Arizona Pass-Through Entity (PTE) Taxation Rate Update

  |   July 28, 2022

The Tax Rate for Arizona Pass-Through Entities is Revised in House Bill 2871

Arizona House Bill 2871 was signed into law on June 28, 2022, revising the tax rate applicable for pass-through entities (PTEs). Partnerships and S corporations were previously allowed to elect to be taxed at a fixed rate of 4.5%. This was applied to the entire portion of the entity’s Arizona taxable income that was attributable to its nonresident partners and/or shareholders for the taxable year.


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The 2017 Tax Cuts and Jobs Act (TCJA) placed a $10,000 limit on state and local tax (SALT) deduction, prompting Arizona and other states to pass laws allowing SALT to be deductible at the entity level, circumventing the TCJA’s individual tax deduction limitation. On July 9, 2021, Arizona Governor Doug Ducey signed Arizona House Bill 2838 into law which included addressing the federal TCJA law that adversely affected Arizona citizens.

While the 2021 House Bill was a step in the right direction, imposing a fixed rate on individuals that made the entity-level election continued to negatively impact business owners that would have had lower tax rates imposed due to their income level. This year’s update to the Arizona law was made to remove what could be seen as a penalty for those individuals.

The new amendment passed in June updated HB 2871 from assessing a fixed 4.5% rate to applying a graduated tax rate based on income level. The new tax rates of 2.59% to 4.5% are in line with the 2021 existing tax rate table for individuals prescribed in Section 43-1011; however if the Arizona individual marginal tax rates successfully move to two brackets (2.5% and 2.98%) for 2022, HB 2871 may again need to be modified if it’s to be kept in alignment with the new individual tax rates.

We Welcome Your Questions

Count on the REDW State and Local Tax (SALT) team to keep you current on the latest tax laws and alert you to tax-saving opportunities—and potential pitfalls. Contact State and Local Tax Manager Jeanna Schenk, CPA, MST, below to start a conversation.