Arizona Tax Conformity Explained: Additions, Subtractions, and Depreciation

Arizona tax conformity is the state’s practice of tying its income tax calculations to the federal Internal Revenue Code as it existed on a specific date chosen by the legislature, rather than accepting federal changes automatically. Under current law, Arizona conforms to the IRC as of January 1, 2025.¹ Anything Congress has enacted since that date does not apply to your Arizona return until lawmakers vote to move the date forward. Because Arizona taxes individual income at a flat 2.5% rate and starts every return with your federal adjusted gross income, which federal provisions the state recognizes in a given year directly shapes what you owe.²

How Static Conformity Works

States handle federal conformity in one of two ways. Some adopt the IRC on a rolling basis, so federal changes take effect at the state level automatically. Arizona takes the other route, called static conformity: it locks in the IRC as of a date the legislature approves and ignores anything Congress passes afterward.¹

The upside is control. Lawmakers review each batch of federal changes and decide whether the revenue impact works for Arizona before accepting them. The downside is a built-in delay. Until the legislature votes to advance the conformity date, new federal credits, deductions, and income definitions simply don’t exist for Arizona purposes. During that gap, you may be juggling two sets of rules for the same tax year.

The Annual Update and What Happens When It Stalls

Each session, the legislature introduces a bill that advances the IRC reference date in A.R.S. § 43-105. Both individual and corporate returns depend on federal definitions. Individual tax starts with federal AGI, corporate tax starts with federal taxable income, and any drift between the two codes ripples through every return filed in the state.³

The update doesn’t always go smoothly. During the 2026 session, HB 2785 was vetoed by the governor, leaving conformity stuck at January 1, 2025. SB 1106 was then introduced to move the date to January 1, 2026, which would pull in federal changes enacted during 2025, including provisions of the One Big Beautiful Bill Act.⁴

If you’re filing during a period of uncertain conformity, prepare your Arizona return based on the last confirmed IRC date and watch for Department of Revenue guidance. The department maintains a conformity history page tracking the effective IRC date for each tax year.⁵ If lawmakers later update the date retroactively, you may need to file an amended return to claim newly available benefits or adjust previously reported income. Tax software may not handle a stalled conformity date cleanly, and manual adjustments raise the risk of errors.

What Conformity Changes on Your Individual Return

Every Arizona individual return begins with federal adjusted gross income pulled directly from your federal return.⁶ From there, you apply Arizona-specific additions and subtractions to reach Arizona adjusted gross income, subtract allowable deductions, and apply the 2.5% flat rate.² Those additions and subtractions are where conformity does its work.

Additions

Under A.R.S. § 43-1021, certain income items that escape federal tax or get favorable federal treatment must be added back on your Arizona return. The most common addition is interest earned on bonds issued by other states or their political subdivisions. The federal government exempts that interest, but Arizona extends the exemption only to bonds it issues itself. Out-of-state municipal bond interest goes back on your Arizona return.⁷

Subtractions

A.R.S. § 43-1022 lists subtractions that pull your Arizona income below your federal starting point. The headline item for retirees: any Social Security or railroad retirement benefits included in your federal AGI under IRC Section 86 can be subtracted in full. Arizona does not tax them. Contributions to a 529 college savings plan qualify for a subtraction of up to $2,000 per beneficiary for single filers or $4,000 per beneficiary for joint filers, and distributions that end up in your federal AGI get a separate subtraction.⁸ The full list in § 43-1022 is extensive and includes certain pension income and specific exemptions tied to military pay and Native American reservation income. Reading the statute against your federal return is the single best way to avoid overpaying.

What Conformity Changes for Businesses

Corporate filers start with federal taxable income and then apply additions under A.R.S. § 43-1121 and subtractions under A.R.S. § 43-1122. The sharpest divergence from federal rules involves how businesses recover the cost of equipment and property.

Bonus Depreciation

Arizona has long decoupled from federal bonus depreciation. Where the federal code allows an immediate deduction for a large percentage of an asset’s cost in the year it’s placed in service, Arizona requires a different calculation. Corporate filers add back the depreciation claimed under IRC Section 167(a) on their federal return, then subtract the depreciation they would have claimed had they opted out of bonus depreciation under IRC Section 168(k).⁹ The same add-back and substitution applies on the individual side under §§ 43-1021 and 43-1022.⁵

Businesses still recover the full cost eventually; Arizona just spreads it over the asset’s useful life rather than allowing it all in year one. The timing difference can create meaningful cash-flow effects for capital-intensive companies, and the compliance headache is tracking two parallel depreciation schedules for every qualifying asset. When you later dispose of an asset, your gain or loss will differ between the two returns, because Arizona allows a subtraction for previously added-back depreciation on property that’s sold.⁹

Section 179 Expensing

Arizona has historically imposed its own limits on Section 179 expensing. Federally, Section 179 allows businesses to immediately expense up to $2,560,000 of qualifying equipment purchases in 2026, with a phase-out beginning at $4,090,000 in total purchases. Whether Arizona recognizes those federal limits depends on the IRC date adopted by the legislature. When conformity lags, businesses may need to add back Section 179 deductions that exceed the limits Arizona recognizes under A.R.S. § 43-1121.¹⁰

What’s Waiting on the Next Update

The One Big Beautiful Bill Act, signed on July 4, 2025, made sweeping federal changes that Arizona will need to address through conformity. The act made the 2017 Tax Cuts and Jobs Act individual provisions permanent, including the lower rates, the larger standard deduction, and the more generous child tax credit. Those provisions would otherwise have expired at the end of 2025.

The act also restored 100% first-year bonus depreciation for qualified property acquired after January 19, 2025, making it permanent rather than continuing the phasedown that had cut it to 60% for 2024 and 40% for 2025.¹¹ Because Arizona decouples from bonus depreciation, the return to 100% federal expensing widens the gap between federal and Arizona deductions, which means larger add-backs and more tracking for every qualifying asset. The federal qualified business income deduction under IRC Section 199A was also made permanent and expanded with higher phase-in thresholds.

Whether any of this applies to your Arizona return turns entirely on whether the legislature moves the conformity date forward. Until it does, your federal return reflects current law and your Arizona return does not.

1
Arizona Legislature. Arizona Code 43-105 – Internal Revenue Code Definition and Application
2
Arizona Department of Revenue. Individual Income Tax Highlights
3
Arizona Legislature. HB 2785 – 572R – House Bill Summary
4
Arizona Legislature. SB 1106 – 572R – Senate Fact Sheet
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Arizona Department of Revenue. Conformity to IRC
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Arizona Department of Revenue. Individual Income Tax Information
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Arizona Legislature. Arizona Code 43-1021 – Addition to Arizona Gross Income
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Arizona Legislature. Arizona Code 43-1022 – Subtractions From Arizona Gross Income
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Arizona Legislature. Arizona Code 43-1122 – Subtractions From Arizona Gross Income for Corporations
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Arizona Legislature. Arizona Code 43-1121 – Additions to Arizona Gross Income for Corporations
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Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill