Business FirstSIMPLIFIED TAX SYSTEM
Arizona’s business environment offers cost benefits and lower operational costs that allow businesses in the state to spend more on delivering quality products and less on heavy financial burdens. Arizona’s focus on business is simple: keep regulation low and taxes light. The state has bucked tax-hiking trends, providing a business climate that stimulates growth, investment in R&D and the development of new innovations.
Arizona's pro-business environment has resulted in corporate and individual income tax rates that are among the lowest in the nation. In 2021, Arizona passed a historic state budget that cements the state’s momentum and economic competitiveness for generations to come. In fiscal year 2022, Arizona will simplify its income tax, reducing the top rate to 4.5% and implementing a flat income tax rate of 2.5% — the lowest flat tax in the nation. This bold measure represents one of the most significant advances for business vitality in Arizona’s history, preventing cumbersome tax increases for small businesses and lessening the tax burden on Arizona workers. The state previously reduced corporate income taxes by 30 percent, which was phased in fully in 2017, with a final rate of just 4.9 percent. This rate is the sixth-lowest among states with a corporate income tax. A 100 percent sales factor income appointment formula was phased in completely in 2017, creating benefits for businesses with multi-state operations.
Arizona also improved industrial and commercial property tax structures, reducing the Class 1 Assessment Ratio for commercial and industrial from 18% to 16% over four years, starting in 2022. This represents an 11.1% reduction in property taxes for Class 1 real and personal property and builds upon the state’s more than 15-year trend of providing cost benefits for most commercial businesses. Previously, Arizona reduced the assessment ratio from 20% in 2012 to 18% by 2016. This resulted in a 10% reduction in effective property tax rates.
In addition, Arizona’s enhanced accelerated depreciation program for real and personal property of businesses can dramatically reduce operating costs.
Manufacturing, R&D and Investment
The Qualified Facility Tax Credit Program provides a refundable income tax credit against Arizona income tax liabilities for qualifying capital investments and net new job creation projects. Qualified facilities include manufacturing, related research & development, headquarters facilities or suppliers of large-scale manufacturers.
Additionally, sales tax exemptions are available for:
- Machinery or equipment used directly in manufacturing or in research and development;
- The electricity or natural gas for businesses that are principally engaged in manufacturing or smelting operations;
- Machinery, equipment or transmission lines used directly in producing or transmitting electrical power, but not including distribution.
The pro-business environment also led to the Angel Investment Program, which provides tax credits to investors who make capital investment in small businesses certified by the Arizona Commerce Authority. For a qualified bioscience or rural company, an investor's income tax credit may total up to 35% of the investment amount over three years; for any other qualified business, the three-year total is 30%. Any unused tax credit amount may be carried forward for up to three taxable years.
The Quality Jobs Tax Credit program encourages business investment and the creation of high-quality employment opportunities in Arizona by providing tax credits to employers creating a minimum number of net new quality jobs and making a minimum capital investment in the state. The Quality Jobs tax credit provides a $9,000 income tax credit against Arizona income tax liabilities for each new qualifying full-time job created over a three-year period.
R&D Computer Benefits
Companies focused on improving their research and computer equipment can take advantage of the Research and Development Tax Credit program, which provides an Arizona income tax credit for increased in-state R&D activities. That includes research conducted at a state university and research funded by the company.
Additional Tax Advantages
Specialized benefits in the simplified tax system include the Government Property Lease Excise Tax Program, which reduces a project's operating costs by replacing the real property tax with an excise tax on land and improvements conveyed to a government entity and leased back for private use; and the Military Reuse Zone program, with tax benefits for airport authorities and aviation or aerospace companies that locate in the vicinity of a former Arizona military base.