The Small Business Income Deduction section is used to report qualifying Arizona small business income that may be eligible for Arizona's Small Business Income Tax treatment.
Arizona allows eligible taxpayers to report qualifying small business income separately on Form 140-SBI, Small Business Income Tax Return. Qualifying income is taxed on the separate small business return rather than entirely on the regular Arizona individual income tax return. Taxpayers who elect to file Form 140-SBI may also receive a subtraction on their Arizona individual return for the amount reported on the small business return.
Program Pathway
- Open the Arizona State Return.
- Click the three dots (⋯) next to Arizona and select Edit.
- Select Small Business Deduction.
- Choose one of the available sections:
- Total Small Business Income
- Additions
- Subtractions
- Tax
- Credits
- Payments
- Miscellaneous Forms
Important Information About Form 140-SBI
If tax is due on Form 140-SBI, that amount must be paid separately from the Arizona individual income tax return.
Any balance due shown on Form 140-SBI:
- Is not included in the Arizona return balance due.
- Requires a separate payment.
- Must be reviewed independently from the Arizona Form 140 return.
Be sure to review both returns before filing to ensure all Arizona tax liabilities are paid.
What Is Arizona Small Business Income?
Arizona small business income generally includes qualifying income included in federal adjusted gross income and reported on:
- Federal Schedule B, Interest and Ordinary Dividends
- Federal Schedule C, Profit or Loss From Business
- Federal Schedule D, Capital Gains and Losses
- Federal Schedule E, Supplemental Income or Loss
- Federal Schedule F, Profit or Loss From Farming
- Federal Form 4797, Sales of Business Property
- Federal Form 4835, Farm Rental Income and Expenses
Qualifying income may also include certain gains from the sale of business property or ownership interests. Arizona refers to these amounts as Arizona small business gross income.
Who Can Claim the Small Business Income Deduction?
You may qualify if you report Arizona small business income from:
- Sole proprietorships
- Partnerships
- S corporations
- Farming operations
- Certain rental activities
- Business-related property sales
- Estates and trusts
The income must meet Arizona's definition of qualifying small business income.
When Is the Election Available?
Arizona's Small Business Income Tax election is available for tax years beginning after December 31, 2020.
Eligible taxpayers may elect to report qualifying income on Form 140-SBI for the applicable tax year.
Total Small Business Income
This section is used to enter qualifying Arizona small business income.
Income from Federal Schedule B
Enter qualifying interest and dividend income that meets Arizona's small business income requirements.
Income from Federal Schedule C
Enter the net profit or loss reported from a sole proprietorship or other business activity reported on Schedule C.
Schedule C NAICS Code
Enter the North American Industry Classification System (NAICS) code associated with the Schedule C business activity.
Important:
- The NAICS code is required whenever Schedule C income is entered.
- The code cannot consist entirely of zeros.
Income from Federal Schedule D
Enter qualifying capital gains or losses related to business assets or business ownership interests.
Income from Federal Form 4797 Not Included on Schedule D
Enter gain or loss from the sale of business property reported on Form 4797 that was not reported on Schedule D.
Income from Federal Schedule F
Enter profit or loss from farming activities.
Rental, Real Estate, and Royalty Income
Enter qualifying income or loss reported on Schedule E, including:
- Rental activities
- Royalties
- Partnerships
- S corporations
- Estates
- Trusts
REMIC Income
Enter income from a Real Estate Mortgage Investment Conduit (REMIC).
Partnership and S Corporation Income
Enter qualifying passthrough income received from partnerships and S corporations.
Farm Rental Income
Enter income received from farm rental activities.
Estates and Trusts Income
Enter qualifying income distributed by estates and trusts.
Small Business Additions
Arizona additions increase the amount of income subject to Arizona Small Business Income Tax.
Fiduciary Adjustment (Positive) - Arizona Schedule K-1
A positive adjustment passed through from an estate or trust.
Non-Arizona Municipal Interest
Interest earned on municipal bonds issued by states or local governments outside Arizona.
Partnership Income Adjustment
Arizona-specific income adjustments received from a partnership.
Total Federal Depreciation
The total federal depreciation deducted that must be added back for Arizona purposes.
Net Capital Loss from Exchange of Legal Tender
A net capital loss from the exchange of one form of legal tender for another.
Claim of Right Adjustment
Adjustments related to repayment of income previously reported in either the current or prior tax years.
Agricultural Water Conservation Expenses
Expenses related to the credit claimed on Arizona Form 312.
Depreciation or Amortization Related to Tax Credits
Depreciation or amortization adjustments associated with Arizona Forms 315 and 325.
Addition to S Corporation Income Due to Pass-Through Credits
An adjustment required when a shareholder claims certain Arizona pass-through credits.
Basis Adjustments
Adjustments involving property associated with:
- Arizona Forms 315 and 325
- Arizona Form 338
Adjustment for Net Operating Loss Due to Claim of Right
Required when claim-of-right provisions affect a net operating loss computation.
Americans with Disabilities Act (ADA) Access Expenditures
Certain ADA-related expenditures that require an Arizona addition adjustment.
Sole Proprietorship Loss of an Arizona Nonprofit Medical Marijuana Dispensary
Losses from qualifying nonprofit medical marijuana dispensary activities.
Entity-Level Income Tax Payment
Arizona income tax paid by a partnership or S corporation on behalf of its owners.
Motion Picture Production Costs
Arizona adjustments associated with qualified motion picture production credits.
Small Business Subtractions
Subtractions reduce income subject to Arizona Small Business Income Tax.
Net Long-Term Capital Gain Subtraction
Allows qualifying long-term capital gains to be subtracted from Arizona small business income.
Fiduciary Adjustment (Negative)
A negative fiduciary adjustment received from Arizona Schedule K-1.
Net Capital Gain from Investment in a Qualified Small Business
Qualifying gains from Arizona-certified small business investments.
Net Capital Gain from Exchange of Legal Tender
Qualifying gains from exchanges of one form of legal tender for another.
Recalculated Arizona Depreciation
Arizona depreciation allowable under Arizona depreciation rules.
Partnership Income Adjustment
Arizona partnership adjustments reported as a subtraction.
Interest on U.S. Obligations
Interest from qualifying U.S. government obligations, such as:
- U.S. Savings Bonds
- Treasury Bills
Net Operating Loss Adjustment
Certain net operating loss adjustments related to prior-year federal NOL provisions.
Agricultural Crops Given to Arizona Charities
The value of qualifying crops donated to Arizona charitable organizations.
Exploration Expenses Deferred Before January 1, 1990
Allowable deductions for certain deferred exploration expenditures.
Installment Sale Income Taxed by Another State
Qualifying installment sale income taxed by another state in a prior year.
Basis Adjustment for Property Sold
Adjustments when Arizona basis differs from federal basis.
Americans with Disabilities Act (ADA) Access Expenditures
Allowable subtraction for qualifying accessibility-related expenses.
Claim of Right Adjustment for Prior-Year Repayments
Adjustments related to qualifying claim-of-right repayments.
Sole Proprietorship Income of an Arizona Nonprofit Medical Marijuana Dispensary
Qualifying income reported by eligible Arizona nonprofit medical marijuana dispensaries.
Ordinary and Necessary Business Expenses for Recreational Product Sales
Business expense adjustments reported on Arizona Schedule DFE.
S Corporation Shareholder Pro-Rata Expenses
Shareholder portions of qualifying recreational-use business expenses.
Wages Used to Claim Certain Federal Credits
Qualifying wages associated with specific federal tax credits.
Virtual Currency Airdrops
Value of virtual currency received through an airdrop.
Gas Fees Not Included in Virtual Currency Basis
Qualifying virtual currency transaction fees not otherwise included in basis.
Small Business Tax Entries
These entries are used to recapture certain Arizona tax benefits when required.
Tax Recapture of Healthy Forest Enterprises
Used to repay or recapture previously claimed Healthy Forest Enterprise tax benefits.
Tax Recapture of Qualified Facilities
Used to recapture previously claimed qualified facility credits or incentives.
Small Business Credits
Credit for Taxes Paid to Another State (Form 309-SBI)
This credit helps prevent double taxation when Arizona and another state tax the same income.
Important information:
- The credit is automatically calculated for most Arizona resident returns when a qualifying nonresident return exists.
- Part-year residents may need to enter the information manually.
The following jurisdictions do not qualify for the Arizona credit:
- Alaska
- California
- District of Columbia
- Florida
- Indiana
- Nevada
- New Hampshire
- Oregon
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wyoming
Small Business Payments
Apply Refund to Next Year's Return
Use this entry to apply all or part of an Arizona refund to the following tax year.
Estimated Tax Payments
Enter Arizona estimated tax payments made during the year.
Claim of Right
Enter claim-of-right adjustments or credits resulting from repayment of previously reported income.
Amount Paid with Extension
Enter payments submitted with an Arizona extension request.
Small Business Miscellaneous Forms
Form 140ES-SBI - Estimated Payment Vouchers
Used to generate Arizona estimated tax vouchers for small business income tax.
Form 204-SBI - Extension
Used to report information related to an Arizona Small Business Income Tax extension.
Amended SBI Return
Used to amend a previously filed Arizona Small Business Income Tax Return.