Arizona legislation has been enacted that updates the state’s conformity to the Internal Revenue Code (Code) for corporate and personal income tax purposes for taxable years beginning after 2015. References to the Code are updated to mean the Code as in effect on January 1, 2016, including those provisions that became effective during 2015, with the specific adoption of all federal retroactive effective dates. In addition, the legislation clarifies some of the federal provisions that are effective for prior taxable years.
For taxpayers that qualify for the federal exclusion from gross income for civil damages, restitution, or other monetary award for wrongful incarceration, the legislation specifies a December 18, 2016 deadline for filing an amended state return claiming a refund due to the exclusion. Any deficiency resulting from the Department of Revenue’s review of the amended return must then be assessed within six months after the date the amended return is filed or within six months after the date the federal adjustment is final, whichever expires later.
Partnership return due date. For taxable years beginning after 2015, the partnership return filing due date is changed from the 15th day of the fourth month following the close of the tax year to the 15th day of the third month following the close of the tax year.
Other partnership return changes. The legislation also specifies reporting and payment requirements for when a partnership is audited by the Internal Revenue Service (IRS) and is assessed an imputed underpayment pursuant to Code §6225, or when a partnership makes the election under Code §6226 with respect to an imputed underpayment. A return showing the adjustments to income or the gain, loss, or deductions on which the imputed underpayment is based, as well as any correlative adjustments to Arizona additions or subtractions, must be filed within 90 days after the final determination by the IRS regarding the adjustments.
If the adjustments on which an imputed underpayment is based result in a net reduction or net increase in Arizona taxable income of a partnership that makes the election under Code §6226, within 90 days after the final determination by the IRS regarding the adjustments, the partnership must furnish each partner and the Department of Revenue with a statement of each partner’s share of the adjustments. The amount reported to a partner is considered a change in the partner’s taxable income, and the partner must file an amended return reporting its share of the partnership adjustments within 150 days after the final determination by the IRS regarding the adjustments.
If the adjustments on which an imputed underpayment is based result in a net increase in Arizona taxable income of a partnership and the partnership fails to provide the required statement to each partner and the Department of Revenue, the partnership must pay the tax due in lieu of the partners reporting the adjustments. The tax will be imposed on the Arizona share of the adjustments at the highest income tax rate imposed on individuals. Interest will be computed for the period beginning on the day after the partnership return due date for the reviewed year, without regard to extensions. For purposes of imposing penalties, the return due date will be the 90th day after the final determination by the IRS regarding the adjustments.
If a partnership fails to file a required return showing the adjustments on which an imputed underpayment is based, or the Department of Revenue is not satisfied with the return or the payment of tax, it may issue a deficiency assessment. If a partnership incorrectly reports the adjustments resulting in an understatement of the distribution of Arizona taxable income to the partners, the partnership must pay the tax on the understatement. If partnership incorrectly reports the adjustments resulting in an overstatement of Arizona taxable income and the adjustments were originally passed through to the partners, the corrected amount must be passed through to the partners and must be reflected on an amended statement provided to the partners and the Department of Revenue. If the tax on the adjustments was originally paid by the partnership, the partnership must file an amended return to claim any refund due. (S.B. 1288, Laws 2016, approved May 11, 1016, and effective August 6, 2016, unless otherwise noted.)
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