Arizona Conformity to the One Big Beautiful Bill Act: The 2026 Developments
November 05, 2026
by Edward K. Zollars, CPA
When this publication last surveyed the business tax provisions of the One Big Beautiful Bill Act (Pub. L. No. 119-21 (July 4, 2025)) in March, the open question for Arizona practitioners was not what the federal law said but whether Arizona would follow it. That question consumed most of the Second Regular Session of the Fifty-seventh Legislature and was not answered until June.
Arizona is a static conformity state. A.R.S. § 43-105 fixes the version of the Internal Revenue Code that Title 43 incorporates, and the state's computation begins with a federal number: "Arizona gross income" of an individual is federal adjusted gross income (A.R.S. § 43-1001(2)), and "Arizona gross income" of a corporation is federal taxable income (A.R.S. § 43-1101(1)). Until the conformity date moved, the entire OBBBA package sat outside the Arizona base.
The 2026 sequence was unusually contentious. Governor Hobbs issued Executive Order 2025-15 on November 25, 2025, directing the Department of Revenue to build the higher federal standard deduction into the 2025 Arizona forms and to provide instructions for claiming a "Middle Class Tax Cuts Package" — the $6,000 senior deduction and deductions for tips, overtime and car loan interest — on the "other" subtractions line. The Department followed that direction and opened the filing season on forms that assumed conformity the Legislature had not yet enacted (ADOR news releases of January 22 and January 30, 2026). The Legislature's first conformity vehicle, S.B. 1106, was vetoed on January 16, 2026, and a second, H.B. 2785, was vetoed on February 12, 2026; in both cases, the Governor's stated objection was to the business provisions of the federal act rather than to conformity as such (KPMG, This Week in State Tax, Jan. 26 and Feb. 23, 2026).
Conformity was ultimately enacted as part of the budget. H.B. 4168 (companion S.B. 1861), "taxation; omnibus; 2026-2027," was signed on June 13, 2026 and became Laws 2026, ch. 140. It moved the conformity date to January 1, 2026, adopted the retroactive effective dates of Pub. L. No. 119-21, and added a set of Arizona-specific additions and subtractions. The table below summarizes the business-relevant results and the governing Arizona authority.
| Federal Provision (OBBBA) | Arizona Treatment and Primary Authority | Arizona Effective Date |
| Conformity date generally | A.R.S. § 43-105(A) now defines the "internal revenue code" as the Code in effect on January 1, 2026, "with the specific adoption of all retroactive effective dates," and A.R.S. § 43-105(B) through (D) separately adopt the provisions of Pub. L. No. 119-21 that are retroactively effective in tax years beginning after December 31, 2021 (Laws 2026, ch. 140, § 12). | T.Y. 2026 forward, with adoption of OBBBA retroactive provisions reaching back to T.Y. 2022. |
| Sec. 11021 — Domestic R&E expensing (IRC § 174A) | No Arizona modification is required. Because A.R.S. § 43-1001(2) starts individuals at federal adjusted gross income and A.R.S. § 43-1101(1) starts corporations at federal taxable income, § 174A expensing flows through automatically. The retroactive-date language in A.R.S. § 43-105 means the small-business retroactive elections and method changes under Rev. Proc. 2025-28 also carry to Arizona. | T.Y. beginning after Dec. 31, 2024; retroactive small-business elections reach T.Y. 2022–2024. |
| Sec. 11031 — § 163(j) business interest (EBITDA ATI) | Conforms automatically through the federal starting points in A.R.S. §§ 43-1001(2) and 43-1101(1). Laws 2026, ch. 140 added no addition or subtraction under A.R.S. §§ 43-1021, 43-1022, 43-1121 or 43-1122. | T.Y. beginning after Dec. 31, 2024. |
| Sec. 11012 — § 179 expensing ($2.5M / $4M) | Conforms automatically; Arizona has no separate § 179 dollar cap in Title 43. The inflation-adjusted 2026 amounts (Rev. Proc. 2025-32) also apply for Arizona purposes. | T.Y. beginning after Dec. 31, 2024. |
| Sec. 11011 — Permanent 100% bonus depreciation (IRC § 168(k)) | Split treatment and Laws 2026, ch. 140 did not change it. Individuals and pass-through owners add back all § 167(a) depreciation under A.R.S. § 43-1021(11) and subtract depreciation computed "as if the additional allowance for depreciation had been the full amount allowed pursuant to section 168(k)" under A.R.S. § 43-1022(17)(e) — full conformity. Corporations add back § 167(a) depreciation under A.R.S. § 43-1121(4) and subtract depreciation computed "as if the election described in section 168(k)(7) . . . had been made" under A.R.S. § 43-1122(20) — no bonus depreciation for Arizona corporate purposes. | Ongoing; longstanding law unchanged by the 2026 legislation. |
| Sec. 11022 — Qualified production property (IRC § 168(n)) | Arizona decouples prospectively. New A.R.S. § 43-1021(17) requires an addition for "the amount of the special depreciation allowance for qualified production property allowed pursuant to section 168(n)" (Laws 2026, ch. 140, § 14). No parallel addition was added to A.R.S. § 43-1121, and A.R.S. § 43-1122(20) is drafted by reference to § 168(k)(7) only. | Addition applies to T.Y. beginning after Dec. 31, 2025. For T.Y. 2025, § 168(n) flows through to Arizona. |
| Sec. 11041 — Permanent QBI deduction (IRC § 199A) | No Arizona benefit. The § 199A deduction is allowed under IRC § 63(b)(3) in computing taxable income, not under IRC § 62 in computing adjusted gross income, so it never reduces the federal AGI starting point in A.R.S. § 43-1001(2). Laws 2026, ch. 140 created no corresponding Arizona subtraction. | N/A — no Arizona conformity mechanism. |
| Secs. 70201, 70202 — Tips and overtime (IRC §§ 224, 225) | Arizona enacted express subtractions because these deductions are also allowed under IRC § 63, not § 62, and therefore do not reduce federal AGI: A.R.S. § 43-1022(31) (qualified tips deducted under § 224) and § 43-1022(32) (qualified overtime compensation deducted under § 225) (Laws 2026, ch. 140, § 15). | T.Y. beginning after Dec. 31, 2024. |
| Senior deduction (IRC § 151(d)(5)); vehicle loan interest (IRC § 163(h)(4)) | A.R.S. § 43-1022(35) allows a subtraction for the amount deducted for a qualified individual under IRC § 151(d)(5)(C); A.R.S. § 43-1022(36) allows a subtraction for qualified passenger vehicle loan interest deducted under IRC § 163(h)(4). | T.Y. beginning after Dec. 31, 2024 (the vehicle loan interest subtraction is limited to T.Y. 2025). |
| SALT deduction cap (IRC § 164(b)(6)) | Arizona decouples from the increased federal cap. A.R.S. § 43-1042, as amended by Laws 2026, ch. 140, § 17, limits the Arizona itemized deduction for state and local taxes to $10,000. | T.Y. beginning after Dec. 31, 2025. |
| Secs. 11051, 11062 — § 461(l) excess business losses; § 1202 QSBS | Both conform automatically. The § 461(l) disallowance and the § 1202 exclusion operate in arriving at federal AGI and federal taxable income, and Arizona adopted no modification for either. | Same as federal. |
| Arizona-only: state R&D and other credits | Laws 2026, ch. 140 repealed the refundable portion of the Arizona research credit, shortened the carryforward from 15 to 10 years and reduced post-2030 rates (A.R.S. §§ 43-1074.01, 43-1168); repealed the credit for new employment (A.R.S. § 43-1074) and the corporate pollution control credit (A.R.S. § 43-1170). | T.Y. beginning after Dec. 31, 2025 (carryforward change applies to T.Y. after Dec. 31, 2021). |
Points That Deserve Particular Attention
- The § 62 versus § 63 distinction drives Arizona results. Arizona begins at federal adjusted gross income for individuals, so a federal deduction allowed in computing taxable income under IRC § 63 — the QBI deduction, the tips and overtime deductions, the senior deduction and the car loan interest deduction — produces no Arizona benefit unless the Legislature writes a subtraction. That is precisely why A.R.S. § 43-1022(31), (32), (35) and (36) exist and why § 199A, which received no such subtraction, remains a purely federal benefit.
- The bonus depreciation split is the largest structural divergence. Permanent 100% bonus depreciation reaches Arizona individuals and pass-through owners in full under A.R.S. § 43-1022(17)(e), but A.R.S. § 43-1122(20) continues to compute the corporate subtraction as though the election out of bonus under IRC § 168(k)(7) had been made. Entity choice modeling that assumes uniform Arizona cost recovery will be wrong for C corporations (see also Bloomberg Tax, State Conformity to Federal Bonus Depreciation).
- There is a one-year window for qualified production property. The new addition in A.R.S. § 43-1021(17) applies only to taxable years beginning after December 31, 2025, so a § 168(n) allowance claimed for a 2025 taxable year flows through to Arizona without adjustment. Whether the corporate subtraction formula in A.R.S. § 43-1122(20), which references only § 168(k)(7), operates to restore a § 168(n) allowance added back under A.R.S. § 43-1121(4) is not addressed in the statutory text and should be confirmed with the Department.
- Retroactive research expenditure elections carry to Arizona. Because A.R.S. § 43-105(B) through (D) adopt the retroactive provisions of Pub. L. No. 119-21 for taxable years back to 2022, a small business making the retroactive § 174A election under Rev. Proc. 2025-28 changes its Arizona base for those years as well.
- Amended 2025 Arizona returns remain a live issue. The Department stated that taxpayers who filed on the executive-order forms and later need to conform would have until October 15, 2027, to amend without penalty or interest. As of the date of this article, the Department had not published a post-enactment conformity notice in its news center, and its "Conformity to IRC" page had not been updated past the 2024 taxable year. Practitioners should expect revised 2025 schedules and instructions before relying on software defaults.