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Arizona Conforms to Federal Pandemic Relief for Taxpayers

Posted on Apr. 19, 2021

Arizona’s governor has signed legislation conforming the state to changes in the federal tax code related to the COVID-19 pandemic, including tax relief for businesses and individuals. 

The bill, S.B. 1752, conforms to provisions in the Families First Coronavirus Response Act (P.L. 116-127); the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136); the Paycheck Protection Program Flexibility Act (P.L. 116-142); the 2021 Consolidated Appropriations Act (P.L. 116-260); and the American Rescue Plan Act of 2021 (P.L. 117-2).

The legislation’s April 14 approval by Gov. Doug Ducey (R) means the state now conforms to tax relief approved by Congress to counter the impact of the pandemic, including the exclusion of forgiven PPP loans from state taxable income and the deduction of eligible expenses that were paid for with forgiven loans.

The conformity also means that for state individual income tax purposes, Arizona will allow net operating losses from 2018, 2019, and 2020 to be carried back five years and permit NOLs to offset 100 percent of taxable income for tax years beginning before January 1, 2021. And the state will now conform to the suspension of the $250,000 single-filer/$500,000 joint-filer excess business loss limitation for tax years beginning before January 1, 2021.

Under the bill, Arizonans also won’t owe state tax on the first $10,200 of their 2020 unemployment pay, among other provisions. All told, the conformity approved by lawmakers and Ducey will cost the state some $624.8 million, according to legislative staff. 

“Arizona taxpayers and small businesses were able to weather the unprecedented economic hardship last year during the pandemic in part [due] to action taken by our federal partners,” Ducey said in a press release. “By conforming our tax laws to the federal code in a bipartisan manner, we’re delivering millions in state income tax relief to our workers and small businesses who’ve played an essential role in getting our economy back on track and fueling our recovery.” 

The legislation passed unanimously with support from Republicans and Democrats in both houses. Sen. Kirsten Engel (D) tweeted that the “$625 M. hit to the general fund will ensure UI recipients will not be taxed on their benefits and nor will recipients of PPP loans.” She said the bill is "the right thing to do — will help working families & businesses!”

The legislation comes after the Treasury Department announced earlier in April that states can adopt federal conformity without running afoul of the provision in the American Rescue Plan Act that forbids federal aid from being used by states to offset state tax cuts. Sen. J.D. Mesnard (R), chair of the Senate Finance Committee, told Tax Notes April 15 that the Legislature believes that federal guidance makes clear the conformity package won’t put the state at odds with the act’s tax cut restriction.

Notably, other legislation proposed in Arizona this session included elements of conformity, but S.B. 1752 superseded those efforts. The conformity language was amended into the bill April 13, completely replacing the legislation’s original text.

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