Taxation

Taxation

A major indicator of a state's business climate is its tax structure. Arkansas maintains a fair and pro-business tax system.

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Arkansas Taxes 

 

Corporate Income

1.0 - 6.5%

Personal Income

1.0 - 7.0% (Tax years through December 31, 2013)
0.9 - 7% (Tax year beginning January 1, 2014)
0.9 - 6.9% (Tax years beginning January 1, 2015)

Sales and Use

6.5%
Energy (electricity and natural gas) used by manufacturers in the manufacturing process is subject to the following rates:*
3.25% effective July 1, 2013
1.625% effective July 1, 2014 - June 30, 2015
0.625% effective July 1, 2015

Corporate Franchise

0.30% of capital stock

Unemployment Insurance

 

For new businesses

4.0%

For existing Arkansas businesses

1.2%-13.1%

 * Eligible tax payers must apply to the Arkansas Department of Finance and Administration to claim the reduced rate.

 

Corporate Income Tax

Domestic and foreign corporations doing business in Arkansas are subject to tax on net income at the following graduated rates:

 

First $3,000

1%

Next $3,000

2%

Next $5,000

3%

Next $14,000

5%

Next $75,000

6%

Over $100,000

6.5%

 

The portion of income that exceeds each category is taxed at the next higher rate. For example, if a business has corporate net income of $125,000, the first $3,000 is taxed at 1%, the next $3,000 is taxed at 2%, and so on. Thus, only the $25,000 in excess of $100,000 is taxed at the maximum rate of 6.5%.

If business income is derived from activity inside and outside the state of Arkansas, it is apportioned for taxation according to the percentage of property and payrolls utilized in the state and sales attributable to Arkansas pursuant to the multi-state compact. Arkansas employs a double-weighted formula for sales.

A corporation doing business in Arkansas and sustaining a net operating loss may carry forward the loss to the next succeeding taxable year and annually thereafter for a total period of five years succeeding the year of such loss and deduct it from Arkansas taxable income. Operating steel mills meeting investment thresholds may carry forward the loss for 10 years. Corporations engaged in research and development in the medical field or manufacturing and distributing medical products may carry forward the loss for 15 years.

Corporations that are members of an affiliated group that file a federal consolidated corporate income tax return may elect to file an Arkansas consolidated corporate income tax return. However, only those corporations in the federal affiliated group that have gross taxable income from sources within Arkansas are eligible. All corporations in the affiliated group eligible to file an Arkansas consolidated income tax return must consent to, and join in, the filing of the consolidated return prior to the last day for filing the return.

Arkansas has adopted the provisions of Subchapter S of the Federal Internal Revenue Code.

Subject to specific conditions, income tax credits are offered through certain incentives, which are described in the Incentives section of the website.

Definitions

  • Domestic - When applied to any corporation or association, including partnership, means created or organized in the State of Arkansas
  • Foreign - When applied to any corporation or association, including partnership, means created or organized outside the State of Arkansas
  • Net Income - Income reported on the federal return, with certain additions and deductions prescribed by Arkansas law, such as adjustments for state income tax deductions, adjustments for capital gains and losses and deductions for energy devices purchased for use by the corporation

The following example shows the method of apportioning business income to Arkansas and the calculation of tax due the state for a hypothetical firm with business income of $1,250,000.

    1. Net business income = $1,250,000
    2. Apportionment method based on the double-weighted sales, three-factor formula
       

      U.S.

      Ark.

      Ark.%

      Plant, property, & equipment (beginning of year)

      $3,100,000

      $750,000

       

      Plant, property, & equipment (end of year)

      +$3,300,000

      +$850,000

       

      TOTAL

      $6,400,000

      $1,600,000

       

      Average(÷2)

      $3,200,000

      $800,000

      25%

      Payroll

      $900,000

      $180,000

      20%

      Sales & receipts

      $25,000,000

      $3,750,000

      15%x2 30%

      Sum of percentages

         

      75%

      Average(÷4)

         

      18.75%

    1. Income subject to tax in Arkansas is the total income multiplied by the average of the sum of percentages in Arkansas:
                   ($1,250,000 x 18.75% = $234,375)
    1.  Arkansas corporate income tax computations based on $234,375 and Arkansas tax rates: 

Income Amount       Amount of Tax
$234,375       $14,174

 

Corporate Income Tax Exemptions

Qualified biofuels manufacturers investing at least $20 million and creating at least 100  new jobs may receive income tax exemptions for up to 20 years. Qualified windmill blade or component manufacturers classified under NAICS Code 333611 may receive income tax exemptions for up to 25 years based upon the investment, jobs created, tier status, and wages of the project. 

 

Personal Income Tax

Resident and non-resident individuals, estates, and trusts deriving income from within the state are subject to a tax on their net income at the following rates: 

2013 Indexed Tax Brackets:

Net Taxable Income Rate
First $4,199

1.0% (0.9% for tax year beginning January 1, 2014)

Next $4,100 2.5%
Next $4,100 3.5%
Next $8,300 4.5%
Next $13,900 6.0%
$34,600 and over 7.0%

 

 

To arrive at net taxable income, the taxpayer may elect to either itemize deductions or to use the standard deduction of $2,000* per taxpayer. (Married couples may deduct $2,000 per spouse.) Federal income tax is not deductible from income subject to Arkansas's personal income tax. 

 *Will increase to $2,200 for tax years beginning on or after January 1, 2015.

A credit is allowed to resident individuals for the amount of income tax paid to any other state not to exceed what the tax would be on out-of-state income if added to the Arkansas income and calculated at Arkansas income tax rates. The following personal tax credits ($26 each) may be taken:

Primary filer, spouse and each dependent **

  • 65 and over (primary filer and spouse)
  • 65 special (not claiming $6,000 retirement exemption) (primary filer and spouse)
  • Blind (primary filer and spouse)
  • Deaf (primary filer and spouse)
  • Head of Household or qualifying widow or widower

A $500 credit is available for individuals with developmental disabilities.

**Dependents must generally have gross incomes less than $3,900; however, income limits do not apply to dependent children under age 19 or children who are students under age 24.

  

Sales and Use Taxes 

The Arkansas sales tax is 6.5% of the gross receipts from the sales of tangible personal property and certain selected services. "Sale" includes the lease or rental of tangible personal property.

Taxable services include sales of gas, water, electricity, solid waste disposal, telephone and prepaid telecommunications and repair services.

The Arkansas compensating use tax of 6.5% is levied on tangible personal property purchased from outside the state of Arkansas for use, storage, or consumption within the state of Arkansas.

Repair and replacement parts for manufacturing machinery are generally taxable. However, one percentage point of sales and use taxes may be refunded for purchases of machinery and equipment or replacement parts purchased to modify, replace or repair manufacturing machinery and equipment.

Exemptions from Sales and Use Taxes

  • Any interstate or international private communications service and any interstate or international 800 or 900 service
  • Property that becomes a recognizable, integral part of property manufactured, compounded, processed or assembled for resale
  • Machinery and equipment used directly in manufacturing that are purchased for a new manufacturing facility or to replace existing machinery and equipment. Machinery and equipment required by Arkansas law to be purchased for air or water pollution control or for removal of sulfur pollutants from refined petroleum are also exempt.
  • Catalysts, chemicals, reagents and solutions that are consumed or used in producing, manufacturing, fabricating, processing, or finishing articles of commerce at manufacturing or processing plants or facilities; and/or to prevent or reduce air, water and other contamination
  • Sewer services

The term "used directly" includes molds and dies that determine the physical characteristics of the finished product or its packaging materials; testing equipment to measure the quality of the finished product; computers and related peripheral equipment that directly control or measure the manufacturing process; machinery and equipment that produce steam, electricity or chemical catalysts; and solutions that are essential to the manufacturing process but are consumed during the course of the manufacturing process and do not become necessary and integral parts of the finished product.

In addition to those operations commonly understood within their ordinary meaning, the term "manufacturing" includes mining; quarrying; refining; the extracting of brine, oil and gas; cotton ginning; the drying of rice, soybeans and other grains; the manufacturing of feed; the processing of poultry; the processing of eggs and livestock; the hatching of poultry; printing of all kinds; the processing of scrap metal into grades and bales for further processing; and the rebuilding or re-manufacturing of used parts and retreading of tires for automobiles, trucks and other mobile equipment powered by electrical or internal combustion engines or motors, provided that the rebuilt or remanufactured parts or retreaded tires are not sold directly to the consumer but are sold for resale; and the production of protective coatings, which increase the quality and durability of a finished product.

Specific exemptions include the following:

  • Electricity, liquified petroleum gas and natural gas used (and separately metered) for qualifying agricultural structures and qualifying aquaculture and horticulture equipment and for commercial grain drying and storage
  • Gas produced from biomass in a facility meeting federal eligibility requirements and sold to an entity for the purpose of generating steam, hot air or electricity to be sold to the gas producer
  • Dental appliances sold by or to dentists or other professionals (effective July 1, 2014)
  • Electricity used in the production of aluminum metal by the electrolytic reduction process
  • Electricity used in the chlor-alkali manufacturing process
  • Feedstuffs and medicines used in livestock production, including poultry for commercial production in Arkansas
  • Agricultural chemicals, fertilizer and limestone used in the commercial production of agricultural products
  • Electricity and natural gas used by steel manufacturers
  • Timber harvesting equipment (effective on July 1, 2014); current exemption is for first $50,000
  • New or used farm equipment or machinery
  • Natural gas used as fuel in the process of manufacturing glass
  • Forms which are consumed or destroyed during the manufacture of the item for which the form was built
  • Repair or maintenance services performed on railroad cars, parts, or equipment brought into the state only to be repaired, refurbished, modified or converted
  • New aircraft manufactured or substantially completed in Arkansas for use exclusively by the purchaser outside of Arkansas
  • Natural gas and electricity used in the manufacture of new motor vehicle tires
  • Products used for baling, packaging, tying, wrapping or sealing animal feed products

Subject to specific conditions, sales and use tax credits are offered through certain incentives, which are described in the "Incentives" section of this website.

Local Sales and Use Taxes

In addition to the state sales and use tax, local sales and use taxes may be levied by each city or county. Prior to January 1, 2008, local taxes were capped at $25.00 per each 1% of tax assessed per "single transaction." Beginning January 1, 2008, retailers began collecting the full amount of state, city and county taxes on all transactions. However, businesses may apply to the Arkansas Department of Finance and Administration for a refund of local taxes. "Single transaction" means any sale of tangible personal property or taxable service reflected in a single invoice, receipt or statement for which an aggregate sales or use tax amount has been reported or remitted to the state for a single, local taxing jurisdiction. These taxes are collected by the state and distributed to the cities and counties each month.

Unemployment Insurance Tax

Every business in Arkansas pays an unemployment insurance tax. A business with no previous employment record in Arkansas is taxed at 4.0% on the first $12,000 of each employee's earnings until an employment record is established, usually within three to five years. Contribution rates range between 1.2% and 13.1%.

Each firm's employment record is determined primarily by its taxable payroll and history of employee involuntary termination. The tax is determined by past experience and the amount of the reserve-ratio. The reserve-ratio is the excess of contributions paid over benefits charged as related to payroll. The higher the reserve-ratio, the lower the tax rate.

Corporate Franchise Tax

The Arkansas Franchise Tax is an annual tax imposed on Arkansas corporations for the grant of charter privileges and on non-Arkansas corporations for the privilege of doing business in Arkansas. The due date for the tax is May 1 in the calendar year following the year of incorporation or qualification and each May 1 thereafter.

For a corporation incorporated under the laws of the State of Arkansas, the franchise tax is calculated by multiplying the number of outstanding capital shares by the par value (if no par stock, $25 is used) of those shares, then multiplying by 0.3%.

For a corporation incorporated outside of Arkansas but authorized to do business in the state, the number of issued and outstanding capital shares is multiplied by the par value to obtain the total value. This value is multiplied by the percentage of assets applicable to Arkansas (Arkansas assets divided by total assets) to obtain the Arkansas capital stock. The resulting figure is multiplied by 0.3% to obtain the franchise tax.

The chart below lists the franchise tax rates for various entities under Arkansas Code 26-54-104.

Franchise Tax Type Current Rate

Corporation/Bank with Stock

0.3% of the outstanding capital stock; $150 minimum

Corporation/Bank without Stock

$300

Limited Liability Company

$150

Insurance Corporation Legal Reserve Mutual, Assets Less Than $100 million

$300

Insurance Corporation Legal Reserve Mutual, Assets Greater Than $100 million

$400

Insurance Company Outstanding Capital Stock Less Than $500,000

$300

Insurance Company Outstanding Capital Stock Greater than $500,000

$400

Mortgage Loan Corporation

0.3% of the outstanding capital stock; $300 minimum

Mutual Assessment Insurance Corporation

$300

 NOTE: 26-54-105. Franchise tax reports

d)(1) Every corporation that dissolves shall be required to pay at the time of dissolution the franchise tax for the prior calendar year and pay at the time of dissolution the minimum franchise tax for the year in which dissolved or withdrawn.

 

Businesses locating in Arkansas do not have to disclose the total assets of their parent corporations. If a business is a U.S.-based corporation and is simply applying for authorization to do business in Arkansas, it need only supply a balance sheet of that U.S. corporation.

Corporations without authorized capital stock shall pay an annual tax of $300 regardless of valuation. No corporation shall pay a tax of less than $150.

Capital Gains Tax Reduction

The Capital Gains Tax Reduction allows for an exemption of 30% of net long-term capital gains. For taxpayers other than corporations, gross income shall not include 50% of any gain from the sale or exchange of qualified small business stock held for more than five years. Act 1488 of 2013 increases the capital gains exemption from 30% to 50% for capital gains after January 1, 2015, and exempts from income tax gains realized in excess of $10 million after January 1, 2014.

Profits from Arkansas venture capital investments are exempt from the capital gains tax provided that the investment was made in a business in Arkansas that is a qualified technology-based, biotechnology enterprise or a qualified technology incubator client. Investments in companies registered on a National Securities Exchange are not eligible.

Property Tax

The State of Arkansas does not have a property tax. However, Arkansas cities and counties do collect property tax, which is the principle local source of revenue for funding public schools.

The tax is calculated based on 20 percent of the market value of real and personal property and the average annual value of merchants' stocks and/or manufacturers' inventories based on millage rates in individual school districts. Business firms and individuals are subject to annual property tax on all real and personal property.

Source: Department of Finance & Administration

Payment in Lieu of Property Taxes

Real and personal property financed by revenue bonds and general obligation bonds may be exempt from property taxes during the lease-amortization period in which a local government retains title to the property. Payments by businesses to local governments in lieu of property taxes are generally encouraged and negotiated between the parties involved.

The negotiated payment in lieu of property taxes shall not be less than 35% of the property taxes that would have been paid if the property were on the tax rolls, unless a lesser amount is approved by the AEDC executive director and the chief fiscal officer of the State of Arkansas.