2025 Business Taxes and Federal Conformity

Each year the Arizona Legislature engages in a process whereby it conforms the state’s tax statutes with the federal changes. Typically, these changes have a minimal impact on the Arizona budget. This year is significantly different due to passage of the Big Beautiful Bill in July 2025.

Businesses rely on Arizona conforming with federal tax changes to be able to keep one set of books and not file significantly different tax returns. However, the Arizona Legislature and Governor do not see eye to eye this year on conformity, which is having an impact on business and individual filings.

At issue are the following deductions and expenses:

Additional $6,000 Deduction for Seniors

Creates an additional standard deduction for taxpayers age 65 and over from 2025 through 2028. The deduction is equal to $6,000 per individual and phases out at a 6% rate for taxpayers making above $75,000 and joint filers making above $150,000.

New Auto Loan Interest Deduction

Creates a new deduction for certain auto loan interest from 2025 through 2028. The deduction is limited to $10,000 overall and phases out at a 20% rate for taxpayers making above $100,000 and joint filers making above $200,000.

Reduce Taxation on Tips

Adds a deduction for qualified tips from 2025 through 2028. Includes a $25,000 limit on the amount of the deduction, and the deduction is generally limited to occupations that the Treasury Secretary certifies “customarily and regularly” received tips before 2025.The deduction phases out at a 10% rate for taxpayers making above $150,000 and joint filers making above $300,000.

Reduce Taxation on Overtime

Adds a deduction for qualified overtime compensation from 2025 through 2028. There is a $12,500 limit on the amount of the deduction ($25,000 for joint filers). The deduction phases out at a 10% rate for taxpayers making above $150,000 and joint filers making above $300,000.

Increase in the Standard Deduction

Adds $750 to the standard deduction for single filers and married individuals filing separately, $1,125 for head of households, and $1,500 for married couples filing jointly in 2025, so that the standard deduction in 2025 is $15,750 for single filers and married individuals filing separately, $23,625 for head of household filers, and $31,500 for married couples filing jointly.

Limitation on Individual Deductions for Certain State and Local Taxes (“SALT Deduction”)

Increases the cap for the SALT deduction from $10,000 to $40,000($20,000 for married filing separately) for taxpayers making less than $500,000 ($250,000 for married filing separately) in 2025. The deduction cap phases down at a 30% rate, from $40,000 to $10,000, for taxpayers making over $500,000.

Full Expensing for Certain Business Property (100% Bonus Depreciation)

Establishes 100% bonus depreciation permanently for business investments in machinery, equipment, and other short-lived assets from Jan.20, 2025, onward.

Full Expensing of Domestic Research and Development Expenditures

Permanently restores full expensing for businesses’ domestic research and development (R&D) investments, retroactive from January 1, 2025 onwards. Since 2022, domestic R&D investments have had to be amortized (i.e., deductions spread out) over five years.Taxpayers can deduct unamortized domestic R&D costs from 2022-2024 either fully in 2025 or over 2025 and 2026. Certain small businesses may amend returns and retroactively apply full expensing back to 2022-2024.

Increased Deduction of Business Interest

Permanently restores full deductibility of business interest expense up to 30% of earnings, calculated on an EBITDA basis, for tax years beginning January 1, 2025 onwards.

Increased Dollar Limitations for Expensing of Certain Depreciable Business Assets (Small Business Expensing)

Permanently increases the Sec. 179 expensing allowance targeted at small businesses, from a maximum of $1.25 million to a maximum of $2.5 million beginning in 2025. Raises the threshold at which the expensing allowance begins to phase out for Sec. 179 property, from $3.13 million to $4 million beginning in 2025.

Special Depreciation Allowance for Qualified Production Property

Creates temporary, 100% depreciation for non-residential structures (i.e., real estate) that is placed in service in the U.S. before Jan. 1, 2031, for which construction begins between Jan. 20, 2025, and Jan. 1, 2029, and that is used for “qualified production activity.” “Qualified production activity”generally includes manufacturing, refining, agricultural production, or chemical production.

The Legislature would like to see full conformity. The Governor only wants the standard deduction, taxes on tips, taxes on overtime, and the senior deduction.

Bottom line, talk with your tax preparer and wait until this issue is resolved for the 2025 tax year.