that part-year residents report all income earned while an Arizona resident, including retirement income from another state, and any income earned from an Arizona source before moving to (or after leaving) Arizona.

Form 140PY. Part-year residents must use Form 140PY (Part-Year Resident Personal Income Tax Return) to file their Arizona return. The form requires the taxpayer to report federal adjusted gross income for the full year, then allocate income and deductions between the resident and nonresident portions of the year, applying the allocation rules in A.R.S. § 43-1097. Full-year residents use Form 140, 140A, or 140EZ; nonresidents with Arizona-source income use Form 140NR.

Standard deduction and exemptions. Full-year and part-year residents use the same filing thresholds and may claim the same standard deduction amounts without proration. Nonresidents, by contrast, must prorate exemptions and the standard deduction based on the ratio of Arizona gross income to federal adjusted gross income.

Source: A.R.S. § 43-1097; Arizona Department of Revenue, Determining Filing Status for Nonresidents and Part-Year Residents; Form 140PY Booklet for 2025

Arizona law requires a full-year or part-year resident individual to file a personal income tax return if the individual's gross income for the taxable year exceeds the amount of the standard deduction allowed under A.R.S. § 43-1041 as adjusted for inflation. A nonresident individual must file a return if the individual's gross income exceeds the standard deduction amount for a full-year or part-year resident multiplied by the percentage that the individual's Arizona gross income is of the individual's federal adjusted gross income.

Full-year and part-year resident filing thresholds for 2025. For the 2025 tax year, a full-year or part-year resident must file an Arizona income tax return if gross income exceeds the inflation-adjusted standard deduction amount. The Department of Revenue's 2025 Form 140EZ instructions confirm the following standard deduction amounts (which serve as the filing thresholds):

• Single or married filing separately: $15,750
• Married filing jointly: $31,500
• Head of household: $23,625 (inflation-adjusted amount for 2025)

These amounts equal the inflation-adjusted standard deduction for the 2025 tax year. The standard deduction base amounts are set by A.R.S. § 43-1041(A) at $12,200 for single or married filing separately, $24,400 for married filing jointly, and $18,350 for head of household, and A.R.S. § 43-1041(H) requires the Department of Revenue to adjust these amounts annually for inflation in the same manner as the federal basic standard deduction under Internal Revenue Code section 63.

Nonresident filing thresholds. A nonresident's filing threshold is the applicable full-year resident threshold (based on filing status) multiplied by the ratio of the nonresident's Arizona gross income to federal adjusted gross income. For example, if a single nonresident has $50,000 of federal adjusted gross income and $10,000 of Arizona-source income, the Arizona income ratio is 20% ($10,000 ÷ $50,000), and the filing threshold is $3,150 ($15,750 × 20%). If the nonresident's gross income exceeds the prorated threshold, the nonresident must file Form 140NR. The proration formula is set forth in A.R.S. § 43-301(B).

Part-year resident treatment. Part-year residents use the same filing thresholds as full-year residents without proration. A.R.S. § 43-301(A) requires a "full-year or part-year resident individual" to file if gross income exceeds the standard deduction amount, without distinguishing between the two categories for threshold purposes. Part-year residents file Form 140PY if they meet the threshold based on their filing status.

Definition of "gross income" for filing purposes. For purposes of determining whether an individual must file, "gross income" is defined by A.R.S. § 43-308 as gross income as defined in the Internal Revenue Code minus income included in gross income but excluded from taxation under Arizona law. The filing requirement applies regardless of whether the individual is required to file a federal return or has any federal adjusted gross income for the taxable year.

Source: A.R.S. § 43-301; A.R.S. § 43-1041; A.R.S. § 43-308; Arizona Form 140EZ Instructions for 2025

Arizona defines "dependent" by reference to the federal Internal Revenue Code rather than creating a separate state-specific definition. Under A.R.S. § 43-1001(3), the term "dependent" has the same meaning prescribed by Internal Revenue Code section 152. This federal conformity approach means that Arizona adopts the IRC's two-category framework: a "dependent" is either a "qualifying child" under IRC § 152(c) or a "qualifying relative" under IRC § 152(d), each with distinct relationship, residency, support, and income tests.

Application to personal exemptions (tax years prior to 2019). For tax years before 2019, Arizona allowed a $2,300 exemption for each dependent as defined in A.R.S. § 43-1001 and subject to the qualifications prescribed by IRC § 151(c). Because Arizona's dependent definition tracked the IRC § 152 definition, a taxpayer could claim the Arizona exemption for any individual who met the federal qualifying-child or qualifying-relative tests, even though the federal Tax Cuts and Jobs Act of 2017 suspended federal personal and dependency exemptions for tax years 2018 through 2025. Arizona continued to allow the $2,300 state exemption during this period because A.R.S. § 43-1023 independently authorized the deduction; the federal suspension of the exemption amount did not alter the underlying IRC § 152 definition of who qualifies as a dependent.

Replacement with dependent tax credit (tax year 2019 and after). Beginning with tax year 2019, Arizona eliminated the $2,300 dependent exemption and replaced it with a dependent tax credit. The initial credit amount was $100 for each dependent under age 17 and $25 for each dependent age 17 or older, subject to phaseout for taxpayers with federal adjusted gross income exceeding $200,000 (single, married filing separately, or head of household) or $400,000 (married filing jointly).

Material update for 2026 and after: increased dependent tax credit. For taxable years beginning January 1, 2026 and after, the Arizona Legislature increased the dependent tax credit to $125 for each dependent under age 17. The $25 credit for dependents age 17 and older remains unchanged. The definition of "dependent" for the credit remains the IRC § 152 definition incorporated by reference in A.R.S. § 43-1001(3). Taxpayers must provide dependent information—names, Social Security numbers, relationships, and months lived in the home—on the front of Arizona Forms 140, 140A, or 140PY (or the dependent section of Forms 140PTC or 140X) to claim the credit.

Federal conformity updates. Arizona periodically updates its conformity to the Internal Revenue Code through legislation. As of 2024, Arizona conforms to the IRC as amended and in effect for the relevant tax year, including amendments to the IRC § 152 dependent definition. Because A.R.S. § 43-1001(3) incorporates the IRC § 152 definition by reference without creating Arizona-specific exceptions, changes to the federal definition of "qualifying child" or "qualifying relative" automatically apply for Arizona purposes in the conformity year, unless Arizona enacts a specific addition or subtraction to address nonconformity.

Source: A.R.S. § 43-1001 Source: A.R.S. § 43-1023 Source: A.R.S. § 43-1073.01, as amended by HB 4168 and SB 1106 (2026 credit increase) Source: Arizona Department of Revenue, Deductions and Exemptions

Arizona adopts a fixed-date, or static, conformity to the federal Internal Revenue Code (IRC) for purposes of individual income tax. For tax year 2025, Arizona conforms to the IRC as amended and in effect on January 1, 2025 (A.R.S. § 43-105; HB 2688). For tax year 2026, the conformity date is January 1, 2026 (SB 1106). Any federal tax provision enacted after Arizona’s stated conformity date is not recognized for Arizona tax purposes unless separately adopted through state legislation.

Practical consequence:

• Only federal tax law in effect as of Arizona’s latest conformity date is part of Arizona law for that tax year. If the federal government enacts special exclusions, above-the-line deductions, bonus depreciation allowances, or new credits after that date, those provisions do not automatically apply to Arizona until specifically adopted by the legislature.
• This static model can result in gaps between federal and Arizona returns, especially when congressional action creates new deductions or credits or changes income calculations after Arizona’s cutoff date for conformity.

Examples of nonconformity:

• If Congress enacts new federal income tax deductions, exclusions, or expanded credits after January 1, 2025 (for TY 2025) or after January 1, 2026 (for TY 2026), those will not be reflected on Arizona returns for the relevant year unless the Arizona Legislature updates conformity in time for that tax year.
• Practitioners should closely track state conformity updates and rely on Department of Revenue annual conformity bulletins before implementing any federal tax changes on Arizona returns that became law after the state’s conformity cutoff date.

Statutory framework:

• The relevant conformity mechanism is set forth in A.R.S. § 43-105 and the session laws establishing the specific dates for each year’s conformity.
• For ongoing guidance and annual conformity status, consult the Arizona Department of Revenue’s official conformity resources.

Source: A.R.S. § 43-105 Source: 2024 HB 2688 Source: 2026 SB 1106 Source: Arizona Department of Revenue — Conformity to IRC

Arizona individual income tax computation starts with federal adjusted gross income (AGI), but statutory modifications—"additions" and "subtractions"—must be applied to arrive at Arizona taxable income. The statutory list of required adjustments appears in A.R.S. § 43-1021 (additions) and § 43-1022 (subtractions), operationalized on Form 140 and its instructions.

Material statutory update for tax years 2024, 2025, and 2026 (HB 4168, enacted June 13, 2026):

Additions to federal AGI (A.R.S. § 43-1021):

• Interest income from non-Arizona municipal bonds
• Federal depreciation/amortization not recognized for Arizona
• Contributions to non-qualified medical savings accounts
• Nonqualified distributions from § 529 or § 529A (ABLE) accounts
• NEW for tax year 2026: Required addition for bonus depreciation under IRC § 168(n) claimed federally. Taxpayers must add back the full amount of federal bonus depreciation for Arizona purposes, effective for tax years beginning January 1, 2026, and after. (HB 4168, sec. 4)

Subtractions from federal AGI (A.R.S. § 43-1022):

• Interest income from U.S. obligations
• Social Security and Railroad Retirement benefits included in federal AGI
• Up to $2,500 public pension/annuity subtraction (more for certain military pensions)
• Active-duty military/Guard/Reserve pay for Arizona service
• Native American wages earned on the reservation
• Qualified distributions from Arizona medical savings accounts, 529/529A plans
• NEW subtractions, taking effect variously in 2024, 2025, and 2026 (HB 4168, sec. 4):
• Qualified tips excluded under IRC § 224 (effective TY2024)
• Qualified overtime compensation excluded under IRC § 225 (effective TY2025)
• Enhanced deduction for taxpayers age 65+ under amended IRC § 151(d)(5)(C) (effective TY2026)
• Distributions from IRC § 530(a) education accounts (effective TY2026)
• Subtraction for child and dependent care expenses above federal credit amount (effective TY2026)
• Qualified passenger vehicle loan interest (effective TY2026 and after)

Part-year residents and nonresidents: These AGI adjustments apply to the Arizona-source portion of federal AGI following the guidance in A.R.S. § 43-1091 and the latest Form 140PY/140NR instructions.

For full statutory detail and an updated list of required additions/subtractions for each tax year, consult A.R.S. §§ 43-1021, 43-1022 and the annual Arizona Form 140 Booklet. Practitioners should note the effective dates for each new item as some subtractions apply to 2024 or 2025 returns, but most new adjustments take effect for tax year 2026 and after following HB 4168's enactment in June 2026.

Source: A.R.S. § 43-1021 (additions); A.R.S. § 43-1022 (subtractions); Arizona Form 140 Booklet 2024; HB 4168 — Arizona 2026 Conformity Amendment

Arizona resident individuals may claim a nonrefundable credit against their Arizona personal income tax for income taxes paid to another state or a foreign country on income also taxed by Arizona. This credit is designed to relieve double taxation where the same income is subject to tax in both Arizona and the other jurisdiction.

Eligibility and scope:

• Only resident individuals (filing Form 140) and part-year residents (filing Form 140PY for Arizona-source income earned while an Arizona resident) may claim this credit. Nonresidents filing Form 140NR are not eligible. (Arizona Form 309 Instructions 2024, p. 1)
• The income must be included in Arizona adjusted gross income and also taxed by the other state or country. (A.R.S. § 43-1071(A))
• No credit is allowed for taxes paid to local or municipal governments, nor for inheritance, estate, gift, excise, franchise, or gross income taxes. Only state- or foreign country-level income, war profits, or excess profits taxes qualify. (A.R.S. § 43-1071(A), (B))

Computation:

• The credit allowed is the lesser of: (a) the tax paid to the other state or country on double-taxed income, or (b) the Arizona tax attributable to that income. (A.R.S. § 43-1071(C))
• If the other jurisdiction allows a credit for taxes paid to Arizona, the Arizona credit must be reduced by that amount. (A.R.S. § 43-1071(D))

Procedural requirements:

• Taxpayers must complete and attach Arizona Form 309, along with a copy of the out-of-state (or foreign) income tax return and proof of payment. If a refund or credit is later received from the other jurisdiction, the Arizona return must be amended. (Arizona Form 309 Instructions 2024, p. 2)

Statutory authority and reference:

• Full eligibility, computation, and procedural requirements are set by A.R.S. § 43-1071. Arizona Department of Revenue provides annual instructions and clarifications via Form 309 Instructions. This section reflects law and guidance current as of the 2024 tax year.

Source: A.R.S. § 43-1071; Arizona Form 309 Instructions (2024)

The section was updated July 2024 to repair an official DOR source link and to confirm statutory and agency guidance remain unchanged from the prior year. No material legal amendments affecting credit eligibility or calculation were identified.

For the 2026 tax year, Arizona imposes a flat personal income tax rate of 2.5 percent on the taxable income of all resident and nonresident individuals, regardless of filing status. This rate, established by A.R.S. § 43-1011, took effect for tax years beginning on or after January 1, 2023, and remains in force for 2026; there has been no statutory change or certified revenue trigger that would reduce the rate for tax year 2026.

Surplus-based reduction mechanism: Legislation enacted by the 56th Legislature (S.C.R. 1035) creates a mechanism for potential reductions to the individual income tax rate using a portion of any General Fund structural surplus. For tax years beginning on or after January 1, 2026, the Department of Revenue must reduce the tax rate if the Joint Legislative Budget Committee (JLBC) certifies a qualifying surplus, but no such certification has occurred as of June 2026. The mechanics require the JLBC to determine a structural surplus after reserving certain required funds, and the tax rate would be reduced by half of that surplus as a percentage of General Fund revenues. Unless the surplus is certified and acted upon, the statutory 2.5 percent rate applies.

Rate reduction for 2027 and thereafter: In 2025, the 57th Legislature adopted H.C.R. 2012, which amends A.R.S. § 43-1011 to reduce the personal income tax rate to 2 percent for tax years beginning on or after December 31, 2026 (i.e., tax year 2027 and later).

Effective dates and summary:

• 2.5 percent flat rate applies for tax year 2026 (A.R.S. § 43-1011; no surplus-triggered reduction declared as of June 2026).
• 2 percent flat rate applies for tax years beginning on or after December 31, 2026 (tax year 2027 and later), per H.C.R. 2012 amendments.
• A surplus-based reduction may be triggered for any future year if certified by JLBC (per S.C.R. 1035), but as of June 2026, no such reduction has occurred or been declared by ADOR.

Source: A.R.S. § 43-1011 Source: S.C.R. 1035 Summary Source: H.C.R. 2012

Updated July 2024: Material statutory change for small business corporation intangible income.

Under amendments to A.R.S. § 43‑1092 effective in 2024 and further revised by SB 1150 (2024 session), the sourcing of intangible income earned by nonresidents has changed in two key respects:

1. General rule (2024 amendment): Intangible income (such as interest or dividends) earned by a nonresident is Arizona-source only if (a) the intangible property has a business situs in Arizona, or (b) the nonresident conducts regular, systematic, and continuous trading or dealing of intangibles in Arizona that constitutes "doing business" in the state (with a statutory floor: less than six months of such activity is not sufficient). The location of the payer or financial institution alone is not sufficient to source such income to Arizona.
2. New carve-in for small business corporation income (SB 1150): Effective on enactment of SB 1150 (codified at A.R.S. § 43‑1092(B)), income received by a nonresident from a small business corporation that has made an election under § 43‑1126 (Arizona S corporation) is deemed Arizona‑source income for nonresidents to the extent attributable to Arizona under statutory allocation and apportionment rules, regardless of general intangible sourcing.

Concrete Example:

• Not Arizona-source: A nonresident holds a CD or savings account at an Arizona-based bank and receives interest or dividends while residing entirely outside Arizona. The income is not Arizona-source unless there is a business situs or regular Arizona "doing business" activity.
• Arizona-source, new for 2024–25: A nonresident is a shareholder in an Arizona S corporation (electing under § 43‑1126) and receives a distributive share of the S corporation’s income that is allocated/apportioned to Arizona. That portion is now Arizona-source intangible income—even if there is no business situs or in-state trading presence otherwise.

This outcome aligns with the language of amended § 43‑1092 and the Department’s prior interpretation in LR 1999‑012 (2000), which remains relevant for the general rule. For the new S corporation carve-in, only the portion of S corporation income that Arizona law attributes to Arizona is treated as Arizona-source (see SB 1150 and statute text).

Source: A.R.S. § 43‑1092 (2024 & 2025 version) Source: SB 1150 — 2024 Amendment Explanation Source: Arizona Department of Revenue, LR 1999‑012