Arizona tax conformity is the rule that ties Arizona’s income tax to a fixed version of the federal Internal Revenue Code chosen by the legislature. Under current law, Arizona conforms to the IRC as it existed on January 1, 2025, and ignores any federal changes enacted after that date until lawmakers vote to move the cutoff forward.1Arizona Legislature. Arizona Code 43-105 – Internal Revenue Code Definition and Application Because the state taxes individual income at a flat 2.5%, the conformity date directly shapes what you owe: your Arizona return starts with numbers from your federal return, then adjusts them using Arizona-specific additions and subtractions based on the version of the IRC Arizona currently recognizes.2Arizona Department of Revenue. Individual Income Tax Highlights
Static Conformity vs. Rolling Conformity
States handle federal tax conformity in two basic ways. Some adopt the Internal Revenue Code on a rolling basis, so every federal change takes effect automatically at the state level. Arizona takes the other route. It locks in the IRC as it existed on a date the legislature approves, including provisions that took effect during the prior year with their retroactive effective dates, and disregards anything Congress enacts after that cutoff.1Arizona Legislature. Arizona Code 43-105 – Internal Revenue Code Definition and Application
The upside is control. Lawmakers can review each batch of federal changes and decide whether the revenue impact makes sense for Arizona before accepting them. The downside is a built-in delay. Until the legislature votes to update the conformity date, new federal credits, deductions, and income definitions simply don’t exist for Arizona purposes. That gap can leave taxpayers juggling two different sets of rules for the same tax year.
The Annual Update to the Conformity Date
Each year, the legislature introduces a conformity bill that advances the IRC reference date in A.R.S. § 43-105. The update is necessary because both individual and corporate returns depend on federal definitions. Individual income tax starts with federal adjusted gross income, and corporate income tax starts with federal taxable income, so any drift between the federal and state codes ripples through every return filed in the state.3Arizona Legislature. HB 2785 – 572R – House Bill Summary
The update doesn’t always go smoothly. During the 2026 legislative session, HB 2785 was vetoed by the governor, leaving conformity stuck at the January 1, 2025 date. SB 1106 was subsequently introduced to move the reference date to January 1, 2026, which would incorporate federal changes enacted during 2025, including significant provisions in the One Big Beautiful Bill Act.4Arizona Legislature. SB 1106 – 572R – Senate Fact Sheet When conformity legislation stalls, the Arizona Department of Revenue typically publishes guidance explaining how to handle the interim period.5Arizona Department of Revenue. Conformity to IRC
How Conformity Changes Your Individual Return
Every Arizona individual return begins with federal adjusted gross income pulled directly from your federal return.6Arizona Department of Revenue. Individual Income Tax Information From there, you apply additions and subtractions under Arizona law to reach Arizona adjusted gross income, subtract any allowable deductions to get to Arizona taxable income, and multiply by the flat 2.5% rate for the 2025 and 2026 tax years.2Arizona Department of Revenue. Individual Income Tax Highlights
The additions and subtractions are where Arizona’s tax picture diverges most from the federal one. Missing a required addition means underreporting income. Missing an available subtraction means overpaying.
What You Add Back
Under A.R.S. § 43-1021, certain items that escape federal tax or get favorable federal treatment must be added back for Arizona purposes. The most common addition for individual filers is interest earned on bonds issued by other states or their political subdivisions. The federal government exempts that interest from tax, but Arizona only extends the exemption to bonds it issues itself. If you hold municipal bonds from another state, that interest goes back on your Arizona return.7Arizona Legislature. Arizona Code 43-1021 – Addition to Arizona Gross Income
What You Subtract
A.R.S. § 43-1022 lists the subtractions that reduce your Arizona income below your federal starting point. These are often the reason your state tax bill is noticeably lower than your federal liability for the same year.8Arizona Legislature. Arizona Code 43-1022 – Subtractions From Arizona Gross Income
- Social Security and railroad retirement benefits included in your federal AGI under IRC Section 86 can be subtracted in full. Arizona does not tax these benefits.
- Contributions to any state’s 529 college savings plan qualify for a subtraction of up to $2,000 per beneficiary for single filers, or $4,000 per beneficiary for married couples filing jointly, covering contributions not already deducted on your federal return.
- A 529 distribution that ended up in your federal AGI, for example because it went to a nonqualified expense, gets its own separate subtraction.
The full list in § 43-1022 is extensive and also covers certain pension income, military pay, and Native American reservation income. Reviewing the statute against your federal return is the single best way to make sure you’re not leaving money on the table.
Where Businesses Feel Conformity Most: Depreciation
Corporate filers start with federal taxable income rather than federal AGI, then apply their own additions under A.R.S. § 43-1121 and subtractions under A.R.S. § 43-1122. The biggest area of divergence 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 businesses to immediately deduct 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 and then subtract the depreciation they would have claimed if they had opted out of bonus depreciation under IRC Section 168(k).9Arizona Legislature. Arizona Code 43-1122 – Subtractions From Arizona Gross Income for Corporations The same add-back and substitution mechanism applies on the individual side under §§ 43-1021 and 43-1022.5Arizona Department of Revenue. Conformity to IRC
Arizona spreads the cost recovery over the asset’s useful life rather than allowing it all in year one. Businesses still get the full deduction eventually, but the timing difference can create a meaningful cash-flow impact, especially for capital-intensive companies. Tracking two parallel depreciation schedules for every qualifying asset is where most of the compliance headaches live. Disposition matters too: when you sell an asset, Arizona allows a subtraction for previously added-back depreciation, so the gain or loss on the Arizona return won’t match the federal figure.9Arizona Legislature. Arizona Code 43-1122 – Subtractions From Arizona Gross Income for Corporations
Section 179 Expensing
Arizona’s conformity to federal Section 179 limits depends on the IRC date adopted by the legislature. When conformity lags behind a federal change to the Section 179 cap, businesses may need to add back deductions that exceed Arizona’s recognized limits under A.R.S. § 43-1121.10Arizona Legislature. Arizona Code 43-1121 – Additions to Arizona Gross Income for Corporations The practical lesson for any business operating in Arizona: your federal depreciation schedule and your Arizona depreciation schedule are probably not the same.
Federal Changes Waiting on Arizona
The One Big Beautiful Bill Act, signed into law on July 4, 2025, made sweeping changes to the federal tax code that Arizona will need to address through its conformity process. The act made the 2017 Tax Cuts and Jobs Act individual provisions permanent, including the lower income tax rates, the larger standard deduction, and the more generous child tax credit. Without that legislation, those provisions would have expired at the end of 2025 and federal rates and brackets would have reverted to pre-2018 levels.
The act also restored 100% first-year bonus depreciation for qualified property acquired after January 19, 2025, making the deduction permanent rather than continuing the phasedown that had reduced it to 60% for 2024 and 40% for 2025.11Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill For Arizona, this matters enormously. Because the state decouples from bonus depreciation, the return to 100% federal expensing widens the gap between what businesses deduct federally and what they can claim on their Arizona returns, producing larger add-back amounts and more complex 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 Arizona recognizes any of these changes depends entirely on whether the legislature moves the conformity date forward. If conformity stays at January 1, 2025, none of the OBBBA provisions apply to Arizona returns until lawmakers act.
Filing When Conformity Is Uncertain
A delayed conformity update creates real problems at filing time. Your federal return reflects current law, but your state return must be calculated under whatever IRC version Arizona has actually adopted. Tax preparation software may not handle the mismatch cleanly, and manual adjustments raise the risk of errors.
The 2026 session shows how this plays out. After HB 2785 was vetoed, the conformity date remained at January 1, 2025, and major 2025 federal changes, including the One Big Beautiful Bill Act, were not yet recognized for Arizona purposes.3Arizona Legislature. HB 2785 – 572R – House Bill Summary SB 1106 was introduced to close that gap by updating conformity to January 1, 2026.4Arizona Legislature. SB 1106 – 572R – Senate Fact Sheet
If you’re filing during a period of uncertain conformity, prepare your Arizona return based on the last confirmed conformity date and watch for Department of Revenue guidance. The department maintains a conformity history page that tracks the effective IRC date for each tax year.5Arizona Department of Revenue. Conformity to IRC If the legislature later updates the date retroactively, you may need to file an amended return to claim newly available benefits or adjust previously reported income.