Arizona has spent the past decade cutting taxes, and in 2026 it has one of the simplest and lowest income tax systems in the country. Corporations pay a flat 4.9%. Individuals, including the owners of LLCs and S corporations, pay a flat 2.5%. The trade-off is a high combined sales tax, which Arizona calls the Transaction Privilege Tax (TPT).
This guide covers Arizona's business taxes, formation costs and compliance obligations for 2026.
Corporate income tax
Arizona taxes C corporations at a flat 4.9% of Arizona taxable income. The minimum tax is $50.
Key features:
- Single sales factor apportionment: Multistate corporations can elect to apportion income using sales only, which benefits companies with large Arizona payrolls and property but sales across the country.
- Combined reporting: Unitary groups may file a combined return.
- Credits: Arizona offers credits for research and development, renewable energy, qualified facilities and contributions to school tuition organizations.
- Returns: Form 120 is due on the 15th day of the fourth month after year-end.
At 4.9%, Arizona's rate is below the national median and lower than every neighbor except Colorado at 4.4% and Utah at 4.45%. Nevada has no corporate income tax.
Personal income tax and pass-through owners
Since 2023 Arizona has used a flat 2.5% income tax for all filers. It replaced a graduated system that topped out at 4.5%. For business owners, this means:
- Sole proprietors and LLC owners pay 2.5% of their Arizona taxable income.
- S corporation shareholders pay 2.5% on their pro rata share.
- Partnerships pass income through to partners in the same way.
Arizona also offers an elective pass-through entity tax. Partnerships and S corporations can choose to pay the 2.5% at the entity level, where it is deductible for federal purposes, and owners claim a credit on their personal returns.
Arizona conforms closely to federal taxable income, and it doesn't tax Social Security benefits. A modest standard deduction mirrors the federal amount.
Transaction Privilege Tax (TPT)
The TPT is Arizona's version of a sales tax, but legally it is a tax on the seller's gross receipts from taxable business activities. Sellers almost always pass it on to customers.
| Item | Rate |
|---|---|
| State TPT on retail | 5.6% |
| County rates | Typically 0.25% to 2% |
| City rates | Typically 1.5% to 4% |
| Average combined rate | About 8.54% |
Important differences from a typical sales tax:
- Broader base: TPT applies to activities such as contracting, restaurants, rentals of real property (commercial leases in many cities), utilities, transportation and amusements.
- Commercial rent: Many Arizona cities still tax commercial leases, although the state removed residential rentals from city TPT from 2025.
- License: Every business making taxable sales needs a TPT license from the Arizona Department of Revenue. The state fee is $12 per location, plus city fees.
- Remote sellers: Out-of-state sellers with more than $100,000 of Arizona sales must obtain a TPT license and collect.
Other Arizona business taxes
- Property tax: Commercial property is assessed at a higher ratio than residential property, but Arizona has gradually lowered the commercial assessment ratio. Business personal property is taxed, with a sizable exemption for smaller businesses.
- Unemployment insurance: Employers pay state unemployment tax on a low wage base of $8,000 per employee. New employers usually start at 2%.
- Withholding: Employers withhold Arizona income tax; employees choose a withholding percentage on Form A-4.
- No franchise, gross receipts or capital stock tax: Arizona keeps the list of entity-level taxes short.
Forming a business in Arizona: fees and ongoing costs
| Item | LLC | Corporation |
|---|---|---|
| Formation filing fee | $50 | $60 |
| Annual report | None | $45 |
| Publication requirement | May apply (within 60 days) | May apply |
| Statutory agent | Required | Required |
| TPT license | $12 per location plus city fees | $12 per location plus city fees |
Arizona's publication rule requires notice in a newspaper of general circulation in the county of the known place of business. The Arizona Corporation Commission now publishes notices on its website for entities in Maricopa and Pima counties, which removes the cost for many businesses.
Worked example: $500,000 of profit
| Step | Amount |
|---|---|
| Taxable income | $500,000 |
| Arizona corporate tax at 4.9% | $24,500 |
| Federal tax at 21% on $475,500 | $99,855 |
| Total income tax | $124,355 (24.9%) |
For a single LLC owner with $150,000 of Arizona taxable income, state tax is about $3,750. At $75,000 it is about $1,875. Arizona's flat rate makes the calculation easy: multiply taxable income by 2.5%.
How Arizona compares with its neighbors
| State | Corporate rate | Top personal rate | State sales tax |
|---|---|---|---|
| Arizona | 4.9% | 2.5% | 5.6% |
| California | 8.84% | 13.3% | 7.25% |
| Nevada | None (Commerce Tax) | None | 6.85% |
| Utah | 4.45% | 4.45% | 6.1% |
| New Mexico | 5.9% | 5.9% | 4.875% GRT |
| Colorado | 4.4% | 4.4% | 2.9% |
Arizona is the most common destination for businesses leaving California. A founder earning $300,000 of pass-through income would pay roughly $24,000 or more in California income tax compared with about $7,500 in Arizona. Nevada beats Arizona on income tax, but Arizona has lower formation and annual costs than Nevada's $350 a year in state list and license fees.
Choosing an entity in Arizona
At a 2.5% personal rate and 4.9% corporate rate, the state-level difference between entity types is small. The choice usually comes down to federal factors:
- LLC or sole proprietorship for simplicity, with no annual report.
- S corporation election to reduce federal self-employment tax once profit is high enough to justify payroll.
- C corporation for venture funding, QSBS eligibility or retaining profits. The 4.9% state rate keeps the combined corporate rate below 25%.
Pass-through owners should also consider the elective entity-level tax, which turns a non-deductible personal state tax into a deductible business expense for federal purposes.
Recent changes for 2025 and 2026
- Flat tax holds at 2.5%: The rate that took effect in 2023 continues for 2026.
- Residential rental TPT ended: Cities could no longer tax residential leases from January 1, 2025.
- Federal conformity: Arizona updated its conformity to the federal Internal Revenue Code, including changes to depreciation and research expensing, through its annual conformity bill.
Is Arizona a good state for business?
Advantages
- Low flat income taxes for both corporations and individuals
- No annual report for LLCs and inexpensive formation
- Elective pass-through entity tax for SALT deduction planning
- Fast-growing population in Phoenix and Tucson
Drawbacks
- High combined TPT rates and a broad tax base that includes services like contracting
- TPT is the seller's legal liability, so errors fall on the business
- Some cities tax commercial rent
- Water and heat-related operating costs
For most small businesses and growth companies, Arizona offers one of the lowest income tax burdens in the West outside the no-income-tax states.
Compliance checklist
- File Articles of Organization or Incorporation with the Arizona Corporation Commission.
- Appoint a statutory agent and handle any publication requirement.
- Register for a TPT license and withholding account with the Arizona Department of Revenue.
- Register for unemployment insurance with the Department of Economic Security if you hire.
- File monthly, quarterly or annual TPT returns depending on your liability.
- File Form 120 (C corporations), 120S (S corporations) or 165 (partnerships) each year.
Compare Arizona with neighboring states below, or estimate your taxes with the United States calculator. See also our guides to LLC taxes and sole proprietor taxes.