Arizona S corp tax return: what to file for tax year 2026

What Arizona requires from an S corporation

A corporation taxed as an S corporation under Subchapter S files Arizona Form 120S. A qualified subchapter S subsidiary is not a separate filer and is included in the parent's return, and a single-member LLC that is disregarded for federal purposes is reported by its owner. An LLC with a valid federal S election files Form 120S like any other S corporation. The instructions tie filing to being taxed as an S corporation under Subchapter S, and I found no separate Arizona S election to make, so the federal election is the starting point.

Filing is electronic unless the firm has a federal waiver or exemption, an Arizona waiver on Form 292, or an Arizona exemption. If the return is e-filed, the Schedule K-1 and Schedule K-1(NR) go in electronically with it.

Transaction privilege tax and employer withholding are separate filings.

Due date and extension for tax year 2026

Form 120S is due on the 15th day of the third month after year end. For a calendar-year 2026 return that is March 15, 2027, a Monday, so no weekend roll applies.

The extension request must be in by the original due date, either on Form 120/165EXT or by filing a federal extension, and box 82F on page 1 of the return is checked when it is filed. The extended due date is six months after the original, so September 15, 2027 for a calendar-year 2026 return. Arizona does not grant an S corporation more than six months.

An extension buys time to file, not time to pay. The instructions require 90% of the liability, including the $50 minimum tax, to be paid by the original due date. On $10,000 of PTE tax, $9,000 has to be paid by March 15, 2027.

Entity-level tax without the PTE election

Without the PTE election, the Arizona return is largely informational. The 4.9% entity tax applies only to income taxed at the corporate level on the federal Form 1120-S: excess net passive income, capital gains tax or built-in gains. Where it applies, the tax is the greater of $50 or 4.9% of the amount on line 11, so a company with a small corporate-level amount still owes the $50.

A multistate S corporation apportions income to Arizona on Schedule A. Pull last year's method from the filed return before preparing this one. I could not confirm a separate election deadline for choosing between the standard formula and sales factor only in the instructions I read, so check the Schedule A instructions in the 2026 package; a change in method shifts every shareholder's Arizona-source income on the Schedule K-1(NR).

Even when no tax is due, the return is required. The information return penalty for failing to file, or filing late, is $100 for each month or fraction of a month, up to $500.

The PTE election: what to decide and when

For tax years beginning after December 31, 2021, an S corporation can elect to pay Arizona tax at the entity level at 2.5% of the income attributable to resident shareholders plus the Arizona-source income attributable to nonresident shareholders. The election is made on Form 120S, so the deadline is the due date or extended due date of the return, per the department's corporate income tax highlights. The practical deadlines come earlier. The sources I read give one 2.5% rate with no separate rate for trusts; I did not find the composite return rate, so take it from the Form 140NR instructions.

The company has to notify every shareholder who is an individual, estate or trust. Each can opt out, and the notice must allow at least 60 days to respond. Under the Form 120S instructions, a shareholder who does not respond is included in the election. Shareholders that are not individuals, estates or trusts, such as a partnership or a corporation, cannot participate. A grantor trust that is disregarded, or an LLC disregarded to an individual, can.

Worked example: a calendar-year S corporation has Arizona-source income that produces $10,000 of PTE tax at 2.5%, and no shareholder opts out. With no estimates paid, it owes the $10,000 by the original due date. If one shareholder is ineligible, that share sits outside the election and is handled on that shareholder's own return.

Get the opt-out decisions in writing and keep the date each notice went out. The 2025 instructions also say that if the company does not pay the entity tax, the department may collect it from the eligible shareholders based on their proportionate share of income.

Estimated payments, including what is still open for 2026

Under the 2025 instructions, PTE estimated payments are required when the S corporation's taxable income for the previous year exceeded $150,000 (for 2026, that means 2025 income). They are four equal installments, due April 15, June 15 and September 15 of the tax year and January 15 of the following year, computed at 2.5%. Confirm the dates against the 2026 instructions once published, and do not assume they carry to 2027. With $10,000 of expected PTE tax, each installment is $2,500. Three 2026 installments have passed; check what was paid before January 15, 2027.

Estimates for corporate-level tax at 4.9% are required when expected Arizona liability is $1,000 or more.

For Form 120S, an S corporation with a tax liability of $500 or more must pay by EFT, with a 5% penalty on the amount not paid that way. Form 120/165ES by mail is for companies expecting less than $500 or holding a waiver.

If the client paid PTE estimates for 2025 and then decided not to elect, the instructions require a Form 120S marked as not making the election to get the money back. The refund cannot be applied to 2026 PTE estimates or to a shareholder's own tax.

Nonresident shareholders and composite returns

Every nonresident shareholder gets a Schedule K-1(NR) in addition to the Schedule K-1. A composite return on Form 140NR is the alternative to each nonresident filing for themselves. It is allowed when the company is not making the PTE election. If the company is making the election and some nonresidents opt out, it can file a composite for those only, and the composite needs at least 10 nonresident shareholders. If everyone stays in the PTE election, no composite is allowed.

That minimum matters. Example: a company elects the PTE tax, and 12 nonresident shareholders opt out. A composite on Form 140NR can cover those 12. If only 5 had opted out, the instructions' minimum of 10 would not be met, so each of the 5 would file their own Arizona return. Settle this before the client tells shareholders the company will handle their Arizona filing.

S corporations use Form 204 to request an extension for the composite return on Form 140NR. The S corporation extension on Form 120/165EXT is a different request, so confirm the Form 204 timing in its instructions rather than assuming the Form 120S extension covers it.

Penalties, with numbers

The late filing penalty is 4.5% of the tax required to be shown for each month or fraction, up to 25%. The late payment penalty is 0.5% per month up to 10%, and the combined cap is 25%. For $10,000 of tax filed two months late with no extension, the late filing penalty is 9%, or $900, and the late payment penalty is 1%, or $100, for $1,000 plus interest.

If the federal return is later amended, file an amended Form 120S within 90 days of the final federal determination.

Documents to collect from the client

Beyond the books and the federal return, ask for the items that drive the Arizona result: the shareholder list with each person's state of residence and percentage by day if ownership changed; the signed PTE notice and opt-outs; PTE and corporate estimated payment confirmations by date; the prior-year Form 120S and Schedule K-1(NR); apportionment data for any multistate company; and any Arizona credit forms and approvals.

Residency is the field that drives Schedule K-1(NR), so collect it per shareholder with an effective date for any change. If you collect these through Usual, a request with a due date and automatic reminders can be scheduled ahead of the January 15 installment.