Arizona Bonus Depreciation: Conforms in Effect, via a Recalculation.
Arizona allows the full federal §168(k) bonus amount for assets placed in service in tax years beginning after December 31, 2016. There is still an adjustment on the Arizona return: the federal depreciation allowance is added back, then an Arizona amount recalculated as if bonus had been the full federal allowance is subtracted. The two entries net to the federal deduction, so an Arizona investor keeps the Year-1 benefit on both returns.
Reviewed by Cost Seg Smart Editorial Team · Last verified against A.R.S. §43-1022 (subtractions; paragraph 17(e) is the current rule), A.R.S. §43-1021 (additions; paragraph 11 is the depreciation add-back), Arizona DOR 2025 Form 140 booklet (line 26, Recalculated Arizona Depreciation)
The 30-second answer: Arizona conforms in effect, for assets placed in service in tax years beginning after December 31, 2016. It is not that Arizona has no adjustment; it is that Arizona has an adjustment that nets to the federal amount. A.R.S. §43-1021(11) adds back the depreciation allowance taken under IRC §167(a), and A.R.S. §43-1022(17)(e) then subtracts an Arizona amount recalculated as if the additional first-year allowance had been the full amount allowed under IRC §168(k). A.R.S. §43-1122 mirrors both for corporations.
In taxpayer-facing terms, that is the add-back on the Arizona additions schedule plus Arizona Form 140, line 26, "Recalculated Arizona Depreciation". Both entries are made; for post-2016 assets they net to the federal deduction, so the Year-1 benefit is not deferred at the state level.
On a representative Arizona single-family rental (the single-family rental band we publish, 9–32% of depreciable basis reclassified, 16% representative), the reclassified components alone generate an estimated $18K–$165K of federal Year-1 depreciation, roughly $6,660-$61,570 of federal Year-1 tax savings at the 37% top bracket, plus an estimated $450-$4,160 at Arizona's flat 2.5% rate.
Federal vs Arizona, Side by Side
For an individual investor's or Arizona corporation's cost-segregation-reclassified components, on assets placed in service in tax years beginning after December 31, 2016:
| Tax provision | Federal (IRC) | Arizona |
|---|---|---|
| Bonus depreciation under §168(k) | 100% may apply to qualified property acquired and placed in service after January 19, 2025, subject to §168(k) eligibility, related-party/prior-use, binding-contract, and election rules | Full amount allowed in effect. The Arizona recalculation under §43-1022(17)(e) is computed as if bonus had been the full §168(k) allowance |
| Add-back required? | Not applicable | Yes, and it is paired with a subtraction. §43-1021(11) adds back the §167(a) depreciation allowance; §43-1022(17)(e) subtracts the recalculated Arizona amount. There is no §168(k)-specific add-back in §43-1021 |
| Net effect on the state deduction | Year-1 bonus on eligible components, then MACRS on the remainder | The addition and the subtraction net to the federal figure for post-2016 assets, so the Year-1 deduction is not deferred at the state level |
| Corporate treatment | Federal taxable income reflects bonus claimed | Same mechanic. §43-1122 carries the recalculated-depreciation subtraction for corporations |
| Income tax on rental income | Ordinary rates, up to 37% | Flat 2.5% on net income from rental real estate (effective for tax year 2023 and after) |
| Federal usability of the deduction | Subject to passive activity, at-risk, basis, and business-interest limits | Same federal limits govern the federal deduction; Arizona adds no separate state-level reduction for post-2016 assets |
| MACRS asset class lives | 5 / 7 / 15 / 27.5 / 39 yr per Rev. Proc. 87-56 | Same class lives; the Arizona recalculation runs on the same component schedule |
Sources: A.R.S. §43-1021, A.R.S. §43-1022, Arizona DOR Form 140 booklet, IRC §168(k). Federal bonus figures reflect current law; eligibility depends on acquisition and placed-in-service dates and elections.
How Arizona's conformity was actually checked
Arizona is the state most likely to be summarised wrongly, because it genuinely did decouple and the old percentages are still printed in the statute. This page previously repeated that stale answer. The correction came from reading the operative sections rather than a conformity label: all sixteen paragraphs of A.R.S. §43-1021 were read, and there is no §168(k)-specific add-back among them. Paragraph 11 adds back "the amount of any depreciation allowance allowed pursuant to section 167(a) of the internal revenue code to the extent not previously added", which is a general depreciation add-back, not a bonus penalty.
The matching subtraction is A.R.S. §43-1022(17)(e). For assets placed in service "in taxable years beginning from and after December 31, 2016" it allows an amount equal to the §167(a) depreciation for the year, computed as if the additional allowance for depreciation had been the full amount allowed under §168(k). A.R.S. §43-1122 carries the same rule for corporations. The Arizona Department of Revenue states it in taxpayer terms on Form 140, line 26, "Recalculated Arizona Depreciation": for those assets, enter the §167(a) depreciation calculated as if bonus depreciation had been the full amount (100%) of federal bonus depreciation under §168(k).
The historic percentages that make Arizona look decoupled are keyed to the year the asset was placed in service, and are not current law for anything placed in service after 2016: 10% of the federal bonus for assets placed in service in tax years 2014-2015, 55% for 2015-2016, and a different rule before 2013. If your property was placed in service inside one of those windows, that older percentage is the one that applies to it, and it is worth raising with your CPA specifically.
Illustrative numbers: an Arizona single-family rental
Using the single-family residential (SFR) band we publish, 9–32% of depreciable basis reclassified into 5/7/15-year property, 16% representative, on a property priced between $250,000 and $650,000, with a 20% residential land allocation, and 100% federal bonus depreciation for eligible components under current law:
| Line item | Federal | Arizona |
|---|---|---|
| Purchase price band | $250,000-$650,000 | Same property |
| Depreciable basis (20% land allocation) | $200,000-$520,000 | Same basis |
| Reclassified to 5/7/15-yr (9–32% of basis) | $18K–$165K | Same components, same schedule |
| Year-1 treatment | $18K–$165K deducted (100% bonus, if eligible) | Added back, then the recalculated Arizona amount is subtracted on Form 140 line 26; for post-2016 assets the two net to the federal figure |
| Marginal tax rate | Up to 37% | Flat 2.5% (effective for tax year 2023 and after) |
| Illustrative Year-1 tax savings on reclassified components | ~$6,660-$61,570 (37% × $18K–$165K) | ~$450-$4,160 (2.5% × $18K–$165K), on top of the federal amount |
Figures are illustrative and use the site's published SFR reclassification band; your result depends on your basis, land allocation, bracket, component mix, and eligibility. Whether the full federal deduction is usable in the current year still depends on your passive-loss, at-risk, basis, and business-interest situation, and the Arizona column assumes an asset placed in service in a tax year beginning after December 31, 2016.
See a sample cost segregation report
Look at exactly what your Arizona study delivers: the component-by-component 5/7/15-year schedule, the Form 4562-ready numbers, and the documentation your CPA files. Real reports are our best answer to "is this legit?"
Forms your CPA files for an Arizona property
The Arizona return does carry a depreciation adjustment, so this is a two-entry workflow rather than a pure pass-through. It is worth stating precisely, because "nothing to do in Arizona" is the version a CPA would immediately push back on:
- Federal Form 4562: depreciation and amortization, including the §168(k) bonus deduction on eligible reclassified components. Flows to Schedule E (rental), Schedule C (active business), or the applicable corporate return.
- Schedule E (or Schedule C): the accelerated federal deduction reduces federal taxable income in Year 1, subject to the federal passive-loss, at-risk, basis, and business-interest limits.
- Arizona additions schedule: add back the federal depreciation allowance taken under IRC §167(a), per A.R.S. §43-1021(11).
- Arizona Form 140, line 26 (Recalculated Arizona Depreciation): subtract the Arizona amount computed as if bonus had been the full §168(k) allowance, per A.R.S. §43-1022(17)(e), for assets placed in service in tax years beginning after December 31, 2016. A corporate filer uses the parallel subtraction under A.R.S. §43-1122.
- Form 3115 §481(a) section: included only if this is a federal lookback method change on a property placed in service in a prior year (see below).
The reclassified schedule is the same engineered output for both books. Arizona asks for the adjustment to be shown, and for post-2016 assets the two entries land on the federal number.
Form 3115 lookback on an Arizona property
If the property was placed in service in a prior tax year and depreciation was reported using a non-segregated method, a federal Form 3115 (Application for Change in Accounting Method) may allow a current-year §481(a) catch-up adjustment for the accelerated depreciation you missed, generally without amending prior returns. This is often the single biggest acceleration mechanism in cost segregation. Any catch-up dollars are illustrative and depend on placed-in-service date, prior depreciation claimed, bonus eligibility, land allocation, and component mix.
The federal §481(a) catch-up is the primary lever, and it remains subject to the federal passive-loss, at-risk, and basis limits. The Arizona recalculation follows the federal depreciation figures, so the catch-up carries through to the Arizona return, with one thing to check first: the placed-in-service year. An asset placed in service in tax years 2014-2015 or 2015-2016 falls under the historic 10% and 55% Arizona percentages rather than the current full-amount recalculation.
See our full Form 3115 cost segregation guide for federal mechanics, partnership and LLC pass-through treatment, and timing rules.
Should you do cost segregation in Arizona? Usually yes.
Arizona is a better state for this than most summaries suggest, for three reasons:
- The Year-1 benefit survives at the state level. For assets placed in service in tax years beginning after December 31, 2016, the Arizona recalculation uses the full federal bonus amount, so the accelerated deduction reduces Arizona taxable income in the same year it reduces federal taxable income.
- The mechanic is an adjustment, not a penalty. The add-back under §43-1021(11) is a general depreciation add-back paired with the subtraction under §43-1022(17)(e). Reading the add-back on its own, without the subtraction, is what produces the widely repeated claim that Arizona strips the bonus.
- The Form 3115 lookback still captures missed federal years. If the property was placed in service in a prior year and depreciated without cost segregation, the federal §481(a) catch-up may be available, generally without amending prior returns.
Two things to flag with your CPA. First, the placed-in-service year, because the historic Arizona percentages still govern assets placed in service before 2017. Second, whether the full federal deduction is usable in the current year, which depends on your passive-loss, at-risk, basis, and business-interest situation rather than on anything Arizona does.
Frequently asked
Does Arizona allow bonus depreciation?
In effect, yes, for assets placed in service in tax years beginning after December 31, 2016. Arizona gets there in two steps rather than by simply following the federal number. A.R.S. §43-1021(11) adds back the depreciation allowance taken under IRC §167(a), and A.R.S. §43-1022(17)(e) then subtracts an Arizona-recalculated amount computed as if the additional first-year allowance had been the full amount allowed under IRC §168(k). The two entries net to the federal deduction, so an Arizona investor keeps the Year-1 benefit at the state level as well as the federal one.
So is there nothing to do on the Arizona return?
No, there is an adjustment, and describing it as nothing to do would be wrong. The taxpayer adds back the federal depreciation allowance on the Arizona additions schedule and enters the recalculated Arizona amount on Arizona Form 140, line 26, "Recalculated Arizona Depreciation". Both entries are made every year the asset is depreciated. What is true is that for post-2016 assets the recalculation uses 100% of the federal bonus, so the net Arizona deduction matches the federal one.
Does Arizona treat corporations differently from individuals for bonus depreciation?
No. A.R.S. §43-1122 carries the same recalculated-depreciation subtraction for corporations that §43-1022(17)(e) carries for individuals, so a corporate Arizona filer follows the same add-back-then-recalculate mechanic and reaches the same net result.
What about the old 10% and 55% Arizona bonus percentages?
Those are historic and are still printed in the statute, which is why stale summaries keep repeating them as if they were current. They attach to the year the asset was placed in service: 10% of the federal bonus for assets placed in service in tax years 2014-2015, 55% for 2015-2016, and a different rule before 2013. For assets placed in service in tax years beginning after December 31, 2016, the recalculation uses the full 100% federal amount. If your property was placed in service in one of those earlier windows, that older percentage is the one your CPA applies to it.
Does Arizona tax my rental income?
Yes. Arizona imposes a flat individual income tax of 2.5% (effective for tax year 2023 and after) and it taxes net income from rental real estate. So there is an Arizona return on which depreciation matters, and because the recalculated Arizona deduction matches the federal one for post-2016 assets, the accelerated Year-1 deduction reduces Arizona taxable income as well. At a flat 2.5% the state-level dollars are smaller than the federal ones, but they run the same direction.
Is cost segregation still worth it in Arizona?
Yes, and Arizona does not blunt the benefit the way a decoupled state does. The reclassified components take federal §168(k) bonus on the federal return (100% may apply to qualified property acquired and placed in service after January 19, 2025, subject to §168(k) eligibility, related-party/prior-use, binding-contract, and election rules), and the Arizona recalculation for post-2016 assets uses that same full bonus amount, so the deduction is not deferred at the state level. Whether the full federal deduction is usable in the current year still depends on federal passive-activity, at-risk, basis, and business-interest limits, which are federal questions rather than Arizona-specific ones.
Can I use Form 3115 on an Arizona property I bought years ago?
Often, yes, at the federal level. If the property was placed in service in a prior tax year and depreciation was reported using a non-segregated method, a federal Form 3115 (Application for Change in Accounting Method) may allow a current-year §481(a) catch-up for the accelerated depreciation you missed, generally without amending prior returns. Any catch-up dollars are illustrative and depend on placed-in-service date, prior depreciation, bonus eligibility, land allocation, and component mix. Because the Arizona recalculation follows the federal depreciation figures, the catch-up flows through to the Arizona return, subject to the placed-in-service-year rules above.
What does an Arizona cost segregation study rely on for its numbers?
The study reclassifies building components into IRS-recognized MACRS class lives (5, 7, and 15-year) per Rev. Proc. 87-56, using an engineering-based methodology that follows the IRS Cost Segregation Audit Techniques Guide (Publication 5653). The reclassified components may then qualify for federal §168(k) bonus depreciation on the federal return, and Arizona's recalculated depreciation for post-2016 assets is computed as if that full bonus had been taken, so the same schedule drives both returns. The engine ships our own calibrated, nationally-recognized construction cost data.
Related guides
- Bonus depreciation by state: overview
- All 50 states: conformity reference table
- Alabama bonus depreciation (conforms, rolling reference)
- California bonus depreciation (decoupled)
- Texas bonus depreciation (no state income tax)
- Form 3115 cost segregation lookback: §481(a) mechanics
- What is cost segregation: the full primer
- Cost segregation in Arizona: market and property examples
- Sample cost segregation reports