Business owners in Arizona have a unique opportunity to offset their personal tax burden dollar for dollar by having their corporation make a charitable donation. Specifically, s-corporations can donate up to the state income tax liability of the business owner for the given tax year.
Substantial Tax Savings
Unlike the Arizona individual credits, the Arizona business tax credit is eligible for a tax deduction on your federal business tax return. Your business will record the donation as a marketing expense, lowering your taxable income.
These credits require a minimum contribution of $5,000; however, this substantial investment carries even more potential for tax savings. Let’s consider the impact of even the minimum donation:
State $5,000 donation = $5,000 tax credit
Federal $5,000 donation x 24% marginal tax rate = $1,200 in tax savings
Total $6,200 in total tax savings
Applications and STOs
While the individual credit is available to every Arizona taxpayer, the corporate tax credit requires an application. Applications are open to c-corps, s-corps, and LLCs that are taxed as s-corps. Donations must be made to a School Tuition Organization (STO) certified by the Arizona Department of Revenue.
STOs award scholarships to underprivileged children so they can receive the education they deserve. Eligible students must meet a state defined low-income threshold. Donors can designate money to a particular school but not to a particular student.
Timing Considerations
Applications open July 1, but the state allocates a limited amount of funding to the credits on a first come, first served basis, so timing is critical. Contributions must be made during the tax year for which the credit will be taken. If the application is approved, the business has 20 days to make the donation to the STO.
A new round of applications for this business credit opens to Arizona corporations on July 1, 2022. Remember that all donors MUST have prior approval by the state. K&R can connect you with a qualified STO and help with your application. To get started, call our office at 480-392-6801.
