Background
After vetoing two similar budget bills earlier this year, Governor Katie Hobbs signed H.B. 4168 into law on June 13, 2026. As a fixed-date conformity state, Arizona previously conformed to the Internal Revenue Code (“IRC”) as of January 1, 2025. As a result, Arizona did not conform to the One Big Beautiful Bill Act (“OBBBA”) provisions enacted on July 4, 2025. The bill updates Arizona’s conformity date to January 1, 2026, and generally adopts retroactive effective dates for provisions effective as of 2025.
The passage of H.B. 4168 means that the state conforms to OBBBA provisions unless the state specifically decouples from the federal provisions. Accordingly, the impact of OBBBA provisions for Arizona income tax purposes must be evaluated on a provision-by-provision basis.
Conformity to Key OBBBA Provisions
Many OBBBA provisions may have a significant tax impact for businesses, including changes to domestic research and experimental expenditures under IRC Section 174 and 174A, the business interest expense limitation under IRC Section 163(j), bonus depreciation under IRC Sections 168(k) and 168(n), and increased expense limits under IRC Section 179.
Under the OBBBA, domestic research and experimental expenditures may be immediately deductible under IRC Section 174A for tax years beginning after December 31, 2024. Arizona now effectively conforms to this treatment for tax years beginning after December 31, 2024.
The OBBBA restores the depreciation, amortization, and depletion addback in computing adjusted taxable income under IRC Section 163(j), increasing the business interest expense limitation. Arizona now effectively conforms to this treatment for tax years beginning after December 31, 2024.
For Section 179, OBBBA increases the maximum expense amount to $2.5 million and the phaseout threshold to $5 million for property placed in service in tax years beginning after December 31, 2024, with both amounts indexed for inflation after 2025. Arizona now effectively conforms to the OBBBA changes to Section 179 for tax years beginning after December 31, 2024.
For federal purposes, OBBBA restores 100% bonus depreciation under IRC Section 168(k) and creates a separate 100% depreciation allowance under IRC Section 168(n) for qualified production property. Arizona decouples from bonus depreciation under IRC Section 168(k). For tax years beginning on or after January 1, 2026, Arizona decouples from qualified production property bonus depreciation under IRC Section 168(n).
Tips and Overtime Deductions
The OBBBA added temporary federal deductions for certain qualified tips and overtime compensation under IRC Sections 224 and 225. These provisions are subject to dollar limits, income-based phaseouts, filing requirements, and other eligibility conditions. For 2025 tax years and later, the bill provides for subtraction modifications for deductions under IRC Sections 224 and 225 to the extent they are not already excluded.
SALT Deduction
While Arizona generally conforms to the federal limit for itemized deductions for state and local taxes for the 2025 tax year, Arizona limits the deduction to $10,000 for tax years beginning on or after January 1, 2026.
How Forvis Mazars Can Help
The Arizona tax legislation adds complexity due to the number of changes under the OBBBA, differing effective dates, and specific decoupling by the state. Contact Forvis Mazars if you have questions about navigating these changes.