Incentives

Targeted In-House R&D

Act 182 of 2003 § 15-4-2708(c)

Businesses deemed by the commission to fit within the six business sectors classified as "targeted businesses" may enter into a financial incentive agreement for income tax credits based on qualified research and development expenditures. An eligible business may be approved for an income tax credit each year equal to 33% of the qualified research and development expenditures incurred each year for the first five years of the financial incentive agreement. This incentive is a discretionary incentive and is offered only at the discretion of the Director. The application for this income tax credit shall include a project plan, which clearly identifies the intent of the project, the expenditures planned, the start and end dates of the project, and an estimate of total project costs. The Department is partnering with the Arkansas Science and Technology Authority which will review all applications for R&D tax credits and monitor projects if appropriate. The Commission will adhere to some of the federal guidelines for qualifying research for federal tax credits as a guide in determining the eligibility for this state income tax credit.

Qualified research expenditures include in-house expenses for taxable wages paid and supplies used in the conduct of qualified research. Qualified research must satisfy all of the following tests in order to qualify:

The activity must be undertaken for the purpose of discovering information which is technological in nature;
The application of technological information must be intended to be useful in the new or improved business component; and
Substantially all of the activities related to the research effort must constitute elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.

The following activities are specifically excluded from the definition of qualified research:

Any research conducted after the beginning of commercial production;
Research adapting an existing product or process to a particular customer's need;
Duplication of an existing product or process;
Surveys or studies;
Research related to certain internal-use computer software;
Research conducted outside of Arkansas; and
Research in the social sciences, arts or humanities.

Qualified wages are taxable wages paid to a full-time permanent employee for performing qualified services. Qualified services are services of employees who are:

Engaging in qualified research, which means the actual conduct of qualified research;
Engaging in the direct supervision of qualified research, which means the immediate supervision (first-line management) of qualified research; and
Engaging in the direct support of research activities that constitute qualified research.

The qualified services must be in the direct support of either A) persons engaging in the actual conduct of qualified research or B) persons who are directly supervising persons engaging in the actual conduct of qualified research.

Direct support of research activities does not include general administrative services or other services only indirectly of benefit to the research activity.

As with the job creation income tax credits for targeted businesses, the income tax credit for research and development earned by targeted businesses may be sold. The business must make application to the commission for the sale of credits earned under this section within one year of issuance. Upon application and approval by the commission, the business may sell earned income tax credits within one year of issuance. The commission may assist the targeted business in finding a buyer for the tax credits.

A targeted business earning research and development tax credits is prohibited from earning job creation tax credits, as authorized by § 15-4-2709 or research tax credits as authorized by § 15-4-2708(a), for the same expenditure.

Combination with other incentives: The income tax credit for research by a targeted business authorized by 15-4-2708(c) may not be used with:

Other in-house research and development incentives as authorized by § 15-4-2708(b) or § 15-4-2708(d)(1)(A); or
Any other incentive in Act 182 of 2003 (Consolidated Incentive Act of 2003) for the same expenditures.