18177: AZ - Pass-through Entity Tax Election and Credit (PTET)

Arizona law allows certain pass-through entities to make an election to pay AZ tax at the entity level. If the S corporation or partnership makes this election, they are then called an "Electing Pass-Through Entity." Members of an electing pass-through entity are eligible for a non-refundable credit on their individual return.

The election must be filed no later than the due date or extended due date of the return. The election can be made annually and is not revocable once made for that tax year. 

1065

Indicate that the election is being made by checking the box on AZ > screen 165 > A - Partnership made the PTE election to pay taxes on its flow-through income at the entity level.

The calculation is done on AZ 165, page 2, part 2 and carried through to Schedule K1 or Schedule K1(NR).

AZ 120V is generated to show the amount due. Direct debit of the balance due is available through Drake Tax via the PMT screen. 

1120-S

Indicate that the election is being made by checking the box on AZ > screen 120S > A - Did the S Corporation make the Pass-Through Entity (PTE) election to pay tax at the entity level. 

The calculation is done on AZ 120-S, page 2, part 2 and carried through to Schedule K1, page 2, lines 8-10 or Schedule K1(NR), page 3, lines 21-23.

AZ 120V is generated to show the amount due. Direct debit of the balance due is available through Drake Tax via the PMT screen. 

Estimates

Partnerships and S-corporations that make the PTE election, and have a taxable income for the preceding tax year exceeding $150,000, must make four estimated income tax payments. To generate estimated tax vouchers, on the ES screen, select State/City: AZ and enter the applicable amount for each voucher. Payments cannot be made through direct debit, but must be paid by electronic funds transfer (EFT) through the AZ website. Per the instructions, "Taxpayers anticipating a tax liability for the current year of at least $1,000 must make Arizona estimated tax payments by EFT."

Certain entities may be eligible to pay via a paper-voucher and check; see the 120/165ES Instructions for details. 

e-Filing

e-Filing through Drake Tax is available.

1040

To enter the information needed to calculate the credit and addback on the individual return, go to AZ > Credits tab > screen 355.

• Form 355 will show the credit calculation which then flows to Form 301 and then to Form 140/Form 140PY/Form 140NR.
• This also makes an addition to income in the amount of taxes paid that appears on: 
  • 140, page 5 line P
  • 140NR page 5 line K
  • 140PY page 5 line O
  • Form AZ 140SBI line 25
  • Form AZ 140PY SBI line 25
  • Form AZ 140NR SBI, line 24

For more information, see Publication 713.