Arizona treats bonus depreciation differently for individuals and corporations. On an individual return, the state’s depreciation addition and subtraction offset each other for property placed in service in taxable years beginning after 2016, so the Arizona deduction generally matches the federal one, bonus included. A corporation adds back federal depreciation and subtracts depreciation figured as if it had elected out of bonus, which leaves regular MACRS. HB 4168 (Laws 2026, chapter 140) moved Arizona’s conformity date forward, adopted the One Big Beautiful Bill Act (OBBBA) changes for 2025, left both bonus rules in place and added an addition for the qualified production property allowance from 2026.
What HB 4168 Changed and When It Applies
The federal rule. The OBBBA made 100 percent bonus depreciation permanent for qualified property acquired and placed in service after January 19, 2025. Property acquired before January 20, 2025 stays on the phase-down: 40 percent if placed in service in 2025 and 20 percent in 2026.
The conformity date moved. Arizona’s individual tax starts from federal adjusted gross income and its corporate tax from federal taxable income, so the state adopts federal changes by amending A.R.S. 43-105. Before HB 4168, that section read the Internal Revenue Code as of January 1, 2025. Section 12 of HB 4168 sets two periods:
| Taxable years beginning | Internal Revenue Code adopted |
| In 2025 | As of January 1, 2025, plus OBBBA provisions retroactive to 2025 |
| After December 31, 2025 | As of January 1, 2026 |
The Senate fact sheet on the enacted bill describes the conformity provision as retroactive to January 1, 2025. Because the 2025 conformity was enacted in mid-2026, an owner who filed a 2025 Arizona return before enactment should ask an adviser whether it matches the law as enacted.
What did not change. HB 4168 amended the subtraction statutes, A.R.S. 43-1022 and 43-1122, but the bonus depreciation paragraphs in the enacted text keep their earlier wording, and neither legislative summary lists a bonus depreciation change. Neither summary describes a phase-in or transition rule for section 168(k).
Individual Returns: The Schedule Generally Nets to Zero
The addition. A.R.S. 43-1021(11) adds back “the amount of any depreciation allowance allowed pursuant to section 167(a)” of the Code, to the extent not previously added.
The subtraction depends on when the property was placed in service. A.R.S. 43-1022(17) returns an amount computed under a different bonus assumption for each period:
| Property placed in service in taxable years beginning | Bonus assumed in the Arizona subtraction |
| Before December 31, 2012 | None |
| 2014 and 2015 | 10% of the federal amount |
| 2016 | 55% of the federal amount |
| After December 31, 2016 | The full federal amount |
A transition rule in A.R.S. 43-1022(17)(b) covers taxable years beginning in 2013. For property placed in service in taxable years beginning after 2016, the addition and the subtraction are equal, so 5-, 7- and 15-year property that a cost segregation study identifies generally carries the same bonus deduction on the Arizona individual return as on the federal return. Older assets still being depreciated keep the adjustment of their own period.
Other states set their own rules. Our California bonus depreciation article covers one state’s separate schedule.
Corporate Returns: Regular MACRS Without Bonus
The rule. A corporation adds back its federal depreciation under A.R.S. 43-1121(4) and subtracts, under A.R.S. 43-1122(20), the depreciation “computed as if the election described in section 168(k)(7)” had been made for each class of property in the year it was placed in service. Section 168(k)(7) is the federal election out of bonus depreciation, so the Arizona figure is regular MACRS depreciation over the same recovery periods. The statute has no date range or phase-in.
A study still changes the corporate schedule. Reclassified property is recovered over 5, 7 or 15 years for Arizona instead of over the building’s 39-year or 27.5-year life, without the first-year bonus.
Illustration. A C corporation acquires and places in service a building in 2026. A study assigns $300,000 to 5-year property and $100,000 to 15-year land improvements, both qualifying for 100 percent federal bonus. The corporation claims no Section 179 deduction, and the half-year convention applies.
| Tax year | Federal deduction | Arizona addition | Arizona subtraction |
| 2026 | $400,000 | $400,000 | $65,000 |
| 2027 | $0 | $0 | $105,500 |
| 2028 | $0 | $0 | $66,150 |
| 2029 to 2041 | $0 | $0 | $163,350 in total |
The subtraction uses the half-year percentages in the 2025 Instructions for Form 4562: 20.00, 32.00 and 19.20 percent for the first three years of 5-year property, and 5.00, 9.50 and 8.55 percent for 15-year property. Both returns deduct $400,000 in total; Arizona spreads it over 2026 through 2041.
At a sale. A.R.S. 43-1122(5) allows a subtraction, in the year the property is sold or otherwise disposed of, for federal depreciation that has not yet reduced Arizona taxable income. A.R.S. 43-1022(18) gives individuals the same rule. Keep an Arizona schedule for each asset until then.
Qualified Production Property and Section 179
A new addition for 2026. HB 4168 added A.R.S. 43-1021(17) and 43-1121(25), which add back the section 168(n) special depreciation allowance for qualified production property for taxable years beginning after December 31, 2025, on both individual and corporate returns. The subtraction statutes as shown on the Legislature’s website do not name section 168(n), so ask your adviser how the added-back amount is recovered for Arizona before relying on the federal allowance for a manufacturing building.
Section 179. None of the four statutes discussed here, A.R.S. 43-1021, 43-1022, 43-1121 and 43-1122, contains a Section 179 adjustment. Confirm the Arizona treatment of any Section 179 deduction with your adviser.
If you own or are buying a building with an Arizona filing obligation, request a no-cost analysis from CSSI Services to see what a study would reclassify.
Frequently Asked Questions
Does Arizona allow bonus depreciation?
For individuals, generally yes. For property placed in service in taxable years beginning after 2016, the A.R.S. 43-1021(11) addition and the A.R.S. 43-1022(17) subtraction offset, so the Arizona deduction generally matches the federal one. Corporations subtract only regular MACRS under A.R.S. 43-1122(20), so their Arizona deduction excludes bonus.
Did HB 4168 change Arizona’s bonus depreciation rules?
The enacted text keeps the earlier wording of the bonus depreciation subtractions. HB 4168 moved the conformity date, adopting the Code as of January 1, 2026 for taxable years beginning after 2025 and the OBBBA’s retroactive provisions for 2025, and it added an addition for the section 168(n) allowance from 2026.
Does Arizona follow the 100 percent federal rate for 2025?
For individuals, our reading of A.R.S. 43-105 and 43-1022(17) is that the subtraction uses the full federal amount, which is 100 percent for qualified property acquired and placed in service after January 19, 2025. Corporations subtract depreciation computed without bonus under A.R.S. 43-1122(20), which has no date range.
How does a corporation report a cost segregation study in Arizona?
It adds back federal depreciation and subtracts depreciation computed as if it had elected out of bonus for each class. Reclassified assets are still recovered over their shorter MACRS lives, and any remaining difference is subtracted when the property is sold or otherwise disposed of.
Does Arizona allow the qualified production property deduction?
Arizona adds back the section 168(n) allowance for taxable years beginning after December 31, 2025. The subtraction statutes do not name section 168(n), so confirm the Arizona recovery of that amount with your adviser.
This article provides general information about federal and state tax rules and is not tax advice. Speak with your tax adviser about your specific circumstances.
