Research & Development Income Tax Credit Incentive

The Research & Development Tax Credit Program allows credits against a taxpayer's Arkansas state income tax for making certain qualified research expenditures as well as certain donations or sales below cost of new machinery and equipment to a qualified research program.

Income tax credits are intended to provide incentives for university-based research, in-house research of several kinds, and research and development in start-up, technology-based enterprises. Prior to submitting an application for this program, applicants should understand the different incentives and receive assistance in selecting the most appropriate incentive for the eligible research and development activity.

Overview: The incentives for in-house research are intended for (a) the on-going in-house research programs of mature firms, (b) younger, “targeted” firms engaged in in-house research over limited five-(5) year periods, and (c) emerging firms engaged in strategic research and development over limited five (5) year periods; generally, these incentives may not be combined with one another (i.e., with other in-house research incentives), but may be combined with incentives for research with universities. 

Unless otherwise specified, the research and development application and project plan shall be the basis for the Commission’s decision to approve tax credit treatment for research and development expenditures. The term of the research and development financial incentive agreements under § 15-4-2708 is five (5) years beginning on the first day of the business’s tax year in which the financial incentive agreement is signed and may not extend beyond five (5) years from that date.

In-House R&D Tax Credit Incentive Program 20%

This program serves as a discretionary tax incentive for mature companies performing on-going In-House research and development in the State of Arkansas. The credit is 20% of qualified R&D salaries (supplies, equipment, and buildings do not qualify).  The company must be in the Federal R&D program before applying. The credits are used for corporate income tax and cannot be sold. The credits carry forward for nine (9) years from the issue date. 

In-House research includes experimental, clinical, or laboratory activities to develop new uses of products, but only to the extent that activity is conducted in Arkansas.  The application submitted by an eligible business should include project plan details which clearly identify the intent of the research project, the research expenditures planned, the start and end dates of the project, and an estimate of total project costs. The credit allowed for approved in-house research is up to twenty percent (20%) of the incremental amount spent on qualified in-house research expenditures that exceeds the baseline established in the preceding year, for a period of five (5) years.

“Qualified research” must satisfy all the following tests: 
• 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 a new or improved business component; and
• Substantially all 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

Qualified research expenditures include in-house expenses for taxable wages paid, and usual fringe benefits specific to research activities of employees of the business or for wages and usual fringe benefits paid through contractual agreements, approved in writing by the Executive Director, with a state college, an Arkansas state university, or other Arkansas-based research organization to perform research for a targeted business. 

Qualified wages are taxable wages and benefits paid to an employee for performing qualified services as listed below: 
• 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 which constitute qualified research.

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

Targeted Business R&D Tax Credit Incentive Program 33%

Businesses deemed by the Commission to fit within the six (6) business sectors classified as “targeted businesses” (below) may enter into a financial incentive agreement for income tax credits based on qualified in-house research and development expenditures. A company receives a tax credit for 33% of qualified R&D salaries each year for five (5) years. The credits can be sold one time within one year of being issued and the money used by the company any way it chooses. The application for this discretionary 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.

“Targeted businesses” means: a growing business sector which include one of the following:

• Advanced materials and manufacturing systems;
• Agriculture, food, and environmental sciences;
• Biotechnology, bioengineering, and life sciences;
• Information technology;
• Transportation logistics; and
• Bio-based products;

 “Qualified research” must satisfy all the following tests: 

• 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 a new or improved business component; and
• Substantially all 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

Qualified wages are taxable wages and benefits paid to a full-time permanent employee or “contractual employee”, as defined in the Act, 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 which constitute qualified research.

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

Applications should be submitted 45 days prior to the company's tax year end date to allow for application review and follow-up.