Arizona’s answer to bonus depreciation depends on who files the return. If you own rental or commercial property as an individual, or through a partnership, LLC, or S corporation that passes income to your personal return, Arizona allows the full federal bonus amount after a two-line adjustment, while a C corporation has to strip the bonus out and depreciate the same assets on a slower Arizona schedule.
As co-founder of Seneca Cost Segregation and a real estate investor myself, I’ve worked with Arizona owners in Phoenix, Tucson, and the surrounding markets who hear “Arizona doesn’t conform” and assume their study loses its state value. What we see consistently when coordinating with CPAs on Arizona filings is that the statement is true for corporations and misleading for almost everyone else.
Below, I walk through how Arizona ties itself to the federal code, how each type of filer handles bonus depreciation, what the 2026 conformity bill changed, and what the difference looks like on an illustrative study.
TL;DR — Arizona Bonus Depreciation at a Glance
- ●Individual and pass-through owners keep the full deduction: Arizona’s recalculated depreciation subtraction is computed as if bonus were the full federal amount, so the year-one deduction matches your federal return.
- ●C corporations lose the year-one acceleration: a corporation recomputes Arizona depreciation as if it had elected out of bonus, which in our illustrative study cuts the Arizona deduction from $250,000 to $50,000.
- ●The adjustment never disappears: every individual filer with federal depreciation still reports an add-back and an offsetting subtraction on Form 140.
- ●Arizona’s 2026 update added a new add-back: for tax years beginning after December 31, 2025, the Section 168(n) qualified production property deduction does not carry over to Arizona.
- ●The state stakes are modest: with a flat 2.5% individual rate, $250,000 of bonus is worth about $6,250 in Arizona tax, so the federal savings drive the decision.
- ●Records at sale matter: Arizona lets you subtract depreciation that never reduced your Arizona income, which only works if you kept the state schedule.
Does Arizona Conform to Bonus Depreciation?
For individuals, Arizona conforms in effect; for C corporations, it does not.
How Arizona Ties Its Tax Code to the Internal Revenue Code
Arizona uses static conformity, meaning the legislature picks a specific date and adopts the federal code as it stood on that day. HB 4168, signed on June 13, 2026, moved that date to January 1, 2026 for tax years beginning after December 31, 2025, and adopted the One Big Beautiful Bill provisions that were retroactively effective for 2025.
Static conformity explains why Arizona treatment can lag a federal change for months. Owners who filed early in 2026 did so before the state had settled how much of the new federal law it would follow.
Why the Answer Depends on Who Files the Return
Arizona writes separate depreciation rules into its individual and corporate statutes. The individual rules start from federal adjusted gross income and the corporate rules start from federal taxable income, and each chapter carries its own add-back and subtraction for depreciation.
Two filers with identical buildings and identical studies can therefore report very different Arizona deductions in year one.
How Arizona Treats Bonus Depreciation for Individuals and Pass-Through Owners
Most rental owners in Arizona land on the individual track, where the end result mirrors the federal deduction.
The Add-Back and Recalculated Depreciation Subtraction
Under A.R.S. 43-1022, an individual first adds back all depreciation claimed under IRC 167(a). The individual then subtracts depreciation recalculated as if the additional first-year allowance had been the full amount allowed under Section 168(k), for property placed in service in taxable years beginning after December 31, 2016.
The two entries net to the federal figure. For property acquired and placed in service after January 19, 2025, that means the 100% bonus from a study reaches the Arizona return intact.
What This Means for Partnerships, S Corporations, and LLCs
Partnerships, S corporations, and LLCs taxed as either one generally pass depreciation through to the owners, who then apply the individual rules on their own Arizona returns. A single-member LLC that is disregarded for federal purposes reports on the owner’s return directly.
Entity-level elections, composite filings, and the Arizona small business return can change where the entries go. Your CPA should confirm the correct form for each owner before filing.
How Arizona Treats Bonus Depreciation for C Corporations
A C corporation follows a different subtraction that removes the bonus entirely.
Under A.R.S. 43-1122, the corporation adds back its federal depreciation and subtracts depreciation computed as if it had made the Section 168(k)(7) election out of bonus for each class of property. Arizona’s own revenue estimate for the 2025 federal changes showed an individual impact from 100% bonus depreciation and no corporate impact, because the state does not conform for corporations.
A pattern we see from clients and CPAs alike is a corporate rule quoted as the Arizona rule for everyone. The reality is that the decoupling sits in the corporate chapter, and an owner holding property personally or through a pass-through is not subject to it.
Arizona vs Federal Bonus Depreciation Side by Side
The table summarizes how each item lines up for tax years beginning in 2026.
What Changed With the One Big Beautiful Bill and HB 4168
Two federal changes in 2025 forced Arizona to decide what it would follow.
100% Bonus Depreciation Returned at the Federal Level
The One Big Beautiful Bill (P.L. 119-21), signed July 4, 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. The acquisition date is the date of the binding written contract, and property placed in service from January 1 through January 19, 2025 stays at 40%.
Arizona’s individual subtraction refers to the full amount allowed under Section 168(k), so the higher federal rate flows through without new state legislation. The federal bonus depreciation changes are covered in more depth in our separate breakdown.
Arizona Added a Qualified Production Property Add-Back
The same federal law created Section 168(n), a 100% deduction for qualified production property used in manufacturing, refining, agricultural production, and chemical production. Construction must begin after January 19, 2025 and before January 1, 2029, with the property placed in service after July 4, 2025 and before January 1, 2031.
HB 4168 requires both individuals and corporations to add that deduction back for tax years beginning after December 31, 2025. An Arizona manufacturer weighing a new facility should model the state result separately from the federal one.
What Arizona Conformity Means on a Cost Segregation Study
A worked example shows how far apart the two tracks land in year one.
Assume a $1,000,000 depreciable basis acquired and placed in service after January 19, 2025, with a study that reclassifies $250,000 into shorter-life property. For simplicity, the example treats all of it as 5-year property and leaves the building portion out, since it depreciates the same way on both tracks.
The corporate figure uses the 20% first-year rate that the 200% declining balance method and half-year convention give 5-year property under IRS Publication 946. The remaining $200,000 is still deducted for Arizona, only over the following years.
When the Arizona Difference Matters Most
For most individual owners the state adjustment is paperwork, though a few situations give it real weight.
- ●Property held in a C corporation: the corporate track defers most of the Arizona deduction, so the state benefit of a study arrives over five to fifteen years.
- ●Large reclassifications: a seven-figure study multiplies every rate difference, and a corporation’s Arizona schedule can diverge from its federal one for years.
- ●New production facilities: QPP expensing after 2025 creates a federal deduction with no Arizona counterpart for both entity types.
- ●A planned sale: the Arizona disposition subtraction only helps if you can show which depreciation never reduced Arizona income.
- ●Owners in more than one state: each state sets its own rule, so a portfolio that includes Phoenix and out-of-state assets needs a schedule for each return.
What we find on multi-entity portfolios is that the same building can sit on different tracks depending on which entity holds title. Owners comparing markets can see how we approach studies in the Phoenix market.
How to Handle Arizona Bonus Depreciation on Your Return
At Seneca, here is what the coordination process looks like for Arizona owners after we deliver a study.
Keep a Separate Arizona Depreciation Schedule
We deliver the asset detail your CPA needs to build the federal schedule, and the same detail supports a parallel Arizona schedule. Individual filers usually end up with matching numbers, while corporations carry a slower state column for every reclassified asset.
Report the Add-Back and Subtraction on the Right Lines
Individual residents report total federal depreciation as an addition on line 17 of Form 140 and the recalculated Arizona amount as a subtraction on line 26, as the Form 140 instructions explain. We see this consistently when coordinating with CPAs on integrating study results: the entries are simple once the asset list is clean.
Track Arizona Basis Through the Sale
Arizona law gives individuals and corporations a subtraction in the year of sale for depreciation that has not already reduced Arizona taxable income. Federal depreciation recapture still applies to the federal gain, so both schedules should travel with the closing file.
Mistakes Arizona Owners Make With Bonus Depreciation
Each of these comes up in Arizona filings, and each has a clear fix.
- ●Skipping the Arizona entries: an individual who leaves lines 17 and 26 blank invites a notice from the Department of Revenue. Report both, even when they net to zero.
- ●Applying the individual rule to a C corporation: a corporation that mirrors the federal deduction overstates its Arizona depreciation. Recompute with the election out of bonus for each class.
- ●Assuming QPP expensing carries over: a production facility deducted in full federally after 2025 still needs an Arizona add-back. Model the state depreciation before construction starts.
- ●Losing the state schedule before a sale: without it, you cannot prove the disposition subtraction. Store the Arizona schedule with the study and the closing documents.
- ●Relying on outdated summaries: older guides describe the 10% and 55% phase-in that ended for property placed in service in tax years beginning after 2016. Check the current statute instead.
- ●Amending returns to catch up depreciation: missed depreciation on property already in service is handled through Form 3115 and a Section 481(a) adjustment in the current year. Ask your CPA to file the accounting method change.
Frequently Asked Questions
Below are the questions we hear most from Arizona owners about bonus depreciation.
How Seneca Supports Arizona Property Owners
Our in-house engineering team builds every study, our Head of Engineering signs off before delivery, and audit defense comes included, backed by 10,200+ properties assessed and zero IRS audits lost. For a quick look at your numbers before a call, our cost segregation calculator gives a first estimate.
Conclusion
Arizona follows federal bonus depreciation for the owners most likely to commission a study, and it pulls the deduction back for C corporations. The two-line Form 140 adjustment, the new QPP add-back, and the disposition subtraction are where the state rules show up in practice.
If you hold Arizona property personally or through a pass-through, the full value of a study generally reaches both returns. Our bonus depreciation guide covers the federal side, and a free estimate or the calculator will show what your property could support.
