Be it enacted by the Legislature of the State of Arizona:
Section 1. Section 42-1104, Arizona Revised Statutes, is amended to read:
42-1104. Statutes of limitation; exceptions
A. For the taxes to which this article applies, every notice of every additional tax due shall be prepared on forms prescribed by the department and mailed within four years after the report or return is required to be filed or within four years after the report or return is filed, whichever period expires later.
B. Notwithstanding subsection A of this section, any notice of additional tax due regarding individual income tax adjustments for taxable years beginning from and after December 31, 2013 that are not based on federal information must be prepared on forms prescribed by the department and mailed within three years after the report or return is required to be filed or within three years after the report or return is filed, whichever period expires later. For the purposes of this subsection, "based on federal information" means that the adjustment is necessary because the individual reported different amounts on the individual's federal return than was reported on the individual's Arizona return in areas in which the Arizona amount is contingent on federal law.
B. C. The following are exceptions to the general rules prescribed by this section, and a deficiency assessment may be issued in any of the following cases:
1. The department may assess the tax or begin a proceeding in court for the collection of the tax at any time:
(a) In the case of a false or fraudulent return with the intent to evade tax.
(b) In the case of failure to file a return.
2. If a taxpayer omits from gross income, gross receipts, gross proceeds of sales or Arizona adjusted gross income, as defined for purposes of chapter 5 of this title or title 43, an amount which that is properly includible and which that is in excess of twenty‑five per cent of the amount of gross income stated in the return, the tax may be assessed at any time within six years after the return was filed.
3. If a taxpayer during a taxable year sells at a gain property used as the taxpayer's principal residence, the statutory period for the assessment of any deficiency attributable to any part of the gain does not expire before the expiration of four years from the date the taxpayer notifies the United States internal revenue service pursuant to the United States internal revenue code.
4. If a claim for credit or refund relates to an overpayment on account of the deductibility of a debt as one which that became worthless, a loss from worthlessness of a security, an erroneous inclusion of an amount attributable to the recovery of a bad debt, prior tax or delinquency amount due to an adjustment of a bad debt deduction or a loss deduction from worthlessness of a security, the period of limitation is seven years from the date prescribed by law for filing the return for the year with respect to which the claim is made.
5. If a taxpayer fails to report a change or correction by the commissioner of internal revenue or other officer of the United States or other competent authority or fails to file an amended return as required by section 43‑327, the department may assess any deficiency resulting from such adjustments within four years after the change, correction or amended return is reported to or filed with the United States internal revenue service regardless of any previous examinations by the department.
6. If a taxpayer is required to report a change or correction by the commissioner of internal revenue or other officer of the United States or other competent authority or to file an amended return as required by section 43‑327 and does report the change or files the return, any deficiency resulting from the adjustments may be assessed within six months from the date the notice of amended return is filed with the department by the taxpayer, or within the period provided in subsection A of this section or paragraph 1 or 2 of this subsection, whichever period expires last.
7. Except as provided in paragraph 8 of this subsection, if a taxpayer agrees with the United States commissioner of internal revenue for an extension or renewals of the period for proposing and assessing deficiencies in federal income taxes for any year, the period for mailing a notice of a proposed income tax deficiency is four years after the return was filed or six months after the date of the expiration of the agreed period for assessing deficiencies in the federal income tax, whichever period expires later.
8. If a taxpayer agrees with the United States commissioner of internal revenue for a limited extension or renewals of the period for proposing and assessing deficiencies in federal income taxes for any year, then, solely with respect to those items specifically enumerated in this agreement, the period for mailing a notice of a proposed income tax deficiency, or claiming a refund, is four years after the return was filed or six months after the date of the expiration of the agreed period for assessing deficiencies in the federal income tax, whichever period expires later.
9. If, before the expiration of the time prescribed for the mailing of a notice of a proposed deficiency assessment, the taxpayer consents in writing to an assessment after that time, the assessment may be made at any time before the expiration of the period agreed on. The period agreed on may be extended by subsequent written agreements made before the expiration of the period previously agreed on.
C. D. Notwithstanding subsection A of this section and subsection B C, paragraphs 1 and 2 of this section, a taxpayer who has a duty to collect use tax shall not be assessed tax pursuant to chapter 5, article 4 of this title for any retail sales to purchasers who were licensed pursuant to section 42‑5005 or registered pursuant to section 42‑5154 and who filed use tax returns for the reporting period in which the sale was made, if the reporting period in which the sale was made is more than four years from the notice of proposed deficiency. If, before the expiration of this time limitation, the taxpayer consents in writing to an assessment after that time for the transactions, a subsequent assessment may include any transaction within the agreed extended period. The period agreed to may be extended by subsequent written agreements made before the expiration of the period previously agreed to.
Sec. 2. Section 42-1123, Arizona Revised Statutes, is amended to read:
42-1123. Interest
A. If it is provided by law that interest applies as determined pursuant to this section, the department shall apply interest, compounded annually, in the same manner and at the same times as prescribed by section 6621 of the United States internal revenue code, except that the rate of interest for both overpayments and underpayments for all taxpayers is the federal short‑term rate, determined pursuant to section 6621(b) of the internal revenue code, plus three percentage points.
B. On January 1 of each year the department shall add any interest outstanding as of that date to the principal amount of the tax. For purposes of this section the amount added to the principal is thereafter considered a part of the principal amount of the tax and accrues interest pursuant to this section.
C. If the tax, whether determined by the department or the taxpayer, or any portion of the tax is not paid on or before the date prescribed for its payment the department shall collect, as a part of the tax, interest on the unpaid amount at the rate determined pursuant to this section from the date prescribed for its payment until it is paid.
D. Interest on the amount assessed as a deficiency shall be assessed and paid at the same time as the deficiency at the rate determined pursuant to this section from the date prescribed for the payment of the tax to the date the deficiency is assessed. If any portion of the deficiency is paid before the date it is assessed, interest shall accrue on that portion only to the date paid.
E. If the time for filing a return is extended, the department shall collect, as part of such tax, interest on any unpaid balance at the rate determined pursuant to this section from the date on which the payment should have been made if no extension had been granted until the date the tax is paid.
F. Except in the case of a jeopardy assessment, collection of which has been stayed by the posting of a bond, if a deficiency or any interest is not paid in full within ten days from the date of notice and demand from the department, the department shall collect as a part of the tax interest on the unpaid tax or interest at the rate determined pursuant to this section from the date of the notice and demand until it is paid.
G. If an original return filed with the department shows that the taxpayer is entitled to a refund, interest is not allowed on the amount to be refunded if the refund is paid within sixty days of the last day for filing the return or sixty days from the filing of the return, whichever is later. If the department does not pay the amount of the refund due within sixty days after the date established in this subsection, the department shall pay the interest on the amount at the rate prescribed in this section from the sixty‑first day to the issued date of the refund warrant. The department's annual budget shall separately state the amount necessary to satisfy the requirements of this subsection.
H. In the case of an amended return, claim for refund or refund determined through audit, interest shall be allowed and paid, with respect to any tax, from the date prescribed for the payment of that tax to the issue date of the refund warrant, but in the case of an original return of tax which is filed after the last date prescribed for filing the return and paying such tax, determined with regard to extensions, no interest may be allowed or paid for any day before the date on which the return is filed or the tax paid, whichever is later. A payment not made incident to a bona fide and orderly discharge of an actual liability or one reasonably assumed to be imposed by law is not an overpayment for the purposes of this subsection and interest is not payable on the payment.
I. If a credit or refund of any part of an overpayment would be barred under section 42‑1106, subsection A, except for the provisions of section 42‑1104, subsection B C, paragraph 4, interest shall not be allowed or paid with respect to such part of the overpayment for any period beginning after the expiration of the period of limitation provided in section 42‑1106, subsection A for filing a claim for credit or refund of such part of the overpayment and ending at the expiration of six months after the date on which the claim was filed or, if no claim was filed and the overpayment was found by the department, ending at the time the appeal was filed with the board.
J. In any judgment of any court rendered for any overpayment, interest shall be allowed at the rate determined pursuant to this section on the amount of the overpayment from the date of the payment or collection to the date of allowance of credit on account of such judgment or to a date determined by the department preceding the date of the refund warrant by not more than thirty days.
Sec. 3. Section 42-2059, Arizona Revised Statutes, as amended by Laws 2005, chapter 95, section 1, is amended to read:
42-2059. No additional audits or proposed assessments; exceptions
A. When the department completes an audit or the findings of a managed audit are accepted by the director or approved on appeal and a deficiency has been completely determined under section 42‑1108 or chapter 1, article 6 of this title, the taxpayer's liability for the particular tax for the period subjected to the audit is fixed and determined, and no additional audit may be conducted except under the following circumstances:
1. If a taxpayer files a claim for refund under section 42‑1251, subsection B or any other provision authorizing a claim for refund. Any departmental audit of the claim is limited to the issues presented on the claim for refund.
2. Changes or corrections required to be reported to the department by section 43‑327. The department may audit any such reports or any periods for which a report was required notwithstanding this section and may determine a tax deficiency or a refund.
3. An audit of state transaction privilege or use tax does not preclude a subsequent audit for a city or town. An audit of transaction privilege or use tax for a city or town does not preclude a subsequent audit for this state.
4. If the taxpayer failed to disclose material information during the audit, or has falsified books or records or otherwise engaged in an action that prevented the department from conducting an accurate audit, the applicability of this subsection may be part of a subsequent protest and may be contested by the taxpayer pursuant to chapter 1, article 6 of this title.
5. If a managed audit is completed under the terms of a limited managed audit agreement, the department may audit the issues not covered by the limited managed audit agreement within the statute of limitations prescribed by section 42‑1104.
6. For individual income tax changes or corrections based on federal information as defined in section 42-1104, subsection B, an audit may be conducted after an assessment has been issued within the period specified in section 42-1104, subsection B. The department's audit adjustments are limited to changes based on federal information.
B. If the department issues a notice of proposed assessment of taxes imposed by chapter 5, article 1 or 4 of this title or title 43, chapter 10, the department may not increase the amount of the proposed assessment except in one or more of the following circumstances:
1. The taxpayer has made a material misrepresentation of facts.
2. The taxpayer has failed to disclose a material fact to the auditor.
3. The department has requested information and the taxpayer fails to provide that information to the department.
4. After issuing the notice of proposed assessment but before the assessment becomes final the tax court, court of appeals or supreme court issues a decision, the application of which causes the tax initially proposed to increase.
5. The proposed assessment was for individual income tax and was issued within the period required in section 42-1104, subsection B, and the changes are based on federal information as defined in section 42-1104, subsection B.
C. Subsection B of this section does not apply to changes or corrections that are required to be reported to the department by section 43‑327.
Sec. 4. Section 42-2059, Arizona Revised Statutes, as amended by Laws 2013, chapter 255, section 3, is amended to read:
42-2059. No additional audits or proposed assessments; exceptions
A. When the department completes an audit or the findings of a managed audit are accepted by the director or approved on appeal and a deficiency has been completely determined under section 42‑1108 or chapter 1, article 6 of this title, the taxpayer's liability for the particular tax for the period subjected to the audit is fixed and determined, and no additional audit may be conducted except under the following circumstances:
1. If a taxpayer files a claim for refund under section 42‑1251, subsection B or any other provision authorizing a claim for refund. Any departmental audit of the claim is limited to the issues presented on the claim for refund.
2. Changes or corrections required to be reported to the department by section 43‑327. The department may audit any such reports or any periods for which a report was required notwithstanding this section and may determine a tax deficiency or a refund.
3. If the taxpayer failed to disclose material information during the audit, or has falsified books or records or otherwise engaged in an action that prevented the department from conducting an accurate audit, the applicability of this subsection may be part of a subsequent protest and may be contested by the taxpayer pursuant to chapter 1, article 6 of this title.
4. If a managed audit is completed under the terms of a limited managed audit agreement, the department may audit the issues not covered by the limited managed audit agreement within the statute of limitations prescribed by section 42‑1104.
5. For individual income tax changes or corrections based on federal information as defined in section 42-1104, subsection B, an audit may be conducted after an assessment has been issued within the period specified in section 42-1104, subsection B. The department's audit adjustments are limited to changes based on federal information.
B. If the department issues a notice of proposed assessment of taxes imposed by chapter 5, article 1 or 4 of this title or title 43, chapter 10, the department may not increase the amount of the proposed assessment except in one or more of the following circumstances:
1. The taxpayer has made a material misrepresentation of facts.
2. The taxpayer has failed to disclose a material fact to the auditor.
3. The department has requested information and the taxpayer fails to provide that information to the department.
4. After issuing the notice of proposed assessment but before the assessment becomes final the tax court, court of appeals or supreme court issues a decision, the application of which causes the tax initially proposed to increase.
5. The proposed assessment was for individual income tax and was issued within the period required in section 42-1104, subsection B, and the changes are based on federal information as defined in section 42-1104, subsection B.
C. Subsection B of this section does not apply to changes or corrections that are required to be reported to the department by section 43‑327.
Sec. 5. Section 42-2075, Arizona Revised Statutes, as amended by Laws 2004, chapter 83, section 2, is amended to read:
42-2075. Audit duration; definition
A. An audit of a taxpayer's return or claim for refund shall not exceed two years from the date of initial audit contact to the issuance of a notice of proposed deficiency assessment or proposed overpayment, except:
1. An audit of a fraudulent tax return.
2. An audit delayed as the result of the taxpayer's bankruptcy proceeding.
3. An audit in which the department has issued a letter to the taxpayer or the taxpayer's representative citing the potential imposition of the penalty described in section 42‑1125, subsection C for the taxpayer's failure or refusal to provide information pursuant to the department's written request.
4. An audit involving proceedings concerning the enforcement or validity of a subpoena or subpoena duces tecum issued pursuant to section 42‑1006, subsection C.
5. An audit involving a proceeding under section 42‑2056.
6. An audit where a taxpayer has filed a petition pursuant to section 43‑1148, but only in relation to the effect of the petition request.
7. An audit in which the taxpayer provides a written request to extend the audit beyond the two‑year period. A request for extension under this paragraph is not a substitute for a waiver of the statute of limitations pursuant to section 42‑1104, subsection B C, paragraph 9. However, a waiver of the statute of limitations is considered to be a written request to extend the audit beyond the two‑year period under this paragraph.
B. This section applies to audits conducted by the department and to joint audits conducted by the department and cities and towns pursuant to section 42‑6005.
C. For the purposes of this section, "initial audit contact" means:
1. For a field audit, the date of the first meeting between the taxpayer or the taxpayer's representative and a member of the department's audit staff.
2. For a desk or office audit, the date of the first letter to the taxpayer regarding the audit.
Sec. 6. Section 42-2075, Arizona Revised Statutes, as amended by Laws 2013, chapter 255, section 4, is amended to read:
42-2075. Audit duration; definition
A. An audit of a taxpayer's return or claim for refund shall not exceed two years from the date of initial audit contact to the issuance of a notice of proposed deficiency assessment or proposed overpayment, except:
1. An audit of a fraudulent tax return.
2. An audit delayed as the result of the taxpayer's bankruptcy proceeding.
3. An audit in which the department has issued a letter to the taxpayer or the taxpayer's representative citing the potential imposition of the penalty described in section 42‑1125, subsection C for the taxpayer's failure or refusal to provide information pursuant to the department's written request.
4. An audit involving proceedings concerning the enforcement or validity of a subpoena or subpoena duces tecum issued pursuant to section 42‑1006, subsection C.
5. An audit involving a proceeding under section 42‑2056.
6. An audit where a taxpayer has filed a petition pursuant to section 43‑1148, but only in relation to the effect of the petition request.
7. An audit in which the taxpayer provides a written request to extend the audit beyond the two‑year period. A request for extension under this paragraph is not a substitute for a waiver of the statute of limitations pursuant to section 42‑1104, subsection B C, paragraph 9. However, a waiver of the statute of limitations is considered to be a written request to extend the audit beyond the two‑year period under this paragraph.
B. This section applies to audits conducted by the department and to audits conducted by the department and cities and towns pursuant to section 42‑6002.
C. For the purposes of this section, "initial audit contact" means:
1. For a field audit, the date of the first meeting between the taxpayer or the taxpayer's representative and a member of the department's audit staff.
2. For a desk or office audit, the date of the first letter to the taxpayer regarding the audit.
Sec. 7. Section 42-5069, Arizona Revised Statutes, is amended to read:
42-5069. Commercial lease classification; definitions
A. The commercial lease classification is comprised of the business of leasing for a consideration the use or occupancy of real property.
B. A person who, as a lessor, leases or rents for a consideration under one or more leases or rental agreements the use or occupancy of real property that is used by the lessee for commercial purposes is deemed to be engaged in business and subject to the tax imposed by article 1 of this chapter, but this subsection does not include leases or rentals of real property used for residential or agricultural purposes.
C. The commercial lease classification does not include:
1. Any business activities that are classified under the transient lodging classification.
2. Activities engaged in by the Arizona exposition and state fair board or county fair commissions in connection with events sponsored by those entities.
3. Leasing real property to a lessee who subleases the property if the lessee is engaged in business classified under the commercial lease classification or the transient lodging classification.
4. Leasing real property pursuant to a written lease agreement entered into before December 1, 1967. This exclusion does not apply to the businesses of hotels, guest houses, dude ranches and resorts, rooming houses, apartment houses, office buildings, automobile storage garages, parking lots or tourist camps, or to the extension or renewal of any such written lease agreement.
5. Leasing real property between affiliated companies, businesses, persons or reciprocal insurers. For the purposes of this paragraph:
(a) "Affiliated companies, businesses, persons or reciprocal insurers" means the lessor holds a controlling interest in the lessee, the lessee holds a controlling interest in the lessor, an affiliated entity holds a controlling interest in both the lessor and the lessee or an unrelated person holds a controlling interest in both the lessor and lessee.
(b) "Controlling interest" means direct or indirect ownership of at least eighty per cent of the voting shares of a corporation or of the interests in a company, business or person other than a corporation.
(c) "Reciprocal insurers" has the same meaning prescribed in section 20-762.
6. Leasing real property for boarding horses.
7. Leasing or renting real property or the right to use real property at exhibition events in this state sponsored, operated or conducted by a nonprofit organization that is exempt from taxation under section 501(c)(3), 501(c)(4) or 501(c)(6) of the internal revenue code if the organization is associated with major league baseball teams or a national touring professional golfing association and no part of the organization's net earnings inures to the benefit of any private shareholder or individual.
8. Leasing or renting real property or the right to use real property for use as a rodeo featuring primarily farm and ranch animals in this state sponsored, operated or conducted by a nonprofit organization that is exempt from taxation under section 501(c)(3), 501(c)(4), 501(c)(6), 501(c)(7) or 501(c)(8) of the internal revenue code and no part of the organization's net earnings inures to the benefit of any private shareholder or individual.
9. Leasing or renting dwelling units, lodging facilities or trailer or mobile home spaces if the units, facilities or spaces are intended to serve as the principal or permanent place of residence for the lessee or renter or if the unit, facility or space is leased or rented to a single tenant thirty or more consecutive days.
10. Leasing or renting real property and improvements for use primarily for religious worship by a nonprofit organization that is exempt from taxation under section 501(c)(3) of the internal revenue code and no part of the organization's net earnings inures to the benefit of any private shareholder or individual.
11. Leasing or renting real property used for agricultural purposes under either of the following circumstances:
(a) The lease or rental is between family members, trusts, estates, corporations, partnerships, joint venturers or similar entities, or any combination thereof, if the individuals or at least eighty per cent of the beneficiaries, shareholders, partners or joint venturers share a family relationship as parents or ancestors of parents, children or descendants of children, siblings, cousins of the first degree, aunts, uncles, nieces or nephews of the first degree, spouses of any of the listed relatives and listed relatives by the half-blood or by adoption.
(b) The lessor leases or rents real property used for agricultural purposes under no more than three leases or rental agreements.
12. Leasing, renting or granting the right to use real property to vendors or exhibitors by a trade or industry association that is a qualifying organization pursuant to section 513(d)(3)(C) of the internal revenue code for a period not to exceed twenty-one days in connection with an event that meets all of the following conditions:
(a) The majority of such vending or exhibition activities relate to the nature of the trade or business sponsoring the event.
(b) The event is held in conjunction with a formal business meeting of the trade or industry association.
(c) The event is organized by the persons engaged in the particular trade or industry.
13. Leasing, renting or granting the right to use real property for a period not to exceed twenty-one days by a coliseum, civic center, civic plaza, convention center, auditorium or arena owned by this state or any of its political subdivisions.
14. Leasing or subleasing real property used by a nursing care institution as defined in section 36-401 that is licensed pursuant to title 36, chapter 4.
15. Leasing or renting an eligible facility as defined in section 28‑7701.
16. Granting or providing rights to real property that constitute a profit à prendre for the severance of minerals, including all rights to use the surface or subsurface of the property as is necessary or convenient to the right to sever the minerals. This paragraph does not exclude from the commercial lease classification leasehold rights to the real property that are granted in addition to and not included within the right of profit à prendre, but the tax base for the grant of such a leasehold right, if the gross income derived from the grant is not separately stated from the gross income derived from the grant of the profit à prendre, shall not exceed the fair market value of the leasehold rights computed after excluding the value of all rights under the profit à prendre. For the purposes of this paragraph, "profit à prendre" means a right to use the land of another to mine minerals, and carries with it the right of entry and the right to remove and take the minerals from the land and also includes the right to use the surface of the land as is necessary and convenient for exercise of the profit.
D. The tax base for the commercial lease classification is the gross proceeds of sales or gross income derived from the business, but reimbursements to the lessor for utility service shall be deducted from the tax base.
E. Notwithstanding section 42‑1104, subsection B C, paragraph 1, subdivision (b) and paragraph 2, the failure to file tax returns for the commercial lease classification that report gross income derived from any agreement that constitutes, in whole or in part, a grant of a right of profit à prendre for the severance of minerals does not constitute an exception to the general rule for the statute of limitations.
F. For the purposes of this section:
1. "Leasing" includes renting.
2. "Real property" includes any improvements, rights or interest in such property.
Sec. 8. Section 43-1011, Arizona Revised Statutes, is amended to read:
43-1011. Taxes and tax rates
A. There shall be levied, collected and paid for each taxable year upon the entire taxable income of every resident of this state and upon the entire taxable income of every nonresident which is derived from sources within this state taxes determined in the following manner:
1. For taxable years beginning from and after December 31, 1996 through December 31, 1997:
(a) In the case of a single person or a married person filing separately:
If taxable income is: The tax is:
$0 - $10,000 2.90% of taxable income
$10,001 - $25,000 $290, plus 3.30% of the excess over $10,000
$25,001 - $50,000 $785, plus 3.90% of the excess over $25,000
$50,001 - $150,000 $1,760, plus 4.80% of the excess over $50,000
$150,001 and over $6,560, plus 5.17% of the excess over $150,000
(b) In the case of a married couple filing a joint return or a single person who is a head of a household:
If taxable income is: The tax is:
$0 - $20,000 2.90% of taxable income
$20,001 - $50,000 $580, plus 3.30% of the excess over $20,000
$50,001 - $100,000 $1,570, plus 3.90% of the excess over $50,000
$100,001 - $300,000 $3,520, plus 4.80% of the excess over $100,000
$300,001 and over $13,120, plus 5.17% of the excess over $300,000
2. For taxable years beginning from and after December 31, 1997 through December 31, 1998:
(a) In the case of a single person or a married person filing separately:
If taxable income is: The tax is:
$0 - $10,000 2.88% of taxable income
$10,001 - $25,000 $288, plus 3.24% of the excess over $10,000
$25,001 - $50,000 $774, plus 3.82% of the excess over $25,000
$50,001 - $150,000 $1,729, plus 4.74% of the excess over $50,000
$150,001 and over $6,469, plus 5.10% of the excess over $150,000
(b) In the case of a married couple filing a joint return or a single person who is a head of a household:
If taxable income is: The tax is:
$0 - $20,000 2.88% of taxable income
$20,001 - $50,000 $576, plus 3.24% of the excess over $20,000
$50,001 - $100,000 $1,548, plus 3.82% of the excess over $50,000
$100,001 - $300,000 $3,458, plus 4.74% of the excess over $100,000
$300,001 and over $12,938, plus 5.10% of the excess over $300,000
3. For taxable years beginning from and after December 31, 1998 through December 31, 2005:
(a) In the case of a single person or a married person filing separately:
If taxable income is: The tax is:
$0 - $10,000 2.87% of taxable income
$10,001 - $25,000 $287, plus 3.20% of the excess over $10,000
$25,001 - $50,000 $767, plus 3.74% of the excess over $25,000
$50,001 - $150,000 $1,702, plus 4.72% of the excess over $50,000
$150,001 and over $6,422, plus 5.04% of the excess over $150,000
(b) In the case of a married couple filing a joint return or a single person who is a head of a household:
If taxable income is: The tax is:
$0 - $20,000 2.87% of taxable income
$20,001 - $50,000 $574, plus 3.20% of the excess over $20,000
$50,001 - $100,000 $1,534, plus 3.74% of the excess over $50,000
$100,001 - $300,000 $3,404, plus 4.72% of the excess over $100,000
$300,001 and over $12,844, plus 5.04% of the excess over $300,000
4. For taxable years beginning from and after December 31, 2005 through December 31, 2006:
(a) In the case of a single person or a married person filing separately:
If taxable income is: The tax is:
$0 - $10,000 2.73% of taxable income
$10,001 - $25,000 $273, plus 3.04% of the excess over $10,000
$25,001 - $50,000 $729, plus 3.55% of the excess over $25,000
$50,001 - $150,000 $1,617, plus 4.48% of the excess over $50,000
$150,001 and over $6,097, plus 4.79% of the excess over $150,000
(b) In the case of a married couple filing a joint return or a single person who is a head of a household:
If taxable income is: The tax is:
$0 - $20,000 2.73% of taxable income
$20,001 - $50,000 $546, plus 3.04% of the excess over $20,000
$50,001 - $100,000 $1,458, plus 3.55% of the excess over $50,000
$100,001 - $300,000 $3,233, plus 4.48% of the excess over $100,000
$300,001 and over $12,193, plus 4.79% of the excess over $300,000
5. For taxable years beginning from and after December 31, 2006:
(a) In the case of a single person or a married person filing separately:
If taxable income is: The tax is:
$0 - $10,000 2.59% of taxable income
$10,001 - $25,000 $259, plus 2.88% of the excess over $10,000
$25,001 - $50,000 $691, plus 3.36% of the excess over $25,000
$50,001 - $150,000 $1,531, plus 4.24% of the excess over $50,000
$150,001 and over $5,771, plus 4.54% of the excess over $150,000
(b) In the case of a married couple filing a joint return or a single person who is a head of a household:
If taxable income is: The tax is:
$0 - $20,000 2.59% of taxable income
$20,001 - $50,000 $518, plus 2.88% of the excess over $20,000
$50,001 - $100,000 $1,382, plus 3.36% of the excess over $50,000
$100,001 -$300,000 $3,062, plus 4.24% of the excess over $100,000
$300,001 and over $11,542, plus 4.54% of the excess over $300,000
B. For each taxable year beginning from and after December 31, 2013, the department shall adjust the income dollar amounts for each rate bracket prescribed by subsection A, paragraph 5 of this section according to the average annual change in the metropolitan phoenix consumer price index published by the United States bureau of labor statistics. The revised dollar amounts shall be raised to the nearest whole dollar. The income dollar amounts for each rate bracket may not be revised below the amounts prescribed in the next preceding taxable year.
Sec. 9. Section 43-1021, Arizona Revised Statutes, is amended to read:
43-1021. Additions to Arizona gross income
In computing Arizona adjusted gross income, the following amounts shall be added to Arizona gross income:
1. A beneficiary's share of the fiduciary adjustment to the extent that the amount determined by section 43‑1333 increases the beneficiary's Arizona gross income.
2. An amount equal to the ordinary income portion of a lump sum distribution that was excluded from federal adjusted gross income pursuant to section 402(d) of the internal revenue code.
3. The amount of interest income received on obligations of any state, territory or possession of the United States, or any political subdivision thereof, located outside the state of Arizona, reduced, for tax years beginning from and after December 31, 1996, by the amount of any interest on indebtedness and other related expenses that were incurred or continued to purchase or carry those obligations and that are not otherwise deducted or subtracted in arriving at Arizona gross income.
4. Annuity income received during the taxable year to the extent that the sum of the proceeds received from such annuity in all taxable years prior to and including the current taxable year exceeds the total consideration and premiums paid by the taxpayer. This paragraph applies only to those annuities with respect to which the first payment was received prior to December 31, 1978.
5. 4. The excess of a partner's share of partnership taxable income required to be included under chapter 14, article 2 of this title over the income required to be reported under section 702(a)(8) of the internal revenue code.
6. 5. The excess of a partner's share of partnership losses determined pursuant to section 702(a)(8) of the internal revenue code over the losses allowable under chapter 14, article 2 of this title.
7. 6. The amount by which the adjusted basis of property described in this paragraph and computed pursuant to the internal revenue code exceeds the adjusted basis of such property computed pursuant to this title and the income tax act of 1954, as amended. This paragraph shall apply to all property that is held for the production of income and that is sold or otherwise disposed of during the taxable year, except depreciable property used in a trade or business.
8. 7. The amount of depreciation or amortization of costs of any capital investment that is deducted pursuant to section 167 or 179 of the internal revenue code by a qualified defense contractor with respect to which an election is made to amortize pursuant to section 43‑1024.
9. 8. The amount of gain from the sale or other disposition of a capital investment that a qualified defense contractor has elected to amortize pursuant to section 43‑1024.
10. 9. Amounts withdrawn from the Arizona state retirement system, the corrections officer retirement plan, the public safety personnel retirement system, the elected officials' retirement plan or a county or city retirement plan by an employee on termination of employment before retirement to the extent they were deducted in arriving at Arizona taxable income in any year.
11. 10. That portion of the net operating loss included in federal adjusted gross income that has already been taken as a net operating loss for Arizona purposes or that is separately taken as a subtraction under the special net operating loss transition rule.
12. 11. Any nonitemized amount deducted pursuant to section 170 of the internal revenue code representing contributions to an educational institution that denies admission, enrollment or board and room accommodations on the basis of race, color or ethnic background except those institutions primarily established for the education of American Indians.
13. 12. Amounts withdrawn from a medical savings account by the individual during the taxable year computed pursuant to section 220(f) of the internal revenue code and not included in federal adjusted gross income.
14. 13. Any amount of agricultural water conservation expenses that were deducted pursuant to the internal revenue code for which a credit is claimed under section 43‑1084.
15. 14. The amount by which the depreciation or amortization computed under the internal revenue code with respect to property for which a credit was taken under section 43‑1080 exceeds the amount of depreciation or amortization computed pursuant to the internal revenue code on the Arizona adjusted basis of the property.
16. 15. The amount by which the adjusted basis computed under the internal revenue code with respect to property for which a credit was claimed under section 43‑1080 and that is sold or otherwise disposed of during the taxable year exceeds the adjusted basis of the property computed under section 43‑1080.
17. 16. The amount by which the depreciation or amortization computed under the internal revenue code with respect to property for which a credit was taken under either section 43‑1081 or 43‑1081.01 exceeds the amount of depreciation or amortization computed pursuant to the internal revenue code on the Arizona adjusted basis of the property.
18. 17. The amount by which the adjusted basis computed under the internal revenue code with respect to property for which a credit was claimed under section 43‑1074.02, 43‑1081 or 43‑1081.01 and that is sold or otherwise disposed of during the taxable year exceeds the adjusted basis of the property computed under section 43‑1074.02, 43‑1081 or 43‑1081.01, as applicable.
19. 18. The deduction referred to in section 1341(a)(4) of the internal revenue code for restoration of a substantial amount held under a claim of right.
20. 19. The amount by which a net operating loss carryover or capital loss carryover allowable pursuant to section 1341(b)(5) of the internal revenue code exceeds the net operating loss carryover or capital loss carryover allowable pursuant to section 43‑1029, subsection F.
21. 20. Any amount deducted pursuant to section 170 of the internal revenue code representing contributions to a school tuition organization or a public school for which a credit is claimed under section 43‑1089, 43‑1089.01 or 43‑1089.03.
22. 21. Any amount deducted in computing Arizona gross income as expenses for installing solar stub outs or electric vehicle recharge outlets in this state with respect to which a credit is claimed pursuant to section 43‑1090.
23. 22. Any wage expenses deducted pursuant to the internal revenue code for which a credit is claimed under section 43‑1087 and representing net increases in qualified employment positions for employment of temporary assistance for needy families recipients.
24. 23. Any amount deducted for conveying ownership or development rights of property to an agricultural preservation district under section 48‑5702 for which a credit is claimed under section 43‑1081.02.
25. 24. The amount of any depreciation allowance allowed pursuant to section 167(a) of the internal revenue code to the extent not previously added.
26. 25. With respect to property for which an expense deduction was taken pursuant to section 179 of the internal revenue code in a taxable year beginning before January 1, 2013, the amount in excess of twenty‑five thousand dollars.
27. 26. The amount by which the depreciation or amortization computed under the internal revenue code with respect to property for which a credit was taken under section 43‑1090.01 exceeds the amount of depreciation or amortization computed pursuant to the internal revenue code on the Arizona adjusted basis of the property.
28. 27. The amount by which the adjusted basis computed under the internal revenue code with respect to property for which a credit was claimed under section 43‑1090.01 and that is sold or otherwise disposed of during the taxable year exceeds the adjusted basis of the property computed under section 43‑1090.01.
29. 28. The amount of a nonqualified withdrawal, as defined in section 15‑1871, from a college savings plan established pursuant to section 529 of the internal revenue code that is made to a distributee to the extent the amount is not included in computing federal adjusted gross income, except that the amount added under this paragraph shall not exceed the difference between the amount subtracted under section 43‑1022 in prior taxable years and the amount added under this section in any prior taxable years.
30. 29. The amount of unemployment compensation that is excluded from federal adjusted gross income pursuant to section 85(c) of the internal revenue code as added by section 1007 of the American recovery and reinvestment act of 2009 (P.L. 111-5).
31. 30. The amount of discharge of indebtedness income that is deferred and excluded from the computation of federal adjusted gross income or federal taxable income in the current taxable year pursuant to section 108(i) of the internal revenue code as added by section 1231 of the American recovery and reinvestment act of 2009 (P.L. 111-5).
32. 31. The amount of any previously deferred original issue discount that was deducted in computing federal adjusted gross income or federal taxable income in the current year pursuant to section 108(i) of the internal revenue code as added by section 1231 of the American recovery and reinvestment act of 2009 (P.L. 111-5), to the extent that the amount was previously subtracted from Arizona gross income pursuant to section 43‑1022, paragraph 31 29.
33. 32. For taxable years beginning from and after December 31, 2011 through December 31, 2014, the amount of any deduction that is claimed in computing federal adjusted gross income for health insurance premiums or contributions to a health savings account for which a credit is claimed under section 43‑1087.01 or 43‑1185.
33. With respect to property for which an adjustment is made under section 43‑1022, paragraph 36, one‑fifth of the difference between the amount of the adjustment under section 43‑1022, paragraph 36 and the amount of depreciation or amortization computed under the internal revenue code for the year in which the adjustment is made and in each of the following four years.
34. For property for which an adjustment was made under section 43‑1022, paragraph 36 and that is sold or otherwise disposed of during the taxable year, the amount by which the adjusted basis computed under the internal revenue code with respect to property exceeds the adjusted basis of the property computed under this title.
35. With respect to qualified property for which an adjustment is made under section 43‑1022, paragraph 37, one‑fifth of the amount of adjustment for the year in which the adjustment is made and in each of the following four years.
36. For property for which an adjustment was made under section 43‑1022, paragraph 37 and that is sold or otherwise disposed of during the taxable year, the amount by which the adjusted basis computed under the internal revenue code with respect to property exceeds the adjusted basis of the property computed under this title.
Sec. 10. Section 43-1022, Arizona Revised Statutes, is amended to read:
43-1022. Subtractions from Arizona gross income
In computing Arizona adjusted gross income, the following amounts shall be subtracted from Arizona gross income:
1. The amount of exemptions allowed by section 43‑1023.
2. Benefits, annuities and pensions in an amount totaling not more than two thousand five hundred dollars received from one or more of the following:
(a) The United States government service retirement and disability fund, retired or retainer pay of the uniformed services of the United States, the United States foreign service retirement and disability system and any other retirement system or plan established by federal law.
(b) The Arizona state retirement system, the corrections officer retirement plan, the public safety personnel retirement system, the elected officials' retirement plan, an optional retirement program established by the Arizona board of regents under section 15‑1628, an optional retirement program established by a community college district board under section 15‑1451 or a retirement plan established for employees of a county, city or town in this state.
3. A beneficiary's share of the fiduciary adjustment to the extent that the amount determined by section 43‑1333 decreases the beneficiary's Arizona gross income.
4. The amount of any distributions from an individual retirement account as provided for in section 408 of the internal revenue code or from a qualified retirement plan of a self‑employed individual as provided for in section 401 of the internal revenue code to the extent that total adjustments made pursuant to this paragraph in all tax years do not exceed the total of all contributions made by the taxpayer to such plans before December 31, 1975, which were included in computing Arizona taxable income.
5. 4. The amount of income on an installment receivable that is recognized pursuant to the internal revenue code and that has already been recognized on the death of the taxpayer for purposes of this title for tax years ending before January 1, 1990.
6. 5. Interest income received on obligations of the United States, less any interest on indebtedness, or other related expenses, and deducted in arriving at Arizona gross income, which were incurred or continued to purchase or carry such obligations.
7. 6. The amount of any income tax refunds that were received from states other than Arizona and that were included as income in computing federal adjusted gross income.
8. Annuity income included in federal adjusted gross income pursuant to section 72 of the internal revenue code if the first payment with respect to such annuity was received before December 31, 1978.
9. 7. The excess of a partner's share of income required to be included under section 702(a)(8) of the internal revenue code over the income required to be included under chapter 14, article 2 of this title.
10. 8. The excess of a partner's share of partnership losses determined pursuant to chapter 14, article 2 of this title over the losses allowable under section 702(a)(8) of the internal revenue code.
11. 9. The amount by which the adjusted basis of property described in this paragraph and computed pursuant to this title and the income tax act of 1954, as amended, exceeds the adjusted basis of such property computed pursuant to the internal revenue code. This paragraph shall apply to all property that is held for the production of income and that is sold or otherwise disposed of during the taxable year other than depreciable property used in a trade or business.
12. 10. The amount allowed by section 43‑1024 for amortization, by a qualified defense contractor certified by the Arizona commerce authority under section 41‑1508, of a capital investment for private commercial activities.
13. 11. The amount of gain included in federal adjusted gross income on the sale or other disposition of a capital investment that a qualified defense contractor has elected to amortize pursuant to section 43‑1024.
14. 12. The amount allowed by section 43‑1025 for contributions during the taxable year of agricultural crops to charitable organizations.
15. 13. The portion of any wages or salaries paid or incurred by the taxpayer for the taxable year that is equal to the amount of the federal work opportunity credit, the empowerment zone employment credit, the credit for employer paid social security taxes on employee cash tips and the Indian employment credit that the taxpayer received under sections 45A, 45B, 51(a) and 1396 of the internal revenue code.
16. 14. The amount of prizes or winnings less than five thousand dollars in a single taxable year from any of the state lotteries established and operated pursuant to title 5, chapter 5.1, article 1, except that all such winnings before March 22, 1983, including periodic distributions from such winnings made after March 22, 1983, may be subtracted.
17. 15. The amount of exploration expenses that is determined pursuant to section 617 of the internal revenue code, that has been deferred in a taxable year ending before January 1, 1990 and for which a subtraction has not previously been made. The subtraction shall be made on a ratable basis as the units of produced ores or minerals discovered or explored as a result of this exploration are sold.
18. 16. The amount included in federal adjusted gross income pursuant to section 86 of the internal revenue code, relating to taxation of social security and railroad retirement benefits.
19. 17. To the extent not already excluded from Arizona gross income under the internal revenue code, compensation received for active service as a member of the reserves, the national guard or the armed forces of the United States, including compensation for service in a combat zone as determined under section 112 of the internal revenue code.
20. 18. The amount of unreimbursed medical and hospital costs, adoption counseling, legal and agency fees and other nonrecurring costs of adoption not to exceed three thousand dollars. In the case of a husband and wife who file separate returns, the subtraction may be taken by either taxpayer or may be divided between them, but the total subtractions allowed both husband and wife shall not exceed three thousand dollars. The subtraction under this paragraph may be taken for the costs that are described in this paragraph and that are incurred in prior years, but the subtraction may be taken only in the year during which the final adoption order is granted.
21. 19. The amount authorized by section 43‑1027 for the taxable year relating to qualified wood stoves, wood fireplaces or gas fired fireplaces.
22. 20. With respect to a medical savings account established pursuant to section 43‑1028:
(a) An eligible individual may subtract:
(i) The amount of contributions made by the individual's employer during the taxable year to the individual's medical savings account pursuant to section 43‑1028 to the extent that the employer contributions are included in the individual's federal adjusted gross income.
(ii) The amount deposited by the individual in the account during the taxable year to the extent that the individual's contributions are included in the individual's federal adjusted gross income.
(b) The individual's employer may subtract the amount of contributions made by the employer to a medical savings account established on the individual's behalf to the extent that the contributions are not deductible under the internal revenue code.
23. 21. The amount by which a net operating loss carryover or capital loss carryover allowable pursuant to section 43‑1029, subsection F exceeds the net operating loss carryover or capital loss carryover allowable pursuant to section 1341(b)(5) of the internal revenue code.
24. 22. Any amount of qualified educational expenses that is distributed from a qualified state tuition program determined pursuant to section 529 of the internal revenue code and that is included in income in computing federal adjusted gross income.
25. 23. Any item of income resulting from an installment sale that has been properly subjected to income tax in another state in a previous taxable year and that is included in Arizona gross income in the current taxable year.
26. 24. The amount authorized by section 43‑1030 relating to holocaust survivors.
27. 25. For property placed in service:
(a) In taxable years beginning before December 31, 2012, an amount equal to the depreciation allowable pursuant to section 167(a) of the internal revenue code for the taxable year computed as if the election described in section 168(k)(2)(D)(iii) of the internal revenue code had been made for each applicable class of property in the year the property was placed in service.
(b) In taxable years beginning from and after December 31, 2012 through December 31, 2013, an amount determined in the year the asset was placed in service based on the calculation in subdivision (a) of this paragraph. In the first taxable year beginning from and after December 31, 2013 through December 31, 2014, the taxpayer may elect to subtract the amount necessary to make the depreciation claimed to date for the purposes of this title the same as it would have been if subdivision (c) of this paragraph had applied an amount equal to the depreciation allowable pursuant to section 167(a) of the internal revenue code for the taxable year as computed as if the additional allowance for depreciation had been ten per cent of the amount allowed pursuant to section 168(k) of the internal revenue code for the entire time the asset was in service. Subdivision (c) of this paragraph iF THE TAXPAYER MAKES THIS ELECTION, IT applies for the remainder of the asset's life. If the taxpayer does not make the election under this subdivision, subdivision (a) of this paragraph applies for the remainder of the asset's life.
(c) In
taxable years beginning from and after December 31, 2013, an amount equal to
the depreciation allowable pursuant to section 167(a) of the internal revenue
code for the taxable year as computed as if the additional allowance for
depreciation had been ten per cent of the amount allowed pursuant to section
168(k) of the internal revenue code.
28. 26. With respect to property that is sold or otherwise disposed of during the taxable year by a taxpayer that complied with section 43‑1021, paragraph 25 24 with respect to that property, the amount of depreciation that has been allowed pursuant to section 167(a) of the internal revenue code to the extent that the amount has not already reduced Arizona taxable income in the current or prior taxable years.
29. 27. With respect to property for which an adjustment was made under section 43‑1021, paragraph 26 25, an amount equal to one‑fifth of the amount of the adjustment pursuant to section 43‑1021, paragraph 26 25 in the year in which the amount was adjusted under section 43‑1021, paragraph 26 25 and in each of the following four years.
30. 28. The amount contributed during the taxable year to college savings plans established pursuant to section 529 of the internal revenue code to the extent that the contributions were not deducted in computing federal adjusted gross income. The amount subtracted shall not exceed:
(a) Two thousand dollars for a single individual or a head of household.
(b) Four thousand dollars for a married couple filing a joint return. In the case of a husband and wife who file separate returns, the subtraction may be taken by either taxpayer or may be divided between them, but the total subtractions allowed both husband and wife shall not exceed four thousand dollars.
31. 29. The amount of any original issue discount that was deferred and not allowed to be deducted in computing federal adjusted gross income or federal taxable income in the current taxable year pursuant to section 108(i) of the internal revenue code as added by section 1231 of the American recovery and reinvestment act of 2009 (P.L. 111‑5).
32. 30. The amount of previously deferred discharge of indebtedness income that is included in the computation of federal adjusted gross income or federal taxable income in the current taxable year pursuant to section 108(i) of the internal revenue code as added by section 1231 of the American recovery and reinvestment act of 2009 (P.L. 111-5), to the extent that the amount was previously added to Arizona gross income pursuant to section 43‑1021, paragraph 31 30.
33. 31. The portion of the net operating loss carryforward that would have been allowed as a deduction in the current year pursuant to section 172 of the internal revenue code if the election described in section 172(b)(1)(H) of the internal revenue code had not been made in the year of the loss that exceeds the actual net operating loss carryforward that was deducted in arriving at federal adjusted gross income. This subtraction only applies to taxpayers who made an election under section 172(b)(1)(H) of the internal revenue code as amended by section 1211 of the American recovery and reinvestment act of 2009 (P.L. 111‑5) or as amended by section 13 of the worker, homeownership, and business assistance act of 2009 (P.L. 111‑92).
34. 32. For taxable years beginning from and after December 31, 2013, the amount of any net capital gain included in federal adjusted gross income for the taxable year derived from investment in a qualified small business as determined by the Arizona commerce authority pursuant to section 41‑1518.
35. 33. An amount of any net long-term capital gain included in federal adjusted gross income for the taxable year that is derived from an investment in an asset acquired after December 31, 2011, as follows:
(a) For taxable years beginning from and after December 31, 2012 through December 31, 2013, ten per cent of the net long-term capital gain included in federal adjusted gross income.
(b) For taxable years beginning from and after December 31, 2013 through December 31, 2014, twenty per cent of the net long-term capital gain included in federal adjusted gross income.
(c) For taxable years beginning from and after December 31, 2014, twenty-five per cent of the net long-term capital gain included in federal adjusted gross income.
For the purposes of this paragraph, a transferee that receives an asset by gift or at the death of a transferor is considered to have acquired the asset when the asset was acquired by the transferor. If the date an asset is acquired cannot be verified, a subtraction under this paragraph is not allowed.
36. 34. If an individual is not claiming itemized deductions pursuant to section 43‑1042, the amount of premium costs for long-term care insurance, as defined in section 20‑1691.
37. 35. With respect to a long-term health care savings account established pursuant to section 43‑1032, the amount deposited by the taxpayer in the account during the taxable year to the extent that the taxpayer's contributions are included in the taxpayer's federal adjusted gross income.
36. fOR PROPERTY PLACED IN SERVICE IN TAXABLE YEARS BEGINNING FROM AND AFTER dECEMBER 31, 2013, The amount of the expense deduction that would be allowed pursuant to section 179 of the internal revenue code if the maximum deduction allowed were five hundred thousand dollars and this limitation were reduced by the amount that the cost of section 179 property placed in service in the taxable year exceeds two million dollars.
37. For qualified property that is placed in service in taxable years beginning from and after December 31, 2013, an allowance equal to fifty per cent of the adjusted basis of the qualified property remaining after the adjustment for the allowance under paragraph 36 of this section and adjustments for any other depreciation allowance under the internal revenue code or this title. for the purposes of this subsection, "qualified property" means property that is not subject to the alternative depreciation system under section 168(g) of the internal revenue code and that meets the following qualifications:
(a) The property is any of the following:
(i) Tangible property depreciated under the modified accelerated cost recovery system that has a recovery period equal to or less than twenty years and is within the scope of section 168 of the internal revenue code.
(ii) Computer software as defined in section 167(f)(1)(b) of the internal revenue code for which a deduction is allowable under section 167(a) of the internal revenue code.
(iii) Water utility property as defined in section 168 of the internal revenue code.
(iv) Qualified leasehold property as defined in section 168 of the internal revenue code.
(b) The original use of the property commences with the taxpayer after December 31, 2013.
(c) The property is acquired by the taxpayer after December 31, 2013 pursuant to a written binding contract entered into after December 31, 2013.
(d) The property is placed in service for use in the taxpayer's trade or business or for the production of income after December 31, 2013.
(e) The property is not excepted property or subject to any special rules under section 168 of the internal revenue code.
Sec. 11. Section 43-1029, Arizona Revised Statutes, is amended to read:
43-1029. Restoration of a substantial amount held under claim of right; computation of tax
A. This section applies if:
1. An item of income was included in gross income for a prior taxable year or years because it appeared that the taxpayer had an unrestricted right to the item.
2. A deduction would be allowable under the internal revenue code or this title for the taxable year, without application of section 1341(b)(3) of the internal revenue code or section 43‑1021, paragraph 19 18, because after the close of the prior taxable year or years it was established that the taxpayer did not have an unrestricted right to all or part of the item.
3. The amount of the deduction exceeds three thousand dollars.
B. If all of the conditions in subsection A of this section apply, the tax imposed by this chapter for the taxable year is an amount equal to the tax for the taxable year computed without the deduction, minus the decrease in tax under this chapter for the prior taxable year or years that would result solely from excluding the item or portion of the item from gross income for the prior taxable year or years.
C. If the decrease in tax exceeds the tax imposed by this chapter for the taxable year, computed without the deduction, the excess is considered to be a payment of tax on the last day prescribed by law for the payment of tax for the taxable year and shall be refunded or credited in the same manner as if it were an overpayment for the taxable year.
D. Subsection B of this section does not apply to any deduction that is allowable with respect to an item that was included in gross income by reason of the sale or other disposition of stock in trade of the taxpayer, or other property of a kind that would properly have been included in the inventory of the taxpayer on hand at the close of the prior taxable year, or property that is held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business. This subsection does not apply if the deduction arises out of refunds or repayments with respect to rates made by a regulated public utility that is listed in section 7701(a)(33)(A) through (H) of the internal revenue code, if the refunds or repayments are:
1. Required to be made by the government, political subdivision, agency or instrumentality referred to in that section.
2. Required to be made by an order of a court.
3. Made in settlement of litigation or under threat or imminence of litigation.
E. If the exclusion under subsection B of this section results in:
1. A net operating loss for the prior taxable year or years for purposes of computing the decrease in tax for the prior year or years under subsection B of this section:
(a) The loss shall be:
(i) Carried over under this chapter to the same extent and in the same manner as was provided under prior law for taxable years beginning on or before December 31, 1989.
(ii) Carried back and carried over to the same extent and in the same manner as provided under section 172 of the internal revenue code for taxable years beginning from and after December 31, 1989.
(b) No carryover beyond the taxable year may be taken into account.
2. A capital loss for the prior taxable year or years, for purposes of computing the decrease in tax for the prior taxable year or years under subsection B of this section:
(a) The loss shall be carried back and carried over to the same extent and in the same manner as is provided under section 1212 of the internal revenue code.
(b) No carryover beyond the taxable year may be taken into account.
F. In computing Arizona taxable income for taxable years subsequent to the current taxable year, the net operating loss or capital loss determined in subsection E of this section shall be taken into account to the same extent and in the same manner as a net operating loss or capital loss sustained for prior taxable years.
Sec. 12. Section 43-1121, Arizona Revised Statutes, is amended to read:
43-1121. Additions to Arizona gross income; corporations
In computing Arizona taxable income for a corporation, the following amounts shall be added to Arizona gross income:
1. The amounts computed pursuant to section 43‑1021, paragraphs 3 through 9, 12, 25, 26, 31, 32 and 33 8, 11, 25 AND 30 THROUGH 36.
2. The amount of dividend income received from corporations and allowed as a deduction pursuant to sections 243, 244 and 245 of the internal revenue code.
3. Taxes which are based on income paid to states, local governments or foreign governments and which were deducted in computing federal taxable income.
4. Expenses and interest relating to tax‑exempt income on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the tax imposed by this title. Financial institutions, as defined in section 6‑101, shall be governed by section 43‑961, paragraph 2.
5. Commissions, rentals and other amounts paid or accrued to a domestic international sales corporation controlled by the payor corporation if the domestic international sales corporation is not required to report its taxable income to this state because its income is not derived from or attributable to sources within this state. If the domestic international sales corporation is subject to article 4 of this chapter, the department shall prescribe by rule the method of determining the portion of the commissions, rentals and other amounts which are paid or accrued to the controlled domestic international sales corporation and which shall be deducted by the payor. For the purposes of this paragraph, "control" means direct or indirect ownership or control of fifty per cent or more of the voting stock of the domestic international sales corporation by the payor corporation.
6. Federal income tax refunds received during the taxable year to the extent they were deducted in arriving at Arizona taxable income in a previous year.
7. The amount of net operating loss taken pursuant to section 172 of the internal revenue code.
8. The amount of exploration expenses determined pursuant to section 617 of the internal revenue code to the extent that they exceed seventy‑five thousand dollars and to the extent that the election is made to defer those expenses not in excess of seventy‑five thousand dollars.
9. Amortization of costs incurred to install pollution control devices and deducted pursuant to the internal revenue code or the amount of deduction for depreciation taken pursuant to the internal revenue code on pollution control devices for which an election is made pursuant to section 43‑1129.
10. The amount of depreciation or amortization of costs of child care facilities deducted pursuant to section 167 or 188 of the internal revenue code for which an election is made to amortize pursuant to section 43‑1130.
11. Arizona state income tax refunds received, to the extent the amount of the refunds is not already included in Arizona gross income, if a tax benefit was derived by deduction of this amount in a prior year.
12. The loss of an insurance company that is exempt under section 43‑1201 to the extent that it is included in computing Arizona gross income on a consolidated return pursuant to section 43‑947.
13. The amount by which the depreciation or amortization computed under the internal revenue code with respect to property for which a credit was taken under section 43‑1169 exceeds the amount of depreciation or amortization computed pursuant to the internal revenue code on the Arizona adjusted basis of the property.
14. The amount by which the adjusted basis computed under the internal revenue code with respect to property for which a credit was claimed under section 43‑1169 and which is sold or otherwise disposed of during the taxable year exceeds the adjusted basis of the property computed under section 43‑1169.
15. The amount by which the depreciation or amortization computed under the internal revenue code with respect to property for which a credit was taken under either section 43‑1170 or 43‑1170.01 exceeds the amount of depreciation or amortization computed pursuant to the internal revenue code on the Arizona adjusted basis of the property.
16. The amount by which the adjusted basis computed under the internal revenue code with respect to property for which a credit was claimed under either section 43‑1170 or 43‑1170.01 and which is sold or otherwise disposed of during the taxable year exceeds the adjusted basis of the property computed under section 43‑1170 or 43‑1170.01, as applicable.
17. The deduction referred to in section 1341(a)(4) of the internal revenue code for restoration of a substantial amount held under a claim of right.
18. The amount by which a capital loss carryover allowable pursuant to section 1341(b)(5) of the internal revenue code exceeds the capital loss carryover allowable pursuant to section 43‑1130.01, subsection F.
19. Any amount deducted in computing Arizona taxable income as expenses for installing solar stub outs or electric vehicle recharge outlets in this state with respect to which a credit is claimed pursuant to section 43‑1176.
20. Any wage expenses deducted pursuant to the internal revenue code for which a credit is claimed under section 43‑1175 and representing net increases in qualified employment positions for employment of temporary assistance for needy families recipients.
21. Any amount of expenses that were deducted pursuant to the internal revenue code and for which a credit is claimed under section 43‑1178.
22. Any amount deducted for conveying ownership or development rights of property to an agricultural preservation district under section 48‑5702 for which a credit is claimed under section 43‑1180.
23. The amount of any deduction that is claimed in computing Arizona gross income and that represents a donation of a school site for which a credit is claimed under section 43‑1181.
24. Any amount deducted in computing Arizona taxable income as expenses for installing water conservation system plumbing stub outs in this state with respect to which a credit is claimed pursuant to section 43‑1182.
25. Any amount deducted pursuant to section 170 of the internal revenue code representing contributions to a school tuition organization for which a credit is claimed under section 43‑1183 or 43‑1184.
Sec. 13. Section 43-1122, Arizona Revised Statutes, is amended to read:
43-1122. Subtractions from Arizona gross income; corporations
In computing Arizona taxable income for a corporation, the following amounts shall be subtracted from Arizona gross income:
1. The amounts computed pursuant to section 43‑1022, paragraphs 8 through 15, 27, 28, 30 and 31 7 THROUGH 13, 25, 26, 27, 29, 30, 36 and 37. For the purposes of this paragraph, "federal adjusted gross income" as used in section 43‑1022 means "federal taxable income".
2. The amount of Arizona capital loss carryover as defined in section 43‑1124 in an amount not to exceed one thousand dollars.
3. With respect to a financial institution as defined in section 6‑101, expenses and interest relating to tax‑exempt income disallowed pursuant to section 265 of the internal revenue code.
4. Dividends received from another corporation owned or controlled directly or indirectly by a recipient corporation. For the purposes of this paragraph, "control" means direct or indirect ownership or control of fifty per cent or more of the voting stock of the payor corporation by the recipient corporation. Dividends shall have the meaning provided in section 316 of the internal revenue code. This subtraction shall apply without regard to section 43‑961, paragraph 2 and article 4 of this chapter. A corporation that has its commercial domicile, as defined in section 43‑1131, in this state may subtract the full amount of the dividends. A corporation that does not have its commercial domicile in this state may subtract:
(a) For its taxable year beginning in 1990, an amount equal to one‑half of the dividends.
(b) For taxable years beginning in 1991 and thereafter, the full amount of the dividends.
5. Interest income received on obligations of the United States.
6. The amount of dividend income from foreign corporations.
7. The amount of net operating loss allowed by section 43‑1123.
8. The amount of any state income tax refunds received which were included as income in computing federal taxable income.
9. The amount of expense recapture included in income pursuant to section 617 of the internal revenue code for mine exploration expenses.
10. The amount of deferred exploration expenses allowed by section 43‑1127.
11. The amount of exploration expenses related to the exploration of oil, gas or geothermal resources, computed in the same manner and on the same basis as a deduction for mine exploration pursuant to section 617 of the internal revenue code. This computation is subject to the adjustments contained in section 43‑1121, paragraph 8 and paragraphs 9 and 10 of this section relating to exploration expenses.
12. The amortization of pollution control devices allowed by section 43‑1129.
13. The amount of amortization of the cost of child care facilities pursuant to section 43‑1130.
14. The amount of income from a domestic international sales corporation required to be included in the income of its shareholders pursuant to section 995 of the internal revenue code.
15. The income of an insurance company that is exempt under section 43‑1201 to the extent that it is included in computing Arizona gross income on a consolidated return pursuant to section 43‑947.
16. The amount of contributions by the taxpayer during the taxable year to medical savings accounts established on behalf of the taxpayer's employees as provided by section 43‑1028, to the extent that the contributions are not deductible under the internal revenue code.
17. The amount by which a capital loss carryover allowable pursuant to section 43‑1130.01, subsection F exceeds the capital loss carryover allowable pursuant to section 1341(b)(5) of the internal revenue code.
18. For property placed in service in the taxable years beginning before January 1, 2014, an amount equal to the depreciation allowable pursuant to section 167(a) of the internal revenue code for the taxable year computed as if the election described in section 168(k)(2)(D)(iii) of the internal revenue code had been made for each applicable class of property in the year the property was placed in service.
Sec. 14. Section 43-1127, Arizona Revised Statutes, is amended to read:
43-1127. Deferred exploration expenses
A. The amount of exploration expenses added to Arizona gross income pursuant to section 43‑1121, paragraph 8 may be subtracted on a ratable basis as the units of produced ores or minerals discovered or explored by reason of such expenditures are sold. An election made for any taxable year shall be binding for such year.
B. If such property is sold, it shall be treated in the same manner and on the same basis as property held for the production of income pursuant to section 43‑1021, paragraph 7 6 or section 43‑1022, paragraph 11 9.
Sec. 15. Retroactivity
A. Section 42-1104, Arizona Revised Statutes, as amended by this act, applies retroactively to taxable years beginning from and after December 31, 2013.
B. Section 42-2059, Arizona Revised Statutes, as amended by Laws 2005, chapter 95, section 1 and this act, applies retroactively to taxable years beginning from and after December 31, 2013.
Sec. 16. Effective date
Sections 42-2059 and 42-2075, Arizona Revised Statutes, as amended by Laws 2013, chapter 255, sections 3 and 4, respectively, and this act, are effective from and after December 31, 2014.