Arizona Business Tax – Complete Guide

Arizona Business Tax

Arizona business tax includes a wide range of taxes and they are levied on individuals and businesses. The taxes are normally levied on the profits earned by a company but can also be on the sales and purchase of products and services. A business tax is basically collected by the state government as it is a source of income for the state. Whether you register a domestic entity or operate as a foreign company, taxes are an integral part of this state’s annual requirement. Since every business will be levied a different type of tax, you may need an Arizona business tax Calculator to move forward with your overall tax planning including accounting and bookkeeping.

What taxes do businesses pay in Arizona?

Arizona is quite a popular destination for first time business owners and one key factor is its good tax environment. The state has one of the lowest flat tax rates in the USA and thus Arizona business tax climate is quite favorable for both domestic and foreign entities. You can choose to form different types of entities in this state right from a limited-liability Company to a C Corporation, sole proprietorship, general partnership, and an S Corporation. Each type of entity will have a different tax status in this state. Depending on the entity structure and the primary business activity, your company may have to file a single form of state tax or multiple taxes like Arizona LLC taxes including individual and state taxes. Let’s try to understand the different types of taxes applicable to new and existing businesses in this state.

Arizona corporate income tax

There are different categories of income taxes in the state and one of them is the Arizona corporate income tax. It is also known as the corporation tax and is levied on any taxable profits generated from your business. The taxable income may include several items like capital gains, investment profit, and trading profit. This type of Arizona Corporation taxes can be reduced through common tax-deductible expenses like operating expenses and employee salaries or bonuses among others. Currently, the rate of corporate income tax in Arizona is 4.9 percent.

Pass-through entity (PTE) tax

The Pass-through Entity (PTE) tax is considered as an entity-level income tax. This type of tax is applicable to mostly partnerships and subchapter S corporations. Currently, the rate of this Arizona corporate income tax is 2.50 percent of the income attributed to the S Corporation or partnership’s shareholders or resident partners. It is also applicable on any income derived from various sources within Arizona and attributed to nonresident shareholders or partners.

Small business income (SBI) tax

The Arizona Small Business Income Tax (SBI) is a fairly new form of tax that is often considered under Arizona LLC taxes. This allows an individual taxpayer to report his or her small business income on a separate return. There is a flat tax rate of 3 percent. It is important to note that the Arizona SBI tax return has to be filed along with the regular income tax return.

Transaction privilege tax (TPT)

The TPT is one of the most important forms of Arizona business tax. It is commonly referred to as the state sales tax. This type of tax is subjected to an individual or company for the privilege of conducting business in this state. There are various business activities that are subjected to the transaction privilege tax like advertising, telecommunications, residential rental, retail, and restaurants among others. You will need to use an Arizona business tax Calculator as the TPT tax rate varies according to the type of business activity and the county or city your company is operating from.

Local Arizona Taxes

There is the Arizona business tax also known as state tax and then there is the local tax. The most common form of local tax is the use tax. The use tax is often seen as a complement to the Transaction privilege tax (TPT). It is also filed using the TPT return. There are certain conditions in which this type of Arizona LLC taxes will be applicable. They are –

• If you make any out of state purchases towards operating your company and have not paid any sales tax on it or if the sales tax is less than that of Arizona use tax rate, then you will be required to file use tax.
• If you have purchased goods using a resale certificate, and if such goods have been stored, used, or consumed within the state contrary to the actual purpose stated in the certificate then will be required to pay use tax.

Arizona State Employer Taxes

State employer taxes are also known as Arizona Withholding Tax. This is additional to any Arizona corporate income tax and is purely based on the situation where your company has employees. If you have employed the services of people and are paying salary then you will need to withhold Arizona income tax from those employees. This is applicable for services being rendered within Arizona. This type of Arizona Corporation taxes is calculated on the basis of a percentage of your employee’s gross taxable wage. There are certain situations in which the withholding tax is not applicable like if you pay salary or wages to a nonresident employee.

Industry Taxes

When it comes to starting a new business in Arizona, it is important to know that you might be levied taxes if your business is connected to specific industries. These can be in the form of state tax or local taxes. For example – if you are operating from Mesa, AZ and are planning to invest in industrial or commercial property then there will be an assessment ratio for property taxes at the rate of 16.5 percent of the limited property value (LPV). Industries like aviation fuel will attract Arizona business tax. If you are producing aviation fuel or importing it into Arizona then the tax rate will be 5¢ per gallon.

Are you thinking of forming a new business in Arizona?

How Arizona Businesses are Taxed?

Once you form a new business in Arizona, your company will have to be compliant with both federal and state taxes in order to maintain good standing with the state. Your company may be required to file Arizona LLC taxes or some other form of taxes depending on the entity structure. The type of taxes levied will also vary according to the location of your company, the business activity, industry, employment. Let us look at the different types of entities and their tax obligations in this state.

Taxes for an LLC

If you are planning to register an Arizona limited-liability company then for tax purposes, it will be considered a pass-through entity. As a result, instead of filing Arizona corporate income tax, you will be required to file personal income tax at a flat rate of 2.50 percent. In a pass-through entity, the business income will pass through to the owners and other members. Apart from this income tax, there are other forms of Arizona LLC taxes that you may be required to file in this state.

Taxes for a C Corporation

If you are planning to incorporate in Arizona then you will be required to file Arizona corporate income tax. The current tax rate for corporate taxes is 4.9 percent. C Corporations may be required to file some of the following taxes –

• Transaction privilege tax (TPT) – This is a mandatory tax if you are selling a product or promoting a service specifically mentioned by the Arizona Department of Revenue.
• Use tax – This is one of the important Arizona Corporation taxes and is mostly levied for different business activities by specific counties.
• Corporate income tax – If you incorporate in this state then you will be required to file the Arizona corporate income tax.
• Individual Income tax – Shareholders and directors of a corporation will have to file individual income tax returns.
• Withholding Tax – If your company has employees then this tax return has to be filed.
• Other Taxes – Depending on your business activity and industry, you may be required to file certain other taxes. These include severance tax on metalliferous minerals, luxury tax on liquor, and workers’ compensation insurance premium tax among others.

Taxes for S Corporation

If you have started an LLC or a C Corporation and elect S Corporation tax status then one of the benefits is that you will not be subjected to the Arizona corporate income tax. S Corporation is a pass-through entity like an LLC hence each member or owner would be required to file personal income tax. S Corporations in this state may choose to file the Arizona Pass-Through Entity (PTE) income tax. Of course the PTE election needs to be done by the S Corporation prior to the due date or extended due date for filing of the state income tax return. You will be required to file Arizona Form 120S for the PTE election. This is one of the important Arizona Corporation taxes and the rate is a flat 2.50 percent of the income attributed to the S Corporation’s shareholders.

Taxes for a Sole Proprietorship

A sole proprietorship is one of the easiest forms of businesses. Once you form this type of company, you will need to report your profits by filing the individual income tax return. Apart from this, depending on the type of activity, you may be required to file an Arizona business tax in the form of transaction privilege tax, and use tax. You can also choose to file the Small Business Income Tax (SBI) where you have to report your small business income on a different return (Arizona Form 140ES-SBI) at a flat rate of 3.0 percent.

Taxes for Partnerships

If you form a partnership company in Arizona then the applicable taxes would be similar to that of taxes for sole proprietorships, S Corporations, or Arizona LLC taxes. Partners will be required to file individual tax returns based on the income they have earned through the business. Partnerships can also elect to file the Arizona Pass-Through Entity (PTE) income tax. If you are selling specific products or services then you will be required to file sales tax or the transaction privilege tax. You may also be required to file withholding tax.

Ready to Incorporate Your Arizona Company?

Arizona provides just the right business environment, good policies and regulations, and strong infrastructural support to new and existing businesses. You can choose to form different types of entities like Limited Liability Company, partnership firm, sole proprietorship, C Corporation, and S Corporation. Once you have formed or registered your company, you will need to ensure fulfillment of all annual state requirements including filing Arizona business tax. IncParadise can help you by providing information and assistance pertaining to business taxes and annual requirements.