Arizona’s tax credit programs offer a unique opportunity for nonprofits to expand their fundraising by enabling individual taxpayers to redirect their state tax liability directly to eligible organizations. These programs provide a dollar-for-dollar reduction in state income tax and are especially impactful for organizations that qualify as QCOs, QFCOs, public schools, or Certified School Tuition Organizations (STOs).
- Qualified Charitable Organizations (QCOs)
A Qualified Charitable Organization (QCO) is an Arizona-based 501(c)(3) nonprofit or a designated community action agency that has been certified by the Arizona Department of Revenue (ADOR) to receive tax credit-eligible donations under A.R.S. § 43-1088.
Certification enables the organization to receive individual contributions that qualify for a dollar-for-dollar credit against the donor’s Arizona state income tax liability. These contributions must be used to provide immediate basic needs—such as food, clothing, shelter, medical care, job training, or similar services—to eligible low-income residents.
QCO Eligibility Criteria. To obtain and maintain QCO certification, an organization must satisfy all of the following:
Organizational Status. The organization must be:
- exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code; or
- a designated community action agency receiving federal community services block grant funding.
Programmatic Focus. Must spend at least 50% of its annual operating budget on services that address the immediate basic needs of Arizona residents who meet at least one of the following criteria:
- Receive Temporary Assistance for Needy Families (TANF);
- Have an annual household income below 150% of the federal poverty level; or
- Are chronically ill or physically disabled.
Compliance Affirmations. Organizations participating in the program must:
- Provide a written affirmation to ADOR confirming that the organization will continue to spend at least 50% of its budget on qualifying services;
- Certify that the organization does not provide, pay for, or financially support abortion services or any entity that does;
- Submit Arizona Form 321 with all required documentation to ADOR by June 30 of each year for initial certification or recertification.
Ongoing Compliance Obligations. Organizations participating in the program take the following steps to maintain their QCO status:
- Annual Recertification. QCO status is not permanent and must be renewed annually by submitting an updated Form 321 and supporting documentation.
- Donor Receipts. QCOs must issue written receipts that include the organization’s name, EIN, contribution amount, and date, in compliance with ADOR regulations.
- Financial Recordkeeping. Organizations must maintain clear and auditable records demonstrating compliance with the 50% budgetary requirement and the use of funds for qualifying services.
- Public Listings. Only organizations appearing on ADOR’s published list of certified QCOs are eligible to receive qualifying contributions.
Final thoughts. For Arizona nonprofits addressing poverty and basic needs, QCO certification is more than a tax designation—it is a powerful tool for sustainable fundraising. By meeting clearly defined statutory and programmatic criteria, certified QCOs can offer donors a direct state tax benefit while increasing support for critical services. To maintain eligibility and maximize impact, organizations must stay current with ADOR requirements, uphold compliance standards, and incorporate the tax credit into strategic outreach efforts. With proper oversight and messaging, QCO status can significantly enhance an organization’s visibility, donor appeal, and mission delivery.
- Qualified Foster Care Charitable Organizations (QFCOs)
A Qualified Foster Care Charitable Organization (QFCO) is a distinct subset of QCOs that provides basic needs services to Arizona children in foster care and meets additional licensure and programmatic criteria established by ADOR. The designation is authorized under A.R.S. § 43-1088.01. Due to the specialized population served, QFCOs qualify for higher tax credit limits than standard QCOs.
QFCO Eligibility Criteria. To be certified as a QFCO, an organization must.
- Be a certified QCO under the requirements above;
- Provide immediate basic needs to children in licensed foster care settings in Arizona;
- Hold any required licensure or certification applicable to foster care providers under Arizona law or administrative rule;
- Submit annual application to ADOR using Arizona Form 352 (in conjunction with or as an addendum to Form 321).
Verification Tip. The Arizona Department of Revenue maintains a separate list of approved QFCOs. Donors and legal counsel should consult the latest list to confirm eligibility.
Tax Credit Limits (2025 Tax Year)
- Married Filing Jointly. $987 (QCO Credit Limit) / $1,173 (QFCO Credit Limit)
- Single / Head of Household. $495 (QCO Credit Limit) / $587 (QFCO Credit Limit)
Note. Donors may contribute to both a QCO and a QFCO in the same tax year and claim the full credit amount for each, provided the organizations are separately certified.
Strategic Benefits of QCO and QFCO Certification
For Arizona nonprofits, QCO or QFCO certification offers several legal, financial, and reputational advantages:
1. Statutory Fundraising Advantage. Certification allows the nonprofit to leverage the Arizona Charitable Tax Credit as a fundraising incentive, making donations more attractive due to the dollar-for-dollar tax benefit provided to contributors.
2. Donor Behavior and Seasonal Impact. Taxpayers are often motivated to maximize state tax credits at year-end. QCOs and QFCOs consistently see increased contributions during Q4 and before the April 15 filing deadline for retroactive credit elections.
3. Competitive Positioning. Few giving options offer direct tax offsets. This advantage allows certified organizations to outcompete non-certified peers for donor dollars.
4. Stronger Messaging and Outreach. Tax credit eligibility enables targeted language in fundraising materials such as: “Give today. Get it back at tax time.” or “Support children in foster care and receive a full Arizona tax credit.”
5. Expanded Credibility. QCO/QFCO certification signals regulatory compliance, programmatic legitimacy, and financial accountability, which can improve visibility with:
- Institutional donors
- Foundations
- Governmental partners
Tax Filing and Carryforward Provisions
- Donors must claim the QCO/QFCO credit using Arizona Form 321 (and Form 352 for QFCOs).
- Donations made by April 15 may be applied to the prior tax year at the donor’s election.
- Unused credits may be carried forward for up to five consecutive years, per A.R.S. § 43-1089(D).
Compliance Considerations. Nonprofits should:
- Review ADOR’s annual guidance on QCO/QFCO eligibility;
- Ensure financial statements reflect the 50% expenditure threshold;
- Confirm compliance with Arizona’s abortion funding prohibition;
- Implement internal controls for receipting and fund tracking;
- Monitor recertification deadlines and filing accuracy.
Final Thoughts. Arizona’s Qualified Charitable Organization and Qualified Foster Care Charitable Organization certifications provide nonprofit entities with a legally sanctioned fundraising mechanism that directly benefits both the organization and its donors. For eligible entities serving Arizona’s most vulnerable populations, QCO/QFCO status is both a compliance responsibility and a strategic asset.
- Arizona Public School Tax Credit
The Arizona Public School Tax Credit, codified at A.R.S. § 43-1089.01, permits individual taxpayers to claim a dollar-for-dollar credit against their Arizona state income tax liability for qualifying contributions made directly to Arizona public schools, including charter schools and Career and Technical Education Districts (CTEDs), provided certain statutory requirements are met.
This credit is distinct from general charitable deductions and is available only for cash contributions supporting qualifying extracurricular activities and specific student-related programs—not for operational support or contributions to third-party nonprofits.
Eligible Recipient Institutions. To qualify for the tax credit, contributions must be made directly to a public or charter school located in Arizona that is recognized by the Arizona Department of Education (ADE) and possesses a valid CTDS number (County Code, Type Code, District Code & Site Number).
CTED Eligibility. Career and Technical Education Districts may qualify as public schools if they are:
- Recognized by ADE as public educational institutions; and
- Listed with an active CTDS number in ADE’s public directory.
Note: Donors and schools should verify the school’s inclusion on the ADE’s official list of public schools with CTDS numbers to ensure tax credit eligibility. Contributions to nonprofit educational foundations or booster organizations are not eligible under this statute unless the payment is made directly to the school entity.
Permitted Uses of Contributions. Per A.R.S. § 43-1089.01(F), contributions must be used exclusively for the following student enrichment purposes:
- Extracurricular activities (clubs, athletics, student organizations)
- Character education programs
- Standardized testing fees (e.g., ACT, SAT)
- Field trips
- Arts and music programs
- Instructional competitions or academic enrichment activities
Note: Contributions may not be used to subsidize general education instruction, administrative costs, or teacher salaries unrelated to qualifying extracurricular programs.
Donor Eligibility and Credit Limits. The tax credit is available only to individual taxpayers. Corporations, LLCs, partnerships, trusts, and estates are not eligible to claim this credit.
Annual Contribution Limits (2025 Tax Year):
- $400 – Married taxpayers filing jointly
- $200 – Single taxpayers, heads of household, or married filing separately
These amounts represent the maximum credit per taxpayer per calendar year. Taxpayers may donate any amount, but the credit is capped at these statutory thresholds.
Donation and Reporting Procedure. To claim the tax credit, the donor must:
- Make a qualifying cash contribution or payment of eligible fees directly to a public or charter school.
- Obtain a receipt from the school acknowledging the amount and date of contribution, including the school’s CTDS number.
- File Arizona Form 322 with the taxpayer’s Arizona income tax return.
- Report the CTDS number and contribution details as required.
Filing Deadline. Contributions made on or before April 15, 2026, may be applied to the 2025 tax year, provided the taxpayer elects to do so at the time of filing.
Carryforward Provision. Under A.R.S. § 43-1089.01(H), any unused portion of the public school tax credit may be carried forward for up to five consecutive tax years. This provision applies only to unused credit amounts and does not permit retroactive donations.
Compliance Considerations for Schools. Public and charter schools should implement internal procedures to:
- Accurately track and restrict the use of designated contributions.
- Issue compliant receipts including:
- Contribution date and amount
- Donor name
- School name and CTDS number
- Maintain documentation sufficient to satisfy any future audit or inquiry by the Arizona Department of Revenue.
Note: Schools should not commingle tax credit funds with general funds and should maintain clear separation in accounting and programmatic use.
Final Thoughts. The Arizona Public School Tax Credit offers a substantial opportunity for public schools and CTEDs to receive direct financial support for student enrichment activities. Proper compliance with statutory requirements—including CTDS verification, contribution tracking, and timely donor acknowledgment—is essential to ensure both eligibility and audit readiness. Legal and administrative personnel should collaborate to implement robust internal controls and maintain eligibility under this valuable funding mechanism.
- Certified School Tuition Organizations (STOs)
A Certified School Tuition Organization (STO) is a nonprofit entity organized under Section 501(c)(3) of the Internal Revenue Code and certified by the Arizona Department of Revenue (ADOR) to administer private school tuition scholarships funded by taxpayer contributions.
STOs operate under A.R.S. §§ 43-1089, 43-1089.01, 43-1183, 43-1184, and 43-1603, which collectively authorize both individual and corporate taxpayers to claim dollar-for-dollar Arizona income tax credits for contributions to eligible STOs. All scholarships must be awarded to students enrolled in qualified Arizona private schools.
Individual Tax Credit Programs. Arizona law permits individual taxpayers to claim two distinct tax credits when contributing to STOs:
- Original Credit (Form 323)
2025 limit: $769 for single filers; $1,535 for married filing jointly
Contributions may be claimed in the year given or retroactively applied to the prior tax year if made by April 15
- Switcher (Overflow) Credit (Form 348)
2025 limit: $766 for single filers; $1,527 for married filing jointly
May only be claimed after the Original Credit limit is fully utilize
Donors may claim both credits in the same tax year
These contributions must support scholarships for students who meet eligibility criteria defined under A.R.S. § 43-1089.01, including prior public school attendance, foster care placement, or military/disability status.
Corporate Tax Credit Programs. In addition to individual contributions, Arizona permits corporate taxpayers to receive tax credits for contributions made to STOs that are specifically certified to accept corporate donations:
Low-Income Corporate Credit (A.R.S. § 43-1183). Supports scholarships for students from households with income up to 185% of the federal poverty level.
Disabled/Displaced Student Credit (A.R.S. § 43-1184). Supports scholarships for students with disabilities as defined under the Individuals with Disabilities Education Act (IDEA) or who are currently or previously in the Arizona foster care system.
Key Corporate Credit Provisions:
- Credit amount is equal to the amount donated, capped at the corporation’s tax liability.
- Subject to annual statewide caps set by ADOR. Once the cap is met, no further credits are approved that year.
- Pre-approval from ADOR is required before accepting corporate contributions.
Note: Only STOs that have applied and been approved to accept corporate contributions may participate in these programs. Additional certification, documentation, and reporting are required.
STO Organizational Requirements. To maintain ADOR certification and legal compliance, all STOs must adhere to the following:
Annual Certification. STOs must apply or recertify annually with ADOR. Failure to maintain certification may disqualify the organization from receiving credit-eligible contributions.
Scholarship Allocation. At least 90% of contributions received (individual and corporate) must be used for tuition scholarships, pursuant to A.R.S. § 43-1603(A). No more than 10% may be used for administrative purposes.
Annual Reporting. Due to ADOR by September 30 each year. Reports must detail:
- Total contributions received
- Total scholarships awarded
- Distribution by school and recipient category (e.g., low-income, disabled, switcher-qualified)
- Evidence of compliance with income and eligibility thresholds
Student Eligibility. Scholarships may only be awarded to students attending qualified private schools in Arizona. For “Switcher” and corporate-funded scholarships, students must:
- Have attended an Arizona public school for at least 90 days;
- Be enrolling in kindergarten;
- Be in foster care;
- Or meet military/disability criteria.
STO Best Practices. To ensure compliance and avoid regulatory risk, STOs should:
- Monitor ADOR guidance and legislative updates annually
- Provide compliant receipts that include:
- Donor name
- Date and amount
- Credit type (Original, Switcher, Corporate)
- STO EIN and contact details
- Maintain clear records demonstrating:
- Allocation of at least 90% of funds to scholarships
- Eligibility of scholarship recipients
- Segregation of individual and corporate funds
- Conduct internal audits and board-level oversight of:
- Fund disbursements
- Scholarship award processes
- Adherence to statutory and policy thresholds
Donor Engagement. STOs are encouraged to coordinate with fundraising teams and legal counsel to ensure clear, compliant messaging. Donors should be advised to:
- Use Form 323 for Original Credit and Form 348 for Switcher Credit
- Confirm eligibility before contributing to corporate STOs
- Retain itemized receipts and consult with a tax advisor regarding filing and carryforward
Final Thoughts. The Arizona STO tax credit programs—both individual and corporate—offer a highly effective fundraising tool for certified nonprofits. However, participation carries significant legal and administrative responsibilities. With proper oversight and compliance infrastructure, STOs can leverage these programs to expand access to private education and enhance their community impact.
Arizona’s tax credit programs provide a unique opportunity for taxpayers to support local nonprofits and schools directly. By contributing to QCOs, QFCOs, public schools, or STOs, individuals can reduce their state tax liability while making a meaningful impact in their communities. Always consult with legal and tax professionals to ensure compliance with current tax laws and to maximize the benefits of these programs.
Need guidance on qualifying as a QCO, QFCO, or STO—or ensuring your Arizona nonprofit remains compliant with tax credit regulations? Contact Ashley Spear at 602-456-0071 or reach out via our contact form to ensure your organization is positioned for long-term success under Arizona law.
Ashley Spear is a nonprofit attorney with Caritas Law Group P.C., licensed in Arizona. She advises nonprofit organizations, charter schools, and socially responsible businesses on a range of matters including tax credit eligibility, corporate governance, compliance, contracts, and tax-exempt financing. Ashley has particular experience supporting organizations navigating the Arizona charitable tax credit programs and advising education-related entities statewide.