Sec 43-961. Items not deductible in computation of taxable income

In computing taxable income no deduction shall in any case be allowed in respect of:

1. Personal, living or family expenses, except medical expenses allowed pursuant to section 43-1042.

2. With respect to financial institutions, as defined in section 6-101, that portion of any amount otherwise allowable as an interest expense deduction pursuant to the internal revenue code and determined by dividing the total of the amount of interest income received on obligations of the United States, this state or any political subdivision of this state by the sum of tax exempt interest as defined in section 103 of the internal revenue code plus gross income determined pursuant to the internal revenue code, and by multiplying the result thus obtained by any interest deduction allowed pursuant to section 163 or 591 of the internal revenue code without regard to the application of section 265 of the internal revenue code, and by adding to such result an amount equal to ten per cent of the total of the amount of interest income received on obligations of the United States, this state or any political subdivision of this state. The total amount disallowed by operation of this paragraph shall be reduced to the extent such disallowance would cause the tax payable by the financial institution under this title to exceed the total of gross income determined pursuant to the internal revenue code, plus the amount of interest income received on obligations of any state, territory or possession of the United States, or any political subdivision thereof, located outside this state, less the amount of interest income received on obligations of the United States.

3. Any amount paid or accrued on indebtedness incurred or continued to purchase a single premium life insurance or endowment contract. For the purposes of this paragraph, if substantially all the premiums of a life insurance or endowment contract are paid within a period of four years from the date on which such contract is purchased, such contract shall be considered a single premium life insurance or endowment contract.

4. Expenses attributable to Arizona gross income derived from illegal activities nor shall any deductions be allowed to any taxpayer on any of his Arizona gross income derived from any other activities which tend to promote or to further, or are connected or associated with, such illegal activities.

5. Any amount, not otherwise provided for by this section, that would otherwise be allowable as a deduction or an adjustment, which is allocable to one or more classes of income, whether or not any amount of income of that class or classes is received or accrued, and that is not required to be included in a person's Arizona adjusted gross income or Arizona taxable income.