Arizona Small Business Tax Guide for 2025

Whether you operate as a solopreneur, partnership, limited liability company (LLC), or S corporation, the state of Arizona is a great place to establish your business. However, as rewarding as it can be to run your business in the state, it features unique tax considerations that can significantly impact compliance and your bottom line. For example, consider the changes implemented as a result of S.B. 1783. After its passage, small business owners operating as pass-through entities were allowed to elect to be taxed at a more favorable tax rate. S.B. 1783 and other initiatives are designed to promote growth in what is viewed as a business-friendly state.

This comprehensive guide breaks down everything Arizona-based small business owners need to know about state tax considerations, compliance requirements, and strategic planning opportunities. These insights will help startup founders, established entrepreneurs, and owners interested in expanding operations into Arizona meet their tax obligations by maximizing available benefits and minimizing liability and unnecessary costs.

Arizona State Taxes for Small Businesses: Quickstart Guide

Before diving into the details, here's a quick reference guide for Arizona small business taxes based on your business structure:

Note: All business types may also be subject to Transaction Privilege Tax (TPT), withholding tax, unemployment tax, and property tax, depending on business activities.

Taxes to Expect for Arizona Small Businesses

Arizona's tax landscape for small businesses has evolved significantly in recent years. Understanding your business tax obligations is essential for proper compliance and financial planning.

Corporate Income Tax

Arizona imposes a flat 4.9% corporate income tax rate on all C corporations doing business in the state, even if they have no tax liability. This tax applies to the corporation's Arizona taxable income, which is calculated by:

1. Starting with federal taxable income

2. Adding any Arizona-specific additions

3. Subtracting any Arizona-specific subtractions

4. Applying any available Arizona tax credits

Form 120 must be filed by the 15th day of the 4th month following the close of the taxable year (typically April 15 for calendar-year filers). Corporations must maintain detailed records of income, expenses, deductions, and credits for at least four years after filing.

Learn how 1-800Accountant can help manage your corporate tax requirements

Pass-Through Entity (PTE) Tax

Arizona's optional PTE tax allows S corporations, partnerships, and LLCs taxed as either to pay tax at the entity level rather than passing the tax burden to the individual owners. The PTE tax rate matches Arizona's individual income tax rate, currently 2.5% for 2025.

The PTE tax election, which must be made annually, can help business owners work around the $10,000 federal SALT (State and Local Tax) deduction limitation. Entities electing the PTE tax must file the appropriate form (120S for S corporations, 165 for partnerships/LLCs) and pay the tax by the entity's regular due date.

Small Business Income (SBI) Tax

Introduced by Senate Bill 1783, the SBI tax option allows qualified small business owners to separate their business income from other income sources and pay tax at the preferential SBI rate. The SBI tax rate is 2.5% for 2025, following a phased reduction from 3.5% in 2021.

Sole proprietors, partners in partnerships, shareholders in S corporations, and LLC members who report business income on their individual tax returns can elect to be taxed at this preferential rate. 

SBI eligibility requirements state you must be an Arizona resident, have Arizona small business gross income, and make the annual election on Form 140-SBI, 140PY-SBI, or 140NR-SBI.

The SBI election can provide tax savings compared to including business income with other income sources on a regular individual return. In addition to filing their regular individual income tax return, Internal Revenue Service (IRS) Form 140, U.S. Individual Income Tax Return, individual taxpayers must file the appropriate SBI form (140-SBI, 140PY-SBI, or 140NR-SBI) typically by April 15.

Learn how 1-800Accountant can help maximize your SBI tax benefits

Transaction Privilege Tax (TPT)

Unlike many other states that impose a sales tax, Arizona has TPT, a tax on the privilege of doing business in Arizona.

Key differences from sales tax:

• TPT is imposed on the seller rather than the buyer

• The seller has the option, but not the obligation, to pass the tax on to customers

• TPT applies to specific business classifications

TPT rates vary by location and business classification, typically ranging from 5.6% to 11.2% (combined state, county, and city rates). Businesses operating in multiple Arizona cities or counties must comply with different TPT rates and may need to file separate returns.

Businesses engaged in taxable activities under Arizona's 16 business classifications, including retail sales, restaurants, commercial leasing, and contracting, must pay this tax and obtain a TPT license from the Arizona Department of Revenue (ADOR) before operating.

The TPT filing deadline is on the 20th day of the month following the end of the filing period. TPT filing frequency:

• Monthly: For businesses with annual TPT liability of $2,000 or more

• Quarterly: For businesses with annual TPT liability between $500 and $2,000

• Annually: For businesses with annual TPT liability under $500

Need help managing your TPT compliance? 1-800Accountant can help.

Withholding Tax

Arizona requires employers to withhold state income tax from employee wages, similar to federal income tax withholding. Employers can withhold at either:

• 1.8% of gross taxable wages, or

• 2.7% of gross taxable wages, or

• 3.6% of gross taxable wages, or

• 4.2% of gross taxable wages, or

• A percentage computed according to the Arizona withholding tables

Employers must register with the ADOR, file Form A1-QRT quarterly, and make timely tax payments. Employers must maintain withholding records for at least four years.

The payment schedule is dependent on the amount of tax withheld:

• Annual: Less than $200 per quarter

• Quarterly: $200 to $1,500 per quarter

• Monthly: $1,500 to $10,000 per quarter

• Semi-weekly: More than $10,000 per quarter

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Unemployment Insurance Tax

Arizona employers are required to pay unemployment insurance (UI) tax to fund benefits for unemployed workers. Rates range from 0.04% to 9.72% of taxable wages (first $8,000 paid to each employee annually), based on the employer's experience rating. New employers typically pay a standard rate of 2% for the first two years.

Generally, employers must pay UI if they:

• Pay $1,500 or more in wages in a calendar quarter, or

• Employ at least one person for any portion of a day in each of 20 different weeks during a calendar year

Employers must register with the Arizona Department of Economic Security and file quarterly tax and wage reports (UC-018) by the last day of the month following the end of each calendar quarter.

Personal Property Tax

Arizona imposes a tax on all businesses using personal property for commercial purposes, which includes furniture, equipment, machinery, and other assets.

Tax rates vary by county and district, typically between 1% and 4% of the assessed value. Property is valued at replacement cost new, less depreciation based on the property's age and expected life. Businesses must file an annual Personal Property Statement with the county assessor where the property is located by April 1. 

Arizona provides a personal property tax exemption for small businesses. For 2025, the exemption applies to the first $207,366 of full cash value, which is adjusted annually for inflation.

Arizona Sales Tax

While Arizona technically doesn't have a "sales tax," the TPT functions similarly from a consumer perspective, as most businesses pass this tax on to them. Most retail sales of tangible personal property are subject to TPT, but exemptions exist. Food for home consumption, prescription medications, specific medical devices, some manufacturing equipment, and certain items for resale are typically exempt. 

Tax rates vary by location, with the state portion at 5.6% and additional county and city taxes bringing the total to between 7.6% and 11.2% in most areas. Out-of-state sellers with economic nexus in Arizona ($100,000+ in sales to Arizona residents) must collect and remit TPT, with online marketplaces like Amazon, eBay, and Etsy responsible for collecting and remitting TPT on behalf of third-party sellers.

Local Taxes in Arizona

Beyond state-level taxes, Arizona businesses must also navigate various local tax obligations.

• Many Arizona cities impose additional business license fees or taxes.

• Cities can impose their own TPT rates and sometimes tax different business activities than the state.

• Counties and cities levy property taxes on both real and personal property.

• Special districts (fire, water, school, etc.) may impose additional taxes.

• Businesses may have tax obligations in multiple jurisdictions if they have physical presence or economic nexus.

• Businesses must pay use tax on taxable items purchased without paying sales/TPT tax if those items are used in Arizona.

Industry-Specific Taxes in Arizona

Certain industries face additional tax obligations in Arizona:

• Restaurant and bar: Subject to TPT at higher rates in many jurisdictions, plus potential liquor license fees.

• Contracting: Construction contractors face complex TPT rules, with tax typically due at the location of the construction project.

• Hospitality: Hotels and short-term rentals are subject to TPT plus additional bed taxes.

• Mining: Subject to severance tax on extracted minerals.

• Utilities: Electric, gas, water, and telecom companies face additional regulatory fees and taxes.

• Cannabis: Medical marijuana businesses face a 5.6% TPT plus additional taxes in some jurisdictions.

• Transportation: Commercial vehicles may be subject to weight-mile taxes and special registration requirements.

Tackling Federal Tax Obligations for Small Businesses

While navigating Arizona's tax landscape is crucial, small business owners must also comply with federal tax requirements.

Federal Income Tax Basics

Federal income tax obligations vary depending on your business structure:

• C corporations: Pay corporate income tax at a flat 21% rate on taxable income. Subject to double taxation, as dividends to shareholders are also taxed at the individual level.

• Pass-through entities: Business income "passes through" to the owners' individual tax returns and is taxed at personal income tax rates. Pass-through entities may qualify for a deduction of up to 20% of qualified business income under Section 199A. 

Most small business owners must make quarterly estimated tax payments if they expect to owe $1,000 or more in taxes for the year.

Common federal deductions include business expenses, employee wages and benefits, business travel and vehicle expenses, home office deduction, depreciation on business assets, and health insurance premiums for self-employed individuals.

Federal credits include the small business health care tax credit, work opportunity tax credit, research and development credit, disabled access credit, and the employer-provided childcare facilities credit. 

Let 1-800Accountant handle your federal tax compliance while you focus on growing your business.

The Ins and Outs of Payroll Taxes

Payroll taxes are a significant responsibility for businesses with employees.

Employers must withhold 7.65% of employee wages for FICA taxes and contribute an additional 7.65% employer portion. They must also withhold federal income tax from employee wages based on each employee's Form W-4 and the federal tax tables.

Employers pay FUTA tax at a rate of 6% on the first $7,000 paid to each employee annually. Deposit schedules depend on the size of your payroll tax liability:

• Monthly: For smaller employers with less than $50,000 in payroll taxes in the lookback period

• Semi-weekly: For larger employers with $50,000 or more in payroll taxes

Reporting requirements:

• IRS Form 941: Quarterly reporting of federal income tax, Social Security, and Medicare taxes

• IRS Form 940: Annual reporting of FUTA tax

• IRS Form W-2: Annual wage and tax statements for employees

• IRS Form W-3: Annual transmittal of W-2 forms

If you hire independent contractors, you're not responsible for payroll taxes, but you must report payments of $600 or more annually on IRS Form 1099-NEC.

Simplify payroll tax compliance with 1-800Accountant's comprehensive payroll services.

Navigating Tax Filing and Payment

Keeping Up with Filing Deadlines

Meeting tax deadlines is crucial to avoid penalties and interest. Here are the key deadlines for Arizona businesses:

Federal income tax returns:

• Individual (including sole proprietors): April 15

• Partnerships and S corporations: 15th day of the 3rd month after the tax year ends (typically March 15)

• C corporations: 15th day of the 4th month after the tax year ends (typically April 15)

TPT returns are due on the 20th day of the month following the reporting period. Unemployment tax reports are due on the last day of the month following the quarter's end. While personal property statements are due by April 1, property tax payments are due on October 1 and March 1. 

Withholding tax:

• Quarterly returns (Form A1-QRT): Due on the last day of the month following the quarter's end

• Annual reconciliation (Form A1-R): Due January 31 of the following year

Arizona generally follows federal extension periods, but an extension to file is not an extension to pay. Any tax due must still be paid by the original deadline to avoid penalties and interest.

Consequences of missed deadlines include late filing penalties of 4.5% per month, up to 25% of the unpaid tax, late payment penalties of 0.5% per month, up to 10% of the unpaid tax, with interest accruing at 8% annually on unpaid tax. 

Stay organized by using calendar reminders or tax preparation software, consider using a tax professional to track deadlines, set up electronic filing and payment options, and maintain organized records throughout the year.

E-Filing Taxes and Payment Plans

The ADOR offers several options for filing and paying taxes electronically:

• AZTaxes.gov: The state's online portal for filing and paying various business taxes, including TPT and withholding taxes.

• ACH Credit: Businesses can initiate electronic payments through their financial institutions.

• Credit card payments are available for most tax types, though processing fees apply.

If you can't fully pay your tax liability, the ADOR may allow you to set up an installment agreement. Requirements include completing Form 140-IA, making a good-faith down payment in addition to a setup fee, and agreeing to make regular monthly payments.

Faster processing times, immediate confirmation of receipt, reduced error rates, quicker refunds, and easier record-keeping are some of the benefits of e-filing. 

Need help setting up electronic filing and payments? 1-800Accountant can help.

Tax Incentives: Deductions and Tax Credits for Arizona Businesses

Arizona offers several tax incentives to encourage business growth and investment:

Key Tax Deductions

Ordinary and necessary business expenses are deductible at the state and federal levels. Some of the top state-specific deductions are pollution control equipment, certain research and development expenses, expenses related to energy-efficient buildings, contributions to 529 college savings plans, and the military family relief fund. 

Tax Credits and Incentives

• Research and development tax credit: Available for increased research activities conducted in Arizona. The credit is 24% of the first $2.5 million in qualifying expenses, plus 15% of qualifying expenses exceeding $2.5 million.

• Qualified facility tax credit: For businesses that make capital investments to establish or expand manufacturing facilities that create new jobs. The credit is up to 10% of the qualifying capital investment.

• Job training tax credit is for businesses that train employees for new technologies or processes. The credit is 50% of training expenses, up to $1,500 per employee.

• Enterprise zone credit: While this program has expired, businesses with existing credits may still claim them for up to five years.

Most credits require pre-approval or certification from the appropriate agency. Tax forms and applications can be found on the ADOR website.

Let 1-800Accountant help you identify and claim all available tax credits and deductions.

Crafting a Smart Tax Strategy for Arizona Small Businesses

Business Structure for Tax Advantage

Your business structure significantly impacts your tax situation in Arizona:

• Sole Proprietorship. This is the simplest structure with minimal paperwork, with its business income reported on Schedule C of a personal tax return. This entity is subject to self-employment tax and may qualify for the SBI tax election.

• LLC. Flexible tax treatment, where multi-member LLCs can elect PTE or SBI tax, and single-member LLCs can elect SBI tax. This entity type offers liability protection while maintaining pass-through taxation.

• S corporation. This entity features pass-through taxation and avoids double taxation. It can reduce self-employment tax by paying a reasonable salary plus distributions, and can elect PTE tax or SBI tax. S corps require more formalities than LLCs.

• C corporation. This entity is subject to a flat 4.9% corporate tax in Arizona and is subject to double taxation (corporate profits and dividends). Corporations can retain earnings for growth and are eligible for the broadest range of deductible benefits.

Remember that business structures can be changed as your business grows and evolves.

Get expert advice on choosing the optimal business structure with 1-800Accountant.

Planning Ahead with Proactive Tax Strategies

Successful tax planning requires a year-round approach:

• Timing of income and expenses. Consider accelerating deductions into the current year, deferring income to the following year when beneficial, and purchasing needed equipment before year-end to take advantage of the Section 179 deduction.

• Retirement planning. Establish and contribute to retirement plans like SEP IRAs, SIMPLE IRAs, or Solo 401(k)s, and time the contributions for maximum tax benefit.

• Employee benefits. Implement tax-advantaged benefits like health insurance and flexible spending accounts, and consider hiring family members when appropriate. 

• Entity structure optimization. Regularly review your business structure as your business grows, consider the potential benefits of electing S corporation status for LLCs, and evaluate whether the SBI tax election benefits your situation. 

• Documentation and record-keeping. Maintain organized records of all business transactions, document the business purpose for expenses, and keep receipts and invoices for all deductions claimed.

• Regular tax planning meetings. Schedule quarterly meetings with your tax advisor, adjust strategies based on business performance and legislative changes, and forecast tax liability to avoid surprises. 

Develop a comprehensive tax strategy with 1-800Accountant's expert advisors.

Tax Pitfalls to Avoid

Common Tax Filing Errors

Small businesses often make these costly mistakes:

• Misclassifying workers: Incorrectly classifying employees as independent contractors can lead to significant penalties and back taxes.

• Mixing personal and business finances: Failing to maintain separate accounts complicates record-keeping and may raise red flags with tax authorities.

• Missing filing deadlines: Late filings can result in substantial penalties and interest charges, even if you can't pay the full amount due.

• Improper recordkeeping: Inadequate documentation can lead to denied deductions and difficulties during audits.

Handling Audits and Disputes

If your business faces an audit or tax dispute, don't panic—not all audits indicate wrongdoing. Respond promptly to all notices and gather requested documentation while considering professional representation. 

Types of audits:

• Correspondence audits (handled by mail)

• Office audits (conducted at an ADOR office)

• Field audits (conducted at your business location)

During the audit, be professional and cooperative, provide only the requested information, answer questions truthfully and concisely, and take notes on all interactions.

You don't have to accept an unfavorable result. Review the audit report carefully, file a written protest within 45 days if you disagree, consider mediation or the Taxpayer Problem Resolution Program, and prepare for a formal hearing.

Get peace of mind with 1-800Accountant's comprehensive audit defense services.

Finding Help and Building Your Tax Compliance Support Network

Professional Organizations That Provide Advice

These organizations offer valuable resources for Arizona small business owners:

• Arizona Society of CPAs: Provides educational resources, networking opportunities, and referrals to qualified tax professionals.

• Arizona Small Business Association: Offers workshops, advocacy, and connections to business resources, including tax professionals.

• Small Business Development Centers (SBDCs): Provides free or low-cost business counseling, including tax guidance, at locations throughout Arizona.

• SCORE: Offers free mentoring and low-cost workshops for small business owners, with chapters across Arizona.

• Local Chambers of Commerce: Many offer tax workshops and connections to local tax professionals.

Network with Peers to Share Knowledge

Learning from other business owners can provide valuable insights regarding tax trends and changes. Consider joining industry-specific associations, small business meetups, browsing online forums and social media groups, peer advisory groups, and co-working spaces.

Arizona Government Resources

Take advantage of these official resources:

• ADOR: Offers online resources, publications, and workshops on various tax topics.

• Arizona Commerce Authority: Provides information on business incentives and tax credits.

• Arizona Corporation Commission: Offers guidance on business formation and compliance requirements.

Partner with 1-800Accountant for Seamless Tax Management

Managing your Arizona small business taxes doesn't have to be overwhelming. With the right partner, you can ensure compliance while maximizing your tax savings opportunities.

How 1-800Accountant Can Help

The benefits of professional tax assistance include peace of mind, substantial time savings, reduced risk, strategic advantages, and real-time adaptability.

By partnering with 1-800Accountant, America's leading virtual accounting firm, you'll gain access to the expertise and resources needed to navigate Arizona's complex tax landscape with confidence, allowing you to focus on what matters most—the success of your business. Our suite of professional accounting services includes: 

• Comprehensive tax preparation: Our experienced accountants stay current with Arizona's evolving tax laws, including changes like the SBI tax election, to ensure your returns are accurate and optimized.

• Year-round tax planning: We don't just prepare your taxes—we help you develop proactive strategies to minimize your tax burden throughout the year.

• Bookkeeping services: Our dedicated bookkeepers maintain organized financial records, ensuring you have the documentation for tax filings and potential audits.

• Industry-specific expertise: Our accountants understand the unique tax challenges businesses face in various industries, providing tailored solutions to address your specific needs.

Ready to take the stress out of tax season? Schedule a consultation with our Arizona tax experts today.