How to Complete and File Arizona Form 120S: PTE Election and Deadlines

Arizona Form 120S is the annual S corporation income tax return filed with the Arizona Department of Revenue (ADOR). Calendar-year filers must submit it by March 15, and Arizona requires electronic filing for tax years beginning after December 31, 2020. Most S corporations owe no entity-level Arizona tax on this return because income passes through to shareholders, but the filing itself is mandatory so the state can match what each shareholder reports.

Who Has to File

Any corporation taxed as an S corporation under Subchapter S of the Internal Revenue Code must file Form 120S if it does business in Arizona or receives income from Arizona sources.¹ Doing business generally means having employees, property, or sales in the state. A foreign S corporation with Arizona-source income has a filing obligation even without a physical location here.

If the S corporation paid federal corporate-level tax on built-in gains, excess net passive income, or certain capital gains reported on Form 1120-S, Arizona taxes the same income. The Arizona tax on that income is the greater of $50 or 4.9% of the taxable amount.² S corporations without any of those federal-level taxes still file, but typically owe only the $50 minimum, or nothing beyond what flows through to shareholders.

What to Gather Before You Start

Completed federal Form 1120-S. The federal Schedule K totals are the starting figures for the Arizona return.
Arizona employer identification number, which is separate from your federal EIN. If you don’t have one, register with ADOR before filing.
Shareholder details: full legal name, current address, taxpayer identification number, ownership percentage, and residency status for every shareholder.
Records for any Arizona additions or subtractions, such as out-of-state municipal bond interest or depreciation timing differences.
Arizona sales figures for the apportionment ratio if the S corporation operates in multiple states.
Arizona Form 300 and the applicable credit forms if you plan to claim any Arizona tax credits.

Download the current-year form and instructions from ADOR before you begin so you know you have the right version.³

Filling Out the Return

The top of Form 120S asks for the corporation’s legal name, federal EIN, Arizona ID number, address, date of incorporation, and taxable year. Check the appropriate box for first return, final return, amended return, or short-period return. Designate a tax matters shareholder here; this is the person ADOR will contact with questions.

Part 1: Entity-Level Tax

Line 1 begins with the net total of pro rata share items from federal Form 1120-S, Schedule K, combining nonseparately and separately stated income and deductions.¹ Lines 2 and 3 pick up income taxed at the federal corporate level: excess net passive income on Line 2, capital gains or built-in gains on Line 3. If neither applies, enter zero on both.

Multistate S corporations handle apportionment on Lines 5 through 10. Subtract nonapportionable income allocable to Arizona on Line 5, compute the apportionment ratio on Schedule A, and apply it to the remaining income on Line 7. The Arizona taxable amount lands on Line 11. A corporation operating entirely in Arizona skips these steps and carries the Line 4 total straight to Line 11.

Line 12 is the Arizona tax: the greater of $50 or 4.9% of Line 11.² If the S corporation has no income subject to entity-level federal tax, Line 11 is zero and the tax defaults to $50. Lines 13 through 19 account for credit recapture, nonrefundable credits from Form 300, and any pass-through entity tax from Part 2.

Required Schedules

Every filer completes Schedule B, which lists each shareholder’s name, TIN, address, ownership percentage, and share of Arizona-source income. Multistate corporations also complete Schedule A for apportionment, or Schedule ACA if they are an air carrier. Schedule C is required for the pass-through entity election. Schedule D applies when additional disclosures are needed.

Arizona Additions and Subtractions

Arizona does not accept every federal figure as-is. Under A.R.S. § 43-1121, certain amounts must be added back to Arizona gross income.⁴ The most common addition for S corporations is interest income from obligations of other states or their subdivisions: bonds issued by California, New York, or any non-Arizona government that are tax-exempt federally but taxable in Arizona.

Under A.R.S. § 43-1122, certain subtractions reduce Arizona gross income.⁵ Interest on U.S. government obligations such as Treasury bonds is subtracted here. Depreciation timing differences between federal and Arizona rules may also generate a subtraction. Work each line of the additions and subtractions schedules against your federal figures. Skipping an applicable adjustment is one of the most common reasons ADOR sends a notice after filing.

Pass-Through Entity Election

Arizona lets S corporations elect to pay income tax at the entity level on behalf of shareholders. This is the pass-through entity (PTE) election, and it exists primarily so shareholders can claim a state tax deduction on their federal return that would otherwise be limited by the $10,000 state and local tax cap. The PTE income tax rate is 2.5% of the taxable income attributable to the entity’s shareholders.⁶

The election applies to income attributable to resident shareholders and to Arizona-source income attributable to nonresident shareholders. Individual shareholders may opt out. When a shareholder opts out, that shareholder’s share is not included in the entity-level PTE calculation, and the shareholder reports and pays on their personal Arizona return as usual.

Report the calculation on Schedule C of Form 120S; the resulting tax appears in Part 2. Shareholders who participated receive a credit on their individual Arizona return for their share of the PTE tax paid, which prevents double taxation. The credit flows through the Arizona Schedule K-1 the S corporation issues to each shareholder.

Nonresident Shareholders

If the S corporation has nonresident shareholders, it must issue each one an Arizona Form 120S Schedule K-1(NR). The schedule breaks out the shareholder’s share of Arizona-source income in a separate column, which the nonresident uses to complete Arizona Form 140NR.⁷ Nonresident trusts or estates use Arizona Form 141AZ instead.

A few items commonly cause errors on the K-1(NR). Passive activity losses from Arizona sources are only allowed to the extent they were allowed on the shareholder’s federal return; a loss limited federally is also limited for Arizona. The IRC § 179 expense deduction is limited to the Arizona portion of the amount claimed on federal Schedule E. Capital gain subtraction lines (14 through 18) need careful attention because qualified small business gains, legal tender exchanges, and net long-term gains each have distinct Arizona treatment.

Composite Returns

Instead of having each nonresident shareholder file individually, the S corporation can file a composite return on their behalf using Form 140NR with the “Composite Return” box checked on page 1. The composite return covers qualifying nonresident shareholders who have no other Arizona-source income and who agree to be included. This simplifies compliance when the S corporation has many out-of-state owners.

Estimated Tax Payments

Two situations require quarterly estimated payments. An S corporation subject to entity-level federal tax on built-in gains or excess passive income that expects its Arizona liability to reach at least $1,000 must pay estimated tax. Separately, an S corporation that made the PTE election and had taxable income over $150,000 in the prior year must also make estimated payments.⁸

For calendar-year PTE filers, the quarterly due dates are April 15, June 15, September 15, and January 15 of the following year. If a due date falls on a weekend or legal holiday, payment is timely on the next business day. Pay electronically at AZTaxes.gov by selecting “Make a Corporation/S-Corporation/Partnership Payment” and choosing the estimated payment option.

Deadline and Extension

Form 120S is due on or before the 15th day of the third month following the close of the taxable year, which is March 15 for calendar-year corporations.³ If you need more time, file Arizona Form 120EXT by the original due date to request a six-month extension, pushing the deadline to September 15 for calendar-year filers.⁹ ADOR also accepts a valid federal extension for the same period.

The extension moves the filing deadline, not the payment deadline. If the S corporation owes tax, at least 90% of the liability must be paid by the original due date. Falling short triggers an extension underpayment penalty of 0.5% per month on the unpaid amount.⁹ Submit any estimated payment with Form 120EXT so ADOR applies it correctly.

Penalties for Filing or Paying Late

Arizona imposes separate penalties for filing late and paying late, and they stack:

Late filing: 4.5% of the tax due for each month or partial month the return is late, up to 25% of the tax due.¹⁰
Late payment: 0.5% of the unpaid tax for each month or partial month the payment is late, up to 10%.¹¹
Combined cap: when both penalties apply to the same period, the total cannot exceed 25%.¹⁰

The late-filing penalty is by far the bigger risk. A corporation that files six months late but paid on time faces no payment penalty and could still owe up to 25% of its tax in filing penalties alone. Either penalty can be waived if you demonstrate reasonable cause and the failure was not due to willful neglect, but ADOR expects a written explanation.

How to Submit the Return

Arizona requires electronic filing for corporate income tax returns, including S corporation returns, for taxable years beginning after December 31, 2020. File through an approved e-file provider or the AZTaxes.gov portal. If the S corporation owes $500 or more in tax for the year, payment must also be made electronically via electronic funds transfer.¹²

If you file a paper return, such as an amended return that cannot be e-filed, mail it to:

Arizona Department of Revenue
P.O. Box 29079
Phoenix, AZ 85038¹³

Include any payment by check made payable to the Arizona Department of Revenue. Electronic payments can be submitted at AZTaxes.gov by selecting “Make a Corporation/S-Corporation/Partnership Payment.”¹⁴

Records to Keep After Filing

Arizona’s statute of limitations for income tax is four years from the due date of the return or the date it was filed, whichever is later.¹⁵ Keep copies of the filed Form 120S, all schedules and K-1s, the federal Form 1120-S, workpapers supporting your additions and subtractions, and your filing confirmation for at least that long. The same four-year window applies if you filed a claim for a credit or refund. Holding records a year or two beyond the minimum is cheap insurance against a notice that arrives close to the deadline.

1
Arizona Department of Revenue. Arizona Form 2025 Arizona S Corporation Income Tax Return 120S
2
Arizona Department of Revenue. Form 120S Instructions
3
Arizona Department of Revenue. Arizona S Corporation Income Tax Return
4
Arizona Legislature. Arizona Code 43-1121 – Additions to Arizona Gross Income Corporations
5
Arizona Legislature. Arizona Code 43-1122 – Subtractions From Arizona Gross Income Corporations
6
Arizona Department of Revenue. The Arizona Pass-Through Entity Election (Pub 713)
7
Arizona Department of Revenue. Nonresident Shareholder’s Share of Income and Deductions (120S Schedule K-1(NR))
8
Arizona Department of Revenue. Corporate and Partnership Estimated Tax Payment
9
Arizona Department of Revenue. Making Payments and Filing Extensions
10
Arizona Legislature. Arizona Code 42-1125 – Civil Penalties Definition
11
Arizona Department of Revenue. Filing Notices of Penalties and Interest
12
Arizona Department of Revenue. Corporate Income Tax Highlights
13
Arizona Department of Revenue. Mailing Addresses
14
Arizona Department of Revenue. Make a Payment Online
15
Arizona Department of Revenue. Record Keeping