Arizona Tax Form 140-SBI
Tax Year 2021 Highlights
On July 9, 2021, Governor Ducey signed Senate Bill 1783 establishing Title 43 Small Businesses, which provides for an alternative tax for Arizona small business income. Beginning with the tax year 2021, a taxpayer may elect to file a separate small business income tax return (Form 140-SBI, 140NR-SBI, or 140PY-SBI) to report their share of Arizona small business gross income. By reporting your Small Business Income on AZ Form 140-SBI, you may be able to significantly reduce your tax liability from Small Businesses, Rental Properties, Farm Income, and several other types of income related to owning and operating a small business in the state of Arizona.
If you elect to report your SBI Income (defined later), the election is made separately for each tax year and is effective by reporting Arizona small business income on a timely filed Arizona small business income tax return (SBI). The SBI tax return will be considered timely if filed together with the taxpayer’s regular income tax return on or before the due date of April 18, 2021, or timely filed extended due date of October 17, 2021.
A taxpayer who elects to file an SBI tax return is required to make an adjustment reducing their federal adjusted gross income reported on the regular individual income tax return (Form 140, 140NR or 140PY) by the total amount of Arizona small business gross income reported on their SBI tax return. The Arizona small business gross income is determined by adding the amounts plus the portion of federal Schedule D that represents capital gains (losses) from the disposition of a non-publicly traded ownership interest or from the disposition of a capital asset used in a trade or business. Only amounts that are included in the taxpayer’s federal adjusted gross income may be included in Arizona small business gross income.
Note: For Arizona nonresidents, Arizona small business gross income is that portion of federal adjusted gross income that represents small business income from sources within Arizona; for Arizona part-year residents, Arizona small business income includes all small business income earned while a resident and only that portion of small business income from Arizona sources during the period of non-residency included in the taxpayer’s federal adjusted gross income.
The SBI tax return must be filed with the regular AZ 140 income tax return to be accepted. If the taxpayer does not file both returns together, the election may be denied, and the adjustment to federal adjusted gross income may be disallowed.
A taxpayer may revoke their election on a timely filed amended Arizona small business tax return (Form 140X-SBI) and corresponding amended Arizona individual income tax return (Form 140X).
Items to Consider When Filing a Small Business Income Tax Return
Due Date (Forms 204 and 204-SBI)
The due date is the same as the due date for a regular individual income tax return. For calendar year filers, the due date is April 15. Because April 15, 2022, falls on a federal holiday, taxpayers have until April 18, 2022, to timely file their 2021 Arizona tax returns.
If you cannot file your SBI return by the due date, a taxpayer may file Form 204, Application for Filing Extension, providing an automatic 6-month extension to file both the regular and SBI tax returns. The extension request must be filed on or before the original due date. Taxpayers are not required to file a separate Form 204 for the SBI tax return. Form 204 will also provide the same extension period for the SBI return. Generally, an extension request would allow the taxpayer to file on or before October 15. Because October 15, 2022, falls on a weekend, taxpayers have until October 17, 2022, to timely file their 2021 Arizona tax return(s).
Note: Keep in mind an extension request does not provide an extension to pay your small business income taxes. Taxpayers must pay their taxes by the return’s original due date to avoid any late payment penalty.
Form 204-SBI, Extension Payment, is used only to remit a required extension payment for the Small Business Income tax return. Do not file this form to request an extension of time to file the SBI tax return. For more information, see Form 204-SBI.
AZ Form 301-SBI, Nonrefundable Individual Tax Credits, and Recapture, for Small Business Income
Most non-refundable income tax credits available to claim on the regular income tax return are also available to claim on the SBI return. A taxpayer that qualifies for any tax credit shown on page 1 of Form 301-SBI must claim that tax credit on the SBI return and not on the regular individual tax return. The credit cannot be “split” between the two tax returns. However, a taxpayer may “transfer” all or a portion of any non-refundable tax credit remaining (not used) on the SBI return. To transfer a credit amount, the taxpayer must have a tax liability remaining on their regular income tax return after applying for regular return credits against the tax liability shown on the regular individual income tax return. A taxpayer determines if they are eligible to transfer any credit amount and the amount available to transfer by completing page 3 of Form 301-SBI. If the taxpayer transfers any available credit from the 301-SBI, that amount is entered on Form 301. For TY 2021, the transfer amount is reported on Form 301, line 60. For more information, see Forms 301-SBI and 301 and their related instructions.
Note: Tax credits claimed for qualifying contributions to qualified charitable organizations (Credit Forms 321, 322, 323, 348, and 352) cannot be claimed on Form 301-SBI and must be claimed on the taxpayer’s regular tax return.
Credit for Income Taxes Paid to Other States (Arizona Credit Form 309-SBI)
SB 1783 (A.R.S. § 43-1701) also establishes a Credit for Income Taxes Paid to the Other States, allowed against Arizona small business income tax liability, for net income taxes imposed by and paid to another state or country on the same Arizona small business taxable income taxed by both Arizona and the other state or country. For more information, see Form 309-SBI.
Small Business Income Estimated Tax Payments
For the tax year 2021, a taxpayer was not required to remit SBI estimated tax payments. The department will not assess a penalty for underpayment of estimated taxes on any amount not remitted.
Note: The taxpayer is still subject to the late payment penalty (including applicable interest) for the amount of taxes not paid by the original due date of the return. The department will not assess a late filing penalty on the SBI tax return. If the taxpayer fails to timely file the SBI tax return (either by the normal due date or extended due date), the election will be denied, and the adjustment (decrease to federal adjusted gross income) made on the regular tax return for small business income will be disallowed. In this case, all income is reported on the regular income tax form.
Beginning with the tax year 2022, a taxpayer is required to pay the estimated tax in four equal installments (25% of the required annual estimated tax payment) if the taxpayer’s liability is at least $1,000. Use Form 140ES-SBI, Individual Estimated Income Tax Payment (Small Business Income Tax Return), to remit the required amount of quarterly estimated taxes. Page 2 of Form 140ES-SBI includes a worksheet to determine the required amount of each quarterly tax payments.
For TY 2022, the tax is equal to 3.0% of small business taxable income reported on the SBI tax return.
The amount of the 2022 Tax Year required estimated payment is the lesser of:
- 90% of the tax shown on the return for the TY 2022 or, if no return is filed, 90 percent of the tax for that year, OR;
- 100% of the tax shown on the small business income tax return for the preceding TY — unless the preceding TY was not 12 months; or the small business did not file a return for the preceding TY that indicated a liability.
If the taxpayer fails to remit the required estimated tax payment (Form 204-SBI), the department may assess an underpayment of estimated taxes penalty on any amount not timely remitted.
Composite Income Tax Return in Another State
A small business taxpayer who participates in a composite income tax return in another state may claim a credit for taxes paid to the other state if the taxes paid to the other state are imposed on — and paid directly — by the small business taxpayer and not the entity and if the:
- Small business taxpayer makes direct payment to the other state;
- Small business taxpayer makes direct payment to the entity filing the composite income tax return;
- Entity charges the small business taxpayer’s loan account for the amount of the tax; and
- Entity reduces the small business taxpayer’s capital account.
- If the taxpayer claims the credit for taxes paid to a foreign country, to use the conversion rate in effect on the date the taxpayer paid the taxes to the foreign country.
- If any taxes paid to another state or country are credited or refunded and the taxpayer has been allowed a credit, to immediately report that fact to DOR.
- If any taxes paid to another state or country are credited or refunded, a tax equal to the credit allowed for the taxes credited or refunded by the other state or country to be paid by the taxpayer on notice and demand from DOR.
CS CPA Group can help your small business work through and optimize your Arizona Tax Liability. Give us a call at 520-568-3303 if you would like to set up a free consultation with one of our CPAs.