Arizona’s tax compliance framework requires careful attention from corporations and pass-through entities alike. C corporations are taxed directly at a flat 4.9% on their Arizona income, with specific filing forms, deadlines, and estimated tax obligations. Extensions are available but only for filing—not for payment.
Other entities such as S corporations, partnerships, LLCs, and LLPs do not pay state-level corporate income tax, but instead pass income, deductions, and credits through to shareholders or partners. These individuals then pay personal state income tax at a rate of 2.98% on their allocated share. Both C and S corporations must make estimated payments if their liability exceeds certain thresholds, and electronic payments are mandatory above specific limits.
Arizona’s system also imposes strict penalties and interest for late filing or late payments, emphasizing the importance of timely compliance. This blog explores taxation in Arizona as outlined in the M2K US Knowledge Series, covering corporate and non-corporate obligations, extensions, estimated payments, and penalties.
Taxation for C-Corporations
C corporations in Arizona must file using Form 120 – Arizona Corporation Income Tax Return. This form reports income, deductions, credits, and tax liability for corporations operating within the state.
- Due Date: Returns are due on the 15th day of the fourth month after the close of the corporation’s tax year.
- If the due date falls on a weekend or holiday, the deadline is extended to the next business day.
C corporations are distinct legal entities from their shareholders and therefore subject to direct corporate income tax. The tax rate is 4.9% on taxable income earned in Arizona.
This establishes Arizona as a moderate-tax state for corporations compared to other U.S. jurisdictions.
Corporations may request additional time to file, but extensions only apply if submitted by the original due date.
- Extension Period: A maximum of seven months can be granted.
- How to Request:
- File a federal extension request; or
- File an Arizona extension request (Form 120/165EXT).
Key Rule: Extensions extend the filing deadline, not the payment deadline. Corporations must pay at least 90% of their tax liability (including the $50 minimum tax) by the original due date.
Failure to meet this payment requirement triggers the extension underpayment penalty, applied to late or underpaid balances.
C corporations with an estimated tax liability of $1,000 or more must make quarterly estimated payments.
- Due Dates: 15th day of the 4th, 6th, 9th, and 12th months of the taxable year.
- Payment Methods:
- Electronic Fund Transfer (EFT): Mandatory for corporations with $1,000+ liability.
- Form 120/165ES: Used by corporations paying by check. If payments are made electronically, Form 120/165ES is not required unless requesting an extension.
This system ensures that larger corporations contribute consistently throughout the year.
Taxation for other than C-Corporations
Arizona does not impose a separate corporate tax on entities like S corporations, partnerships, LLPs, or LLCs. Instead, these entities are treated as pass-through entities.
- Pass-Through System:
- Income, deductions, and credits flow through to shareholders or partners.
- Shareholders then report their share on their individual state income tax returns.
- Individual Rate: 2.98% on income earned from pass-through entities.
Filing Forms:
- S corporations issue Schedule K-1 (Form 120S).
- Partnerships issue Schedule K-1 (Form 165).
- Shareholders file Form 140 – Arizona Individual Income Tax Return.
- Partners file Form 165 – Arizona Partnership Income Tax Return.
Deadline: All S corporation returns are due by the 15th day of the third month after the close of the tax year.
Extensions are also available for S corporations and other pass-through entities, provided requests are submitted by the original due date.
- Extension Period: Up to six months.
- How to Request:
- Federal extension; or
- Arizona extension request (Form 120/165EXT).
As with C corporations, extensions apply only to filing, not to payment. At least 90% of tax liability (including the $50 minimum tax) must be paid by the original due date.
Estimated Payments:
- Required for S corporations if annual tax liability exceeds $1,000.
- Payments are due quarterly (April, June, September, December).
- All S corporations above this threshold must make payments via Electronic Funds Transfer (EFT).
This ensures that entities with significant liabilities maintain steady contributions to state revenues.
Penalty and Interest
Arizona enforces strict penalties for non-compliance:
- Late Filing Penalty:
- 4.5% of the tax due per month (or part thereof).
- Capped at 25% of total tax due.
- Late Payment Penalty:
- 0.5% of the unpaid tax per day.
- Capped at 10% of total tax due.
- Interest:
- Charged on unpaid balances from the original due date.
- The rate is set by the Arizona Department of Revenue (ADOR), based on the federal underpayment rate.
This penalty system highlights the importance of timely filings and payments, especially for corporations with larger tax obligations.
Conclusion
Arizona’s tax compliance system reflects a balance between simplicity and strict enforcement. C corporations face a flat 4.9% corporate income tax, with obligations to file Form 120, make estimated payments, and comply with strict extension rules. S corporations and other pass-through entities do not pay tax at the corporate level but must file information returns, pass income to shareholders, and ensure estimated payments are made when liabilities exceed $1,000.
While extensions provide flexibility, they never excuse late payments. The penalty and interest regime is tough, with fines accumulating quickly for late or unpaid obligations. For businesses operating in Arizona, the lesson is clear: track deadlines closely, make required estimated payments, and ensure filings are accurate and on time.
By staying compliant, companies can avoid penalties and focus their energy on operations and growth in one of the U.S.’s competitive business landscapes.
