REVISED

ARIZONA STATE SENATE

RESEARCH STAFF

MIKE HANS

LEGISLATIVE RESEARCH ANALYST

GOVERNMENT COMMITTEE

Telephone: (602) 926-3171

TO:                  MEMBERS OF THE SENATE

FINANCE COMMITTEE

DATE:            February 19, 2019

SUBJECT:      Strike everything amendment to S.B. 1465, relating to contributions in aid of construction

Purpose

Allows corporations to subtract the amount of any contribution in aid of construction and advance in aid of construction for water and wastewater utilities when computing gross income for the taxable year.

Background

State gross income for a corporation is the same as the corporation's federal taxable income for the taxable year. A corporation's state gross income is adjusted by certain statutory modifications, including additions and subtractions of certain expenses and income, in order to determine the corporation's state taxable income (A.R.S. §§ 43-1101; 43-1121; and 43-1122).

Currently, federal law requires any contributions in the aid of construction to be included in corporate gross income (26 U.S.C. § 118). Prior to 2017, federal law included a special rule for water and sewage disposal utilities which allowed any amount of money or other property received from any person by a regulated public utility which provides water or sewage service that was a contribution in aid of construction to be exempted from corporate gross income (P.L. 104-118
§ 1613). In 2017, the U.S. Congress passed the federal Tax Cuts and Jobs Act (TCJA), which repealed the special rule for water and sewage disposal utilities (P.L. 115-97 § 13312).

According to the Joint Legislative Budget Committee, state conformity to TCJA changes to the tax treatment of contributions to capital would result in an estimated state General Fund revenue gain of $200,000 in FY 2019 and $400,000 in FY 2020. Allowing corporations to subtract contribution in aid and advance in aid of construction for water and wastewater utilities amounts from state taxable income would result in the state not receiving the estimated revenue gains from state conformity to TCJA changes.

Provisions

1. Allows corporations, when computing Arizona gross income for the taxable year, to subtract the amount of any contribution in aid of construction and advance in aid of construction for water and wastewater utilities to the extent the amount was included in federal taxable income.

2. Retroactively effective to the taxable year beginning January 1, 2018.

Revisions

· Makes a correction to the effective date from the taxable year beginning January 1, 2019, to the taxable year beginning January 1, 2018.