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. The deduction equals 25% of qualifying small business income. This section helps determine whether income from certain business activities qualifies for separate Arizona taxation and reporting.
What Is the Arizona Small Business Income Deduction?
Arizona allows eligible taxpayers to report qualifying Arizona small business income separately from their regular individual income tax return. Income that qualifies may be subject to Arizona's Small Business Income Tax provisions rather than being taxed entirely through the regular individual income tax return.
Generally, Arizona small business income consists of certain amounts included in federal adjusted gross income and reported on specific federal schedules and forms, such as:
- Schedule C – Profit or Loss From Business
- Schedule E – Supplemental Income or Loss
- Schedule F – Profit or Loss From Farming
- Schedule B – Interest and Ordinary Dividends
- Form 4797 – Sale of Business Property
- Form 4835 – Farm Rental Income and Expenses
Certain qualifying gains from the sale of business assets or ownership interests may also be included.
Who Can Take the Small Business Income Deduction?
A taxpayer may qualify if they report income on their federal return that constitutes Arizona small business gross income. This may include individuals with income from:
- Sole proprietorships
- Partnerships
- S corporations
- Farming activities
- Rental activities reported on qualifying schedules
- Certain business-related property sales and dispositions
The income must meet Arizona's definition of small business income to qualify.
When Can It Be Taken?
The Small Business Income Tax election is available for taxable years beginning after December 31, 2020. Eligible taxpayers may elect to report qualifying Arizona small business income on the applicable Arizona Small Business Income Tax Return for the tax year.
What Are the Entries in Small Business Total Income?
Income from Federal Schedule B
Interest and dividend income that qualifies as Arizona small business income.
Income from Federal Schedule C
Net profit or loss from a sole proprietorship or other business activity reported on Schedule C.
Schedule C NAICS Code
The North American Industry Classification System (NAICS) code that identifies the type of business activity reported on Schedule C. This field is required when Schedule C income is entered and cannot consist of all zeros.
Income from Federal Schedule D
Qualifying capital gains or losses related to business assets or business ownership interests.
Income from Federal Form 4797 Not Included on Federal Schedule D
Gain or loss from the sale of business property that is reported on Form 4797 but not already included on Schedule D.
Income from Federal Schedule F
Profit or loss from farming activities reported on Schedule F.
Rental, Real Estate, Royalty Income
Income or loss from rental properties, royalties, partnerships, S corporations, estates, trusts, or other activities reported on Schedule E.
REMICs Income
Income from Real Estate Mortgage Investment Conduits (REMICs).
Partnership and S Corporation Income
Income passed through from partnerships or S corporations.
Farm Rental Income
Income received from renting farmland or participating in farm rental arrangements.
Estates and Trusts Income
Income distributed from estates or trusts.
What Are the Entries in Small Business – Additions?
Fiduciary Adjustment (Positive) from Arizona Form 141AZ Schedule K-1
An adjustment passed through from an estate or trust that increases Arizona small business income.
Non-Arizona Municipal Interest
Interest earned from municipal bonds issued by states or localities outside Arizona.
Partnership Income Adjustment
An adjustment related to income received from a partnership.
Total Federal Depreciation
The total amount of depreciation claimed on federal tax forms that must be added back for Arizona purposes.
Net Capital Loss from the Exchange of One Kind of Legal Tender for Another Kind of Legal Tender
A loss resulting from exchanging one form of currency for another that must be added back to Arizona income.
Claim of Right Adjustment for Amounts Repaid in 2025
An adjustment related to income previously reported and later repaid during tax year 2025.
Claim of Right Adjustment for Amounts Repaid in Prior Taxable Years
An adjustment for eligible repayments of income that occurred in years before 2025.
Agricultural Water Conservation Expenses Related to the Tax Credit Claimed on Arizona Form 312
Expenses associated with agricultural water conservation projects for which an Arizona tax credit was claimed.
Depreciation or Amortization Related to Tax Credits Claimed on Arizona Forms 315 and 325
Depreciation or amortization amounts associated with assets for which Arizona tax credits were claimed.
Addition to S Corporation Income Due to Claiming Pass-Through Credit
An adjustment required when an S corporation owner claims an Arizona pass-through entity tax credit.
Basis Adjustment for Property Claimed as a Credit on Arizona Forms 315 and 325
An adjustment to the property's tax basis when credits were claimed on these forms.
Basis Adjustment for Property Claimed as a Credit on Arizona Form 338
An adjustment to the property's tax basis related to credits claimed on Form 338.
Adjustment for Net Operating Loss Due to Claim of Right
An adjustment to a net operating loss calculation resulting from a Claim of Right repayment.
Americans with Disabilities Act (ADA) – Access Expenditures
Expenses incurred to improve accessibility and comply with ADA requirements.
Sole Proprietorship Loss of an Arizona Nonprofit Medical Marijuana Dispensary
A loss reported from operating a qualifying Arizona nonprofit medical marijuana dispensary as a sole proprietorship.
Entity-Level Income Tax Payment
Taxes paid directly by a pass-through entity on behalf of its owners.
Motion Picture Production Costs
Qualifying costs related to motion picture production activities that require an Arizona adjustment.
These descriptions should fit well as collapsible sections or subsections within your Arizona: What Is Included in the Small Business Income Deduction Section? KB article.
What Are the Entries in Small Business – Subtractions?
Subtractions reduce the amount of income subject to Arizona Small Business Income Tax.
Net Long-Term Capital Gain Subtraction
Allows eligible long-term capital gains to be subtracted from Arizona small business income.
Fiduciary Adjustment (Negative) from Arizona Form 141AZ K-1
A negative adjustment passed through from an estate or trust that decreases Arizona small business income.
Net Capital Gain Derived from Investment in Qualified Small Business
Subtracts qualifying gains from the sale or disposition of an eligible small business investment.
Net Capital Gain from the Exchange of One Kind of Legal Tender for Another Kind of Legal Tender
Subtracts qualifying gains resulting from exchanging one form of legal tender for another.
Recalculated Arizona Depreciation
Allows Arizona depreciation adjustments that differ from federal depreciation calculations.
Partnership Income Adjustment
Adjusts partnership income to reflect Arizona-specific treatment.
Interest on U.S. Obligations Such as U.S. Savings Bonds and Treasury Bills
Subtracts interest income from qualifying U.S. government obligations.
Net Operating Loss Adjustment from Tax Years 2008 and 2009
Allows eligible net operating loss adjustments carried forward from those tax years.
Agricultural Crops Given to Arizona Charitable Organizations
Subtracts the value of qualifying agricultural products donated to Arizona charities.
Exploration Expenses Deferred Before January 1, 1990
Allows deductions related to certain previously deferred exploration expenses.
Installment Sale Income from Another State Taxed by the Other State in a Prior Year
Prevents double taxation of qualifying installment sale income.
Basis Adjustment for Property Sold or Otherwise Disposed of During the Tax Year
Adjusts gains or losses when Arizona basis differs from federal basis.
Americans with Disabilities Act (ADA) – Access Expenditures
Provides an adjustment for qualifying accessibility improvement expenses.
Claim of Right Adjustment for Amounts Repaid in Prior Years
Adjusts income for qualifying repayments of amounts previously reported as income.
Sole Proprietorship Income of an Arizona Nonprofit Medical Marijuana Dispensary Included in Schedule C
Subtracts qualifying income reported by an eligible nonprofit medical marijuana dispensary.
Ordinary and Necessary Business Expenses Related to the Sales of Recreational Use Products from Schedule DFE
Allows qualifying business expense adjustments related to recreational-use product sales.
S Corporation Shareholders – Pro-rata Share of Expenses Related to the Sales of Recreational Products
Allows shareholders to claim their share of qualifying expenses.
Amount of Wages or Salaries Paid or Incurred During the Tax Year and Used to Claim Certain Federal Tax Credits
Provides an adjustment for wages associated with specific federal tax credits.
Value of Virtual Currency Received at the Time of the Airdrop
Subtracts qualifying virtual currency income recognized from an airdrop.
Gas Fees Not Included in Virtual Currency
Allows adjustments for certain virtual currency transaction fees not previously included.
What Are the Tax Entries?
These entries relate to recapturing tax benefits previously claimed.
Tax Recapture of Healthy Forest Enterprises
Used to repay or recapture certain tax benefits related to Healthy Forest Enterprise incentives when required.
Tax Recapture of Qualified Facilities
Used to recapture previously claimed credits or incentives related to qualifying facilities.
What Are the Small Business – Credits?
Credit for Taxes Paid to Another State – Form 309-SBI
This credit helps prevent double taxation when the same income is taxed by both Arizona and another state.
- The credit is automatically calculated for Arizona resident returns when a qualifying nonresident return exists in the account.
- Taxpayers with a part-year resident return may need to enter the information manually.
- The following jurisdictions do not qualify for this Arizona credit:
- Alaska
- California
- District of Columbia
- Florida
- Indiana
- Nevada
- New Hampshire
- Oregon
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wyoming
What Entries Are in Small Business – Payments?
Enter the State Refund Amount to Apply to Your 2026 Tax Return
Allows all or part of the current Arizona refund to be applied to the following tax year.
Estimated Tax Payments
Enter qualifying Arizona estimated tax payments made throughout the year.
Claim of Right
Used when income reported in a prior year was later repaid and qualifies for a Claim of Right adjustment or credit.
Enter the Amount Paid with Extension
Enter any Arizona tax payment submitted with a filing extension.
What Entries Are in Small Business – Miscellaneous Forms?
Estimated Payment Vouchers (Form 140ES-SBI)
Used to generate estimated payment vouchers for Arizona Small Business Income Tax.
Form 204-SBI – Extension
Used to report information related to an Arizona Small Business Income Tax filing extension.
Form Amended SBI
Used to amend a previously filed Arizona Small Business Income Tax return.