How to Complete and File Arizona Form 165: K-1s, PTE Election, Deadlines

Arizona Form 165 is the state partnership income tax return filed with the Arizona Department of Revenue, and for calendar-year partnerships it is due March 15 and must be filed electronically. The partnership itself usually owes no Arizona income tax because partnerships are taxed as pass-through entities, but the return still has to be filed each year, and each partner receives an Arizona Schedule K-1 showing their share of income and adjustments.¹

Who Has to File

Every partnership doing business in Arizona or earning income from Arizona sources must file Form 165. That covers domestic partnerships, syndicates, joint ventures, and pools, plus foreign partnerships with Arizona-source activity such as rental income or localized services.² An LLC classified as a partnership for federal income tax purposes files Form 165 too.³

A headquarters outside Arizona does not get a partnership off the hook; the state looks at where economic activity happens. Two narrow exceptions exist. A partnership with no Arizona income, deductions, or credits for the year does not have to file, and an out-of-state partnership whose only Arizona activity is disaster-recovery work during a declared disaster period is also exempt.⁴

What to Gather Before You Start

Form 165 draws directly from the federal partnership return, so finish federal Form 1065 first and keep all supporting federal schedules within reach. Arizona no longer requires the federal 1065 to be submitted with the state return, but the Department of Revenue can request it at any time.¹

You will also need:

The partnership’s Federal Employer Identification Number (FEIN).
Each partner’s full legal name, current mailing address, and either Social Security number (individuals) or EIN (entity partners).
Documentation for any Arizona adjustments, such as statements showing interest on out-of-state municipal bonds or on U.S. government obligations.
If the partnership operates in more than one state, gross receipts, property values, and payroll figures for the Arizona apportionment schedule.

Completing the Form

The current Form 165 and its instructions are posted on the Arizona Department of Revenue website.⁵ Enter the entity’s name, address, FEIN, and the taxable year at the top. The body of the form carries the partnership’s total ordinary income from the federal return, then adjusts it using two Arizona-specific schedules.

Schedule A: Additions

Schedule A increases the federal figure for items Arizona taxes but the federal government does not. The most common addition is interest on bonds issued by other states or their political subdivisions, which is tax-free federally but taxable in Arizona.⁶ Other additions include depreciation adjustments for property on which an Arizona tax credit was claimed and any credit-related expense add-backs. A separate line captures total federal depreciation, which feeds the depreciation reconciliation.⁷

Schedule B: Subtractions

Schedule B reduces the figure for items Arizona excludes. The most frequent subtraction is interest on U.S. government obligations such as Treasury bonds and savings bonds, which states cannot tax under federal law.⁸ Also subtracted are the excess of a partner’s income share under Arizona rules over the federal figure, and exploration expenses deferred from earlier years.⁷

K-1s for Each Partner

Prepare an Arizona Schedule K-1 for every partner showing that partner’s distributive share of income, adjustments, and credits after the Arizona modifications. The K-1 totals across all partners should tie back to the amounts on the main Form 165.⁹

For any partner who is not an Arizona resident, also complete Schedule K-1(NR). This version splits the partner’s share into an Arizona-source column so the nonresident reports and pays Arizona tax only on income earned inside the state. Overstating Arizona-source income makes the nonresident overpay; understating it will surface during a reconciliation at the department.

Arizona accepts, but does not require, a composite return for qualifying nonresident individual partners. The composite is filed on Form 140NR on behalf of those partners, and filing one does not relieve the partnership from also filing Form 165.¹⁰

The Pass-Through Entity Election

Since tax year 2022, an Arizona partnership can elect to pay state income tax at the entity level rather than passing the full obligation to its partners. The rate on the Pass-Through Entity (PTE) election is 2.5 percent of taxable income computed on an Arizona basis.¹¹

To elect, check “Yes” on Line A of Form 165. The election must be made by the due date (including any extended due date) of the Arizona return.¹² Before checking that box, the partnership must notify every eligible partner (individuals, estates, and trusts) of its intent to elect and give each partner at least 60 days to opt out. A partner who does not respond is included by default.

The main draw of the election is the federal SALT deduction workaround: a partnership paying state tax at the entity level deducts that payment from the income passed through, which gets around the individual-level cap on state and local tax deductions. Each eligible partner then claims a credit under A.R.S. § 43-1077 for their share of the entity-level tax paid.¹¹ If the partnership elects, any entity-level tax it owes is due by the original return deadline, not the extended one.

Filing, Signing, and Where to Send a Paper Return

Electronic filing has been mandatory for Arizona partnership returns since tax year 2020.¹ File through an approved e-file provider or tax software that supports Form 165. Paper filing is available only in limited situations, such as an amended return when electronic filing is not available.

If you do need to mail a paper or amended return, send it to:

Arizona Department of Revenue
PO Box 52153
Phoenix, AZ 85072-2153¹³

One partner must sign. Arizona follows the federal rule: any partner’s signature is sufficient and is treated as prima facie evidence that the signer was authorized to sign for the partnership.⁴ The return has to include a written declaration that it is made under penalty of perjury. An unsigned return is treated as incomplete and can trigger a penalty.¹⁴

Deadline and Extensions

Form 165 is due by the fifteenth day of the third month after the close of the taxable year. For calendar-year partnerships that is March 15.⁵ Fiscal-year filers apply the same rule to their own year-end; a partnership with a June 30 fiscal year, for instance, files by September 15.

For more time, file Arizona Form 120/165EXT to request an automatic six-month extension. The department will also accept a valid federal extension covering the same period.¹⁵ An extension to file is not an extension to pay.

Penalties

Arizona’s general late-filing penalty under A.R.S. § 42-1125 is 4.5 percent of the tax due for each month or partial month the return is late, capped at 25 percent of the tax owed. For a standard pass-through return with no PTE election, the percentage calculation produces zero because no tax is due, but other penalties still apply.¹⁶

An unsigned or incomplete return triggers a separate flat penalty. The Department of Revenue has ruled that an unsigned partnership return counts as incomplete, exposing the partnership to a penalty for failing to show required information.¹⁴ If the department demands a return and the partnership still refuses to file, the penalty rises to 25 percent of the tax due or $100, whichever is greater, on top of any monthly penalties already accrued.¹⁶ Any of these penalties can be waived if the partnership shows reasonable cause.

Amending the Return

If the partnership finds an error, or the IRS adjusts the federal return, file an amended Arizona Form 165. Check the “Amended” box in the upper right corner of page 1 and attach schedules explaining the changes. When the amendment stems from a federal change, file the amended Arizona return within 90 days of the IRS’s final determination.²

One boundary: partnerships subject to the federal Bipartisan Budget Act (BBA) centralized audit regime do not use an amended Form 165 to report federal audit changes. Those partnerships file Arizona Form 165PA instead. Only partnerships that elected out of the BBA regime for the relevant tax year use the amended Form 165 process.

1
Arizona Department of Revenue. Partnership Forms
2
Arizona Department of Revenue. Arizona Form 165 Instructions
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Arizona Department of Revenue. Arizona Form 165 Instructions 2021
4
Arizona Legislature. Arizona Code 43-306 – Partnership Returns
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Arizona Department of Revenue. Arizona Partnership Income Tax Return
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Arizona Legislature. Arizona Code 43-1021 – Addition to Arizona Gross Income
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Arizona Department of Revenue. Arizona Form 165 – Arizona Partnership Income Tax Return 2025
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Arizona Legislature. Arizona Code 43-1022 – Subtractions From Arizona Gross Income
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Arizona Department of Revenue. Arizona Form 165 Schedule K-1(NR) Instructions
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Arizona Department of Revenue. Arizona Individual Income Tax Ruling ITR 16-2
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Arizona Department of Revenue. Publication 713 – The Arizona Pass-Through Entity Election
12
Arizona Department of Revenue. Arizona Form 165 Instructions 2025
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Arizona Department of Revenue. Mailing Addresses
14
Arizona Department of Revenue. Arizona Partnership Tax Ruling PTR 93-3
15
Arizona Department of Revenue. Arizona Form 120/165EXT – Application for Automatic Extension of Time to File
16
Arizona Legislature. Arizona Code Title 42 – Taxation 42-1125 – Civil Penalties