Arizona Schedule DFE (Disallowed Federal Expenses) is a tax adjustment schedule used in Arizona income tax filings for certain taxpayers engaged in marijuana-related business activities. It is used to report and compute Arizona adjustments related to federal limitations on deductions under Internal Revenue Code (IRC) §280E.
Who Must File Schedule DFE?
Schedule DFE is required for taxpayers engaged in marijuana-related business activities that are licensed by the Arizona Department of Health Services (ADHS), including:
- Marijuana Establishments
- Marijuana Testing Facilities
- Dual Licensees (when operating in a manner subject to Arizona income tax reporting)
The schedule is used by applicable taxpayers regardless of entity type, including corporations, S corporations, partnerships, fiduciaries, and individuals, when required to report Arizona adjustments related to marijuana business income.
Reporting Purpose of Schedule DFE
Schedule DFE is used to compute Arizona-specific adjustments for disallowed federal expenses related to marijuana business activities under IRC §280E. Because federal law disallows deductions for certain expenses in these activities, Arizona requires taxpayers to separately report allowable state adjustments to determine Arizona taxable income in accordance with Arizona tax law and conformity rules.
The schedule captures the difference between federal treatment of expenses and Arizona allowable adjustments for the same tax year.
Reporting Requirements for Flow-Through Entities
For S Corporations: Amounts from Schedule DFE are passed through to shareholders and reported on Arizona Form 120S, Schedule K-1, in accordance with Arizona instructions. Resident and nonresident shareholder allocations are reported using the applicable K-1 reporting lines as instructed for the tax year.
For Partnerships: Amounts flow through to partners on Arizona Form 165 Schedule K-1 in accordance with Arizona partnership reporting instructions.
For Fiduciaries and Other Entities: Applicable adjustments are reported through Arizona Form 141 or other required entity-level schedules as directed by Arizona Department of Revenue instructions.
Key Notes
- Schedule DFE is a specialized Arizona adjustment schedule related to marijuana business income reporting and IRC §280E conformity issues.
- It is required only when applicable Arizona law and ADOR instructions require reporting of disallowed federal expenses for marijuana-related activities.
- Proper completion ensures Arizona taxable income reflects required state-level adjustments to federal income limitations.
Source:
Schedule DFE.pdf
Disclaimer: Always verify details with the official forms and instructions from the Arizona Department of Revenue or consult a tax professional for personalized advice.