Small Business Tax Relief Bill Awaits Governor’s Signature

On Wednesday, a bill which revises state tax structure passed out of the Arizona House of Representatives on a bipartisan vote and is on its way to Gov. Doug Ducey’s desk. HB 2838, sponsored by Rep. Joseph Chaplik, has no fiscal impact on Arizona cities and towns.

Chaplik says the bill “protects small business from over taxation by the federal government, without impacting the state general fund.”

“Providing Arizona’s small businesses with more working capital and tax relief at this critical moment, without having a negative fiscal impact to the state, is responsible public policy,” said Chaplik.

The 2017 Federal Tax Cuts and Jobs Act (TCJA) placed a cap of $10,000 on the amount of state and local taxes (SALT) that an individual can deduct on their federal taxes. Experts say this hurts employers organized as S Corporations, partnerships and limited liability companies that pay taxes on business profits at the individual level. This has negatively impacted main street businesses by:

  • Increasing federal taxes for main street employers.
  • Putting main street employers at a disadvantage when compared with C corporations, which are not subject to the new SALT cap.
  • Putting Arizona’s main street employers at a disadvantage when compared to businesses operating in states that have already adopted SALT parity reform.

Fifteen states have already adopted SALT parity legislation since 2017, including: Connecticut, Wisconsin, Oklahoma, Oregon, Louisiana, Rhode Island, New Jersey, and Maryland. SALT parity legislation is currently advancing in North Carolina, Pennsylvania, Michigan, Illinois, Colorado, Massachusetts, Ohio, and California.

On November 9, 2020, the Department of Treasury and the IRS announced proposed regulations supporting state enacted SALT reform: “The Department of Treasury and IRS are taking the necessary steps to provide fairness for America’s small businesses. These proposed regulations will offer clarity for individual owners of pass-through entities.”

The bill was amended in the Finance Committee to ensure that the mechanics of the legislation are consistent with Arizona law, and the Senate Floor Amendment to the Finance Committee amendment was the result of successful discussions with the Executive and the Arizona Department of Revenue. The amendment clarifies how partners and shareholders can opt out of the election, and changes the retroactivity date from January 1, 2018, to January 1, 2021. This is consistent with other states that have adopted SALT parity.