- i -

Senate Engrossed

taxation; 2023-2024.

State of Arizona Senate Fifty-sixth Legislature First Regular Session 2023

CHAPTER 147

SENATE BILL 1734

AN ACT

AMENDING SECTION 43-1014, ARIZONA REVISED STATUTES; RELATING TO TAXATION.

(TEXT OF BILL BEGINS ON NEXT PAGE)

S.B. 1734

- 1 - Be it enacted by the Legislature of the State of Arizona: 1 Section 1. Section 43-1014, Arizona Revised Statutes, is amended to 2 read: 3 43-1014. Entity-level tax election; partnerships; 4 S corporations; rules 5 A. For taxable years beginning from and after December 31, 2021, 6 the partners or shareholders of a business that is treated as a 7 partnership or S corporation for federal income tax purposes may consent 8 to be taxed at the entity level at a tax rate that is the same as the tax 9 rate prescribed by section 43-1011 applicable to the entire portion of its 10 taxable income that is attributable to its resident partners or 11 shareholders and the portion of its taxable income derived from sources 12 within this state that is attributable to its nonresident partners or 13 shareholders for that taxable year. The election under this subsection 14 must be made on or before the due date or extended due date of the 15 business's return under this title. 16 B. If the election is made under subsection A of this section, all 17 of the following apply: 18 1. The taxable income of the partnership or S corporation is as 19 follows: 20 (a) For a partnership: 21 (i) FOR TAXABLE YEARS THROUGH DECEMBER 31, 2022, the Arizona 22 taxable income determined under chapter 14 of this title. 23 (ii) FOR TAXABLE YEARS BEGINNING FROM AND AFTER DECEMBER 31, 2022, 24 THE ARIZONA TAXABLE INCOME DETERMINED UNDER CHAPTER 14 OF THIS TITLE, 25 INCLUDING THE ITEMS THAT REQUIRE SEPARATE COMPUTATION UNDER SECTION 26 43-1412, PARAGRAPHS 1 THROUGH 16. 27 (b) For an S corporation, the total of all distributive income 28 passed through to the shareholders under section 43-1126, subsection B. 29 2. If the partnership or S corporation does not pay the amount owed 30 to the department as a result of the election under this section, the 31 department may collect the amount from the partners or shareholders based 32 on the proportionate share of income that is attributable to each partner 33 or shareholder for Arizona tax purposes. 34 3. The partnership or S corporation shall pay estimated tax 35 pursuant to section 43-581 as necessary. 36 C. The election under subsection A of this section does not apply 37 to the following: 38 1. Partners or shareholders that are not individuals, estates or 39 trusts. The portion of the taxable income attributable to a partner or 40 shareholder that is not an individual, estate or trust is not included in 41 the entity-level tax under subsection A of this section. 42

S.B. 1734

- 2 - 2. Partners or shareholders who are individuals, estates or trusts 1 and who opt out of the election pursuant to subsection D of this section. 2 The portion of the taxable income attributable to a partner or shareholder 3 who is an individual, estate or trust and who opts out of the election 4 pursuant to subsection D of this section is not included in the 5 entity-level tax under subsection A of this section. 6 D. A partnership or S corporation that intends to make the election 7 under subsection A of this section shall notify all partners or 8 shareholders who are individuals, estates or trusts of the intent to make 9 the election and that each partner or shareholder who is an individual, 10 estate or trust has the right to opt out of the election. The notice 11 shall allow each partner or shareholder who is an individual, estate or 12 trust at least sixty days after receiving the notice to notify the 13 partnership or S corporation that the partner or shareholder who is an 14 individual, estate or trust is exercising the partner's or shareholder's 15 right to opt out of the election. If the partner or shareholder who is an 16 individual, estate or trust does not respond within the sixty-day period 17 or waives the right to opt out, the partner or shareholder will be 18 included in the election. 19 E. The department shall adopt rules and prescribe forms and 20 procedures as necessary to administer this section. 21 Sec. 2. Individual income tax subtraction; adoption expenses; 22 taxable years 2023, 2024 and 2025; amount; 23 retroactivity; delayed repeal 24 A. Notwithstanding any other law, for taxable years beginning from 25 and after December 31, 2022 through December 31, 2025, the subtraction 26 amount allowed under section 43-1022, paragraph 12, Arizona Revised 27 Statutes, is the amount of unreimbursed medical and hospital costs, 28 adoption counseling, legal and agency fees and other nonrecurring costs of 29 adoption not to exceed $40,000. For a married couple filing separate 30 returns, the subtraction may be taken by either taxpayer or may be divided 31 between them, but the total subtractions allowed to each spouse may not 32 exceed $40,000. The subtraction may be taken for the costs that are 33 described in this subsection and that are incurred in prior years, but the 34 subtraction may be taken only in the year during which the final adoption 35 order is granted. 36 B. This section applies retroactively to taxable years beginning 37 from and after December 31, 2022. 38 C. This section is repealed from and after December 31, 2029. 39 Sec. 3. Individual income tax general welfare rebate; 40 eligibility; claim application; subtraction from 41 Arizona gross income; appeal; report; legislative 42 findings; delayed repeal; definitions 43 A. The department of revenue shall issue a onetime individual 44 income tax general welfare rebate, known as the Arizona families tax 45

S.B. 1734

- 3 - rebate, to an Arizona taxpayer who filed a full-year resident tax return 1 for taxable year 2021, claimed a dependent tax credit under section 2 43-1073.01, Arizona Revised Statutes, on the return and who meets one of 3 the following qualifications: 4 1. Had a tax liability of at least $1 on the filed full-year 5 resident tax return for taxable year 2021. 6 2. If the taxpayer does not meet the tax liability requirement for 7 taxable year 2021, filed a full-year resident tax return for taxable year 8 2020 under the identical filing status used on the taxpayer's taxable year 9 2021 full-year resident tax return and had a tax liability of at least $1 10 on the full-year resident tax return for taxable year 2020. 11 3. If the taxpayer does not meet the tax liability requirement for 12 taxable years 2021 or 2020, filed a full-year resident tax return for 13 taxable year 2019 under the identical filing status used on the taxpayer's 14 full-year resident tax returns for taxable years 2020 and 2021 and had a 15 tax liability of at least $1 on the full-year resident tax return for 16 taxable year 2019. 17 B. If the taxpayer does not meet any of the requirements in 18 subsection A of this section, the department of revenue shall conclude 19 that the taxpayer does not meet the criteria to be issued a rebate under 20 this section. 21 C. One rebate will be issued for each full-year resident tax return 22 for taxable year 2021 that qualifies under subsection A of this section. 23 The primary taxpayer's taxpayer identification number as reported on the 24 taxpayer's full-year resident tax return for taxable year 2021 shall be 25 used as needed in subsection A of this section for matching and 26 verification purposes. 27 D. The department of revenue shall issue to a qualifying taxpayer a 28 rebate of $250 for each dependent tax credit claimed on the taxpayer's 29 full-year resident tax return for taxable year 2021 who was under 30 seventeen years of age at the end of taxable year 2021 and $100 for each 31 dependent who was at least seventeen years of age at the end of taxable 32 year 2021. 33 E. The department of revenue shall issue a rebate for a maximum of 34 three dependents for a qualifying taxpayer under this section. For a 35 taxpayer who claimed more than three dependents on the taxpayer's 36 full-year resident tax return for taxable year 2021, the rebate will be 37 calculated by first counting the dependents who were under seventeen years 38 of age at the end of taxable year 2021 and then, if additional dependents 39 may be claimed to meet the maximum number, the dependents who were at 40 least seventeen years of age at the end of taxable year 2021. 41 F. If a qualifying taxpayer is deceased, the taxpayer's surviving 42 spouse, personal representative or executor or another official 43 representative of the estate designated pursuant to applicable state law 44 may receive the rebate for the deceased taxpayer. 45

S.B. 1734

- 4 - G. The department of revenue shall pay all rebates issued pursuant 1 to this section on or before November 15, 2023, but not earlier than 2 October 15, 2023. The department shall attempt to pay a qualifying 3 taxpayer's rebate by electronic funds transfer using the routing and 4 account information provided by the taxpayer on the taxpayer's full-year 5 resident tax return for taxable year 2021 or more recent routing and 6 account information provided by the taxpayer. If such attempt fails, or if 7 the taxpayer did not provide such routing and account information, the 8 department shall issue the rebate check by mail to the most recent home 9 address provided by the taxpayer. Any notification from the department 10 that relates to the rebate issued under this section shall state the 11 following: "This rebate is being issued pursuant to Senate Bill 1734, as 12 passed by the fifty-sixth legislature, first regular session, and signed 13 into law by the governor." No letter relating to the Arizona families tax 14 rebate issued under this section shall be sent from the governor's office, 15 be sent on the governor's letterhead or reference the governor's office. 16 H. A taxpayer who does not receive the rebate issued pursuant to 17 this section on or before November 15, 2024 may claim the rebate by filing 18 a claim application online in the form and manner prescribed by the 19 department of revenue. The claim application must include the claimant's 20 name, address, taxpayer identification number and individual income tax 21 filing status. The department shall review each claim application and 22 verify the information provided. The department may request that a 23 claimant provide evidence to verify the claimant's eligibility for the 24 rebate. 25 I. In computing Arizona adjusted gross income, any rebate received 26 by a taxpayer pursuant to this section and required to be included in 27 Arizona gross income under the internal revenue code shall be subtracted 28 from the taxpayer's Arizona gross income. 29 J. Notwithstanding any other administrative proceedings established 30 by law or by rule, all appealable agency actions as defined in section 31 41-1092, Arizona Revised Statutes, and contested cases as defined in 32 section 41-1001, Arizona Revised Statutes, relating to a rebate issued 33 pursuant to this section are governed by title 41, chapter 6, article 10, 34 Arizona Revised Statutes. 35 K. On or before February 15, 2025, the director of the department 36 of revenue shall report the following information to the president of the 37 senate, the speaker of the house of representatives and the director of 38 the joint legislative budget committee: 39 1. The total dollar amount of rebates paid under this section. 40 2. The administrative costs associated with the department's 41 program for issuing the rebates under this section. 42 3. The total number of tax rebates issued. 43

S.B. 1734

- 5 - L. The legislature finds that: 1 1. Inflation is at a forty-year high, putting gas, groceries and 2 other necessities out of reach for many Arizonans. 3 2. Responsible budgeting has allowed this state to take action to 4 mitigate the harmful impacts of inflation by returning a portion of the 5 surplus to this state's taxpayers with dependents. 6 M. This section is repealed from and after December 31, 2029. 7 N. For the purposes of this section: 8 1. "Arizona small business taxable income" has the same meaning 9 prescribed in section 43-1701, Arizona Revised Statutes. 10 2. "Arizona small business tax liability" means an Arizona small 11 business taxpayer's Arizona small business taxable income multiplied by 12 the Arizona small business' applicable tax rate as prescribed by section 13 43-1711, Arizona Revised Statutes, plus any amount of recaptured Arizona 14 small business income tax credits, minus any nonrefundable and refundable 15 Arizona small business income tax credits claimed by the Arizona small 16 business taxpayer under title 43, chapter 17, article 5, Arizona Revised 17 Statutes. 18 3. "Taxable income" has the same meaning prescribed in section 19 43-1001, Arizona Revised Statutes. 20 4. "Tax liability" means the taxpayer's taxable income multiplied 21 by the taxpayer's applicable tax rate as prescribed in section 43-1011, 22 Arizona Revised Statutes, plus any amount of recaptured income tax credits 23 and the taxpayer's Arizona small business tax liability, if any, minus the 24 sum of nonrefundable and refundable income tax credits claimed by the 25 taxpayer under title 43, chapter 10, article 5, Arizona Revised Statutes. 26 Sec. 4. Legislative intent 27 The legislature intends: 28 1. That in fiscal year 2023-2024 the fee prescribed in section 29 42-5041, subsection B, Arizona Revised Statutes, be assessed and collected 30 pursuant to the following guidelines: 31 (a) The total amount of fees for all counties, cities, towns, 32 councils of governments and regional transportation authorities may not 33 exceed $6,597,200 in fiscal year 2023-2024. 34 (b) The share of fees assessed to all counties pursuant to 35 subdivision (a) of this paragraph shall be in proportion to the aggregate 36 amount of monies distributed to counties for the fiscal year two years 37 preceding the current fiscal year pursuant to sections 42-5029, 42-6103, 38 42-6107, 42-6108, 42-6108.01, 42-6109, 42-6109.01, 42-6110, 42-6111 and 39 42-6112, Arizona Revised Statutes, as a percentage of aggregate 40 distributions to all counties, cities, towns, councils of governments and 41 regional transportation authorities located in a county with a population 42 of more than eight hundred thousand persons for the fiscal year two years 43 preceding the current fiscal year pursuant to sections 42-5029, 42-6001, 44 42-6103, 42-6105, 42-6106, 42-6107, 42-6108, 42-6108.01, 42-6109, 45

S.B. 1734

- 6 - 42-6109.01, 42-6110, 42-6111, 42-6112 and 43-206, Arizona Revised 1 Statutes. 2 (c) The share of fees assessed to all cities and towns pursuant to 3 subdivision (a) of this paragraph shall be in proportion to the aggregate 4 amount of monies distributed to cities and towns for the fiscal year two 5 years preceding the current fiscal year pursuant to sections 42-5029, 6 42-6001 and 43-206, Arizona Revised Statutes, as a percentage of aggregate 7 distributions to all counties, cities, towns, councils of governments and 8 regional transportation authorities located in a county with a population 9 of more than eight hundred thousand persons for the fiscal year two years 10 preceding the current fiscal year pursuant to sections 42-5029, 42-6001, 11 42-6103, 42-6105, 42-6106, 42-6107, 42-6108, 42-6108.01, 42-6109, 12 42-6109.01, 42-6110, 42-6111, 42-6112 and 43-206, Arizona Revised 13 Statutes. 14 (d) The share of fees assessed to all councils of governments 15 pursuant to subdivision (a) of this paragraph shall be in proportion to 16 the aggregate amount of monies distributed to all councils of governments 17 for the fiscal year two years preceding the current fiscal year pursuant 18 to section 42-6105, Arizona Revised Statutes, as a percentage of aggregate 19 distributions to all counties, cities, towns, councils of governments and 20 regional transportation authorities located in a county with a population 21 of more than eight hundred thousand persons for the fiscal year two years 22 preceding the current fiscal year pursuant to sections 42-5029, 42-6001, 23 42-6103, 42-6105, 42-6106, 42-6107, 42-6108, 42-6108.01, 42-6109, 24 42-6109.01, 42-6110, 42-6111, 42-6112 and 43-206, Arizona Revised 25 Statutes. 26 (e) The share of fees assessed to all regional transportation 27 authorities located in a county with a population of more than eight 28 hundred thousand persons pursuant to subdivision (a) of this paragraph 29 shall be in proportion to the aggregate amount of monies distributed to 30 all regional transportation authorities located in a county with a 31 population of more than eight hundred thousand persons for the fiscal year 32 two years preceding the current fiscal year pursuant to section 42-6106, 33 Arizona Revised Statutes, as a percentage of aggregate distributions to 34 all counties, cities, towns, councils of governments and regional 35 transportation authorities located in a county with a population of more 36 than eight hundred thousand persons for the fiscal year two years 37 preceding the current fiscal year pursuant to sections 42-5029, 42-6001, 38 42-6103, 42-6105, 42-6106, 42-6107, 42-6108, 42-6108.01, 42-6109, 39 42-6109.01, 42-6110, 42-6111, 42-6112 and 43-206, Arizona Revised 40 Statutes. 41 (f) Except as provided by sections 42-5033 and 42-5033.01, Arizona 42 Revised Statutes, the population of a county as determined by the most 43 recent United States decennial census plus any revision to the decennial 44 census certified by the United States census bureau shall be used as the 45

S.B. 1734

- 7 - basis for apportioning monies pursuant to subdivision (b) of this 1 paragraph. 2 (g) Except as provided by sections 42-5033 and 42-5033.01, Arizona 3 Revised Statutes, the population of a city or town as determined by the 4 most recent United States decennial census plus any revision to the 5 decennial census certified by the United States census bureau shall be 6 used as the basis for apportioning monies pursuant to subdivision (c) of 7 this paragraph. 8 2. That in fiscal year 2023-2024 the transfer prescribed in section 9 42-5041, subsection E, Arizona Revised Statutes, not exceed $800,000. 10 3. That in fiscal year 2023-2024 the transfer prescribed in section 11 42-5041, subsection F, Arizona Revised Statutes, not exceed $178,100. 12

APPROVED BY THE GOVERNOR MAY 11, 2023.

FILED IN THE OFFICE OF THE SECRETARY OF STATE MAY 12, 2023.