Arizona LLC Taxes: Pass-Through Income, the Flat 2.5% Rate and Corporate Election
Arizona LLC Taxes: Pass-Through Income, the Flat 2.5% Rate and Corporate Election
Most Arizona LLC owners never pay a tax labeled as an LLC tax. The LLC files no franchise tax return and no annual report, and its profit flows through to the owners, who report it on their personal Arizona return. What you owe depends on how the LLC is classified for tax purposes, how many members it has, and whether it makes taxable sales or provides taxable services. This guide covers the pieces that matter for most Arizona LLCs.
This is informational content, not legal or tax advice. Tax rules change, and your situation may differ. Confirm current rules with the Arizona Department of Revenue (ADOR) at azdor.gov, and talk with a qualified CPA or attorney before you choose a tax classification or file a return.
The default: an Arizona LLC is a pass-through
Unless it elects otherwise, an LLC is taxed as a pass-through entity. The company generally pays no Arizona income tax on its profit. Instead, each member's share of income is taxed on that member's own return at Arizona's flat 2.5% individual rate. ADOR applies the 2.5% rate to all income levels and all filing statuses for tax year 2023 and later. Check ADOR for any change after that year.
Arizona generally starts from the federal tax classification of the LLC, so the number of members is the first question to answer. The answer determines which Arizona form you file.
Single-member LLC
A single-member LLC that is disregarded for tax purposes reports its income on the owner's individual return, Arizona Form 140. It does not file a separate income tax return for the LLC itself. The business profit appears on the owner's return alongside the owner's other income, and the owner pays 2.5% on the Arizona taxable income that results.
Multi-member LLC taxed as a partnership
An LLC with two or more members is generally taxed as a partnership by default. It files Arizona Form 165, the partnership return, by March 15 for calendar-year filers. The partnership generally does not pay the tax itself. Instead, it issues a Schedule K-1 to each partner showing that partner's share of income, deductions and credits. Nonresident partners receive a Schedule K-1(NR). Each partner then reports those amounts on their own return at 2.5%.
If your LLC uses a fiscal year instead of the calendar year, the Form 165 due date is different. Confirm the deadline and any extension rules with ADOR before the year closes.
What the flat 2.5% rate means in practice
The 2.5% rate is a flat rate, so there are no brackets to work through. For illustration only, if an owner's Arizona taxable income after adjustments were $100,000, the flat rate would produce $2,500 of Arizona income tax before any credits. Your actual figure depends on your federal return, Arizona modifications and credits, and your other income, so ask a CPA to run the numbers before you rely on any estimate.
The table below summarizes how the main structures are taxed.
| Structure | How profit is taxed | Arizona filing |
|---|---|---|
| Single-member LLC (disregarded) | Owner pays 2.5% on the owner's return | Owner's Form 140 |
| Multi-member LLC (partnership) | Each partner pays 2.5% on their share | Form 165 by March 15 (calendar year), with Schedule K-1 or K-1(NR) to each partner |
| LLC electing corporate treatment | Entity pays 4.9% of net income, or $50 if greater | Corporate income tax return (confirm the form with ADOR) |
The corporate election: 4.9% with a $50 minimum
An LLC can elect to be taxed as a corporation. The federal classification choice is made with the IRS, and Arizona generally follows that classification. Once the LLC is taxed as a corporation, its net income is taxed at 4.9% of net income or $50, whichever is greater, under A.R.S. 43-1111. For example, $100,000 of net income at 4.9% produces $4,900, compared with $2,500 at the 2.5% individual rate on the same amount.
The $50 minimum applies when net income is low, so include it in any cost model, and confirm with ADOR how it applies in a loss year. Arizona has no corporate franchise tax based on net worth.
The comparison above is not a complete picture. Profit taxed at the entity level can be taxed again when it is distributed to owners as dividends, which is a federal consideration. Many owners who consider this election work through the federal side with a CPA before they decide. The pass-through entity (PTE) election, which applies a 2.5% rate at the entity level, is a separate option and is covered on its own page.
No franchise tax and no LLC annual fee
Arizona levies no LLC franchise tax, and the Arizona Corporation Commission (ACC) charges an LLC no annual report fee. The ACC's Business Services FAQ confirms that LLCs are not required to file annual reports and that only corporations must file them. That means an LLC has no recurring state filing cost to stay in good standing.
Corporations are different. A for-profit corporation files an annual report each year in its anniversary month, and the fee is $45. Nonprofit corporations pay $10 instead. If you are comparing structures, this recurring difference matters as much as the tax rate.
The initial LLC filing is separate from taxes. The Articles of Organization (Form L010) cost $50 at regular speed. Expedited review adds $35, for $85 total, and accelerated service costs extra on top of that. Filing is through the Arizona Business Center at arizonabusinesscenter.azcc.gov, and the ACC's corporations page is at azcc.gov/corporations.
Transaction Privilege Tax: a tax license, not a general business license
Arizona issues no general statewide business license. What most businesses need is a Transaction Privilege Tax (TPT) license from ADOR, required for retail sales and other taxable business classifications. The license costs $12 per location.
TPT is a tax on business activity, and many businesses pass it on to customers in their prices. The combined state rate is 5.6% on retail and most other taxable classifications, and county and city rates apply on top of it. Apply for the license at the ADOR TPT license page if your LLC makes taxable sales or provides taxable services. A business with no taxable activity may not need one, so confirm your classification with ADOR before you assume either way.
Local licenses: cities, counties and regulated trades
Counties issue no general business license. Cities and towns commonly require their own business license or local TPT license on top of the state license, so check with the city or town where you operate. Requirements vary by location, and a business with more than one location may need more than one local license.
Some trades require separate licensing. The Arizona Registrar of Contractors licenses contractors. Other regulated professions are licensed by their own state boards. If your LLC falls into one of these categories, add the board or the Registrar to your checklist before you take paying work.
Employees: withholding and unemployment registration
Hiring the first employee adds registration steps that are separate from your income tax return. Arizona withholding is administered by ADOR, and unemployment insurance is administered by the Arizona Department of Economic Security. Confirm the registration steps, rates and deposit schedules with each agency before you run your first payroll.
Members of a multi-member LLC taxed as a partnership are generally not treated as employees for payroll purposes. Ask a CPA how your owners should be paid before you set up payroll.
Other filings to keep separate from taxes
Three non-tax filings often come up during formation, and they are handled by different offices. Trade name registration, which is optional in Arizona, is filed with the Secretary of State's Business Services Division at azsos.gov/business/tntm. The Corporation Commission files your LLC's formation and other LLC documents. Arizona LLCs must also publish notice of formation unless the county of their statutory agent is Maricopa or Pima. Publication requirements can change, so check the current rule with the ACC before you file.
Tax checklist for an Arizona LLC
- Confirm your LLC's federal tax classification: default, or an election to be taxed as a corporation.
- Count your members. One member means Form 140 on the owner's return. Two or more means Form 165 and K-1 or K-1(NR) statements, due March 15 for calendar-year filers.
- Estimate the 2.5% individual tax for each owner, or the 4.9% corporate tax with its $50 minimum if you elect corporate treatment.
- Apply for a TPT license if the LLC makes taxable sales or provides taxable services. The fee is $12 per location.
- Check the city or town where you operate for a local business or TPT license.
- If you will hire employees, register for withholding with ADOR and for unemployment insurance with the Department of Economic Security.
- Decide separately whether the pass-through entity election fits your situation.
- Review the plan with a qualified CPA and, for formation questions, an attorney.
Official Arizona sources
- Arizona Corporation Commission, Corporations Division: azcc.gov/corporations
- Arizona Business Center (online filing): arizonabusinesscenter.azcc.gov
- Arizona Department of Revenue: azdor.gov
- Transaction Privilege Tax license: azdor.gov TPT license page
- Trade name registration, Arizona Secretary of State: azsos.gov/business/tntm
- Arizona Small Business Development Center Network: arizonasbdc.com
This guide is informational only and is not legal or tax advice. Tax treatment depends on your facts, and rates, forms and deadlines can change. Verify current figures with the agencies named above, and consult a qualified CPA or attorney before you make a tax election or file a return.