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Additional Depreciation

The Arizona Competitiveness Package (HB 2001, 2011) encouraged new capital investment in Arizona by enhancing Arizona’s additional depreciation allowance for property tax. Additional depreciation substantially reduces tax liability for most personal property devoted to commercial, industrial and agricultural uses by reducing the taxable value of such property during its first five years of use (by increasing the depreciation factored in determining such value). For eligible property initially classified in tax year 2012 or thereafter, additional depreciation reduces the personal property’s full cash value for tax purposes by 75% in the first year of use, 59% in the second year of use, 43% in the third year of use, 27% in the fourth year of use and 11% in the fifth year of use. (The Arizona Competitiveness Package increased each of the foregoing percentages by five points.)

To illustrate the impact of additional depreciation, consider a piece of qualified industrial equipment with a 10-year life purchased in 2013 for $1,000,000. Without additional depreciation, the equipment in its first year of use would have a full cash value of $910,000 (see note 1, below), an assessed value of $147,465 after applying the personal property tax exemption (see note 2, below), and, assuming a statewide average property tax rate of 11.75%, a resulting estimated tax liability of $17,327. 

With additional depreciation, the property’s full cash value would be reduced by 75%, to $228,000, its assessed value would be $17,885 after applying the personal property tax exemption, and its estimated tax liability would be $2,101. This translates to a one-year estimated tax savings from additional depreciation of $15,226, or 75%. Running the same calculations for a five-year period predicts total property tax savings over five years from additional depreciation of $36,367, or 56%.

  1. Based on the Arizona Department of Revenue standard valuation tables.
  2. Under the Arizona Competiveness Package, the Assessment Ratio of Class One (commercial and industrial) real and personal property is currently 19% (reduced from 20% in 2012) and will decrease to 18% in increments by 2016, thereby ultimately reducing tax liability for such property by 10%. See A.R.S. § 42-15001. Reductions included in 2012 legislation enhanced this exemption, which in 2014 was equal to $141,385. The deduction reduces the full cash value of property assessed. Hence, assuming the full deduction is taken on $1 million of property in its first year of use, an assessment ratio of 19% and a tax rate of 11.75%, the exemption reduces annual personal property tax liability by $3,156. 

For more information:
Arizona Department of Revenue
1600 West Monroe Street, Phoenix, AZ 85007-2650
602-716-6843
http://www.azdor.gov