Taxation
A major indicator of a state's business climate is its tax structure. Arkansas maintains a fair and pro-business tax system.
| Arkansas Taxes | |
| Corporate Income | 1.0 - 6.5% |
| Personal Income | 1.0 - 7.0% |
| Sales and Use | 6.0% |
| Corporate Franchise | 0.27% |
| Unemployment Insurance | |
| For new businesses | 3.3% |
| For existing Arkansas businesses | 2.0% |
Arkansas State Taxes
Corporate Franchise Tax |
Corporate Income Tax |
Personal Income Tax |
Property Tax
Payment in Lieu of Property Taxes (PILOT) |
Sales and Use taxes |
Unemployment Insurance Tax
Capital Gains Tax Reduction
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. The due date for the tax is June 1 in the calendar year following the year of incorporation or qualification and each June 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 0.0027.
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 0.0027 to obtain the franchise tax.
| Number of issued and outstanding capital shares | x | Par value;$25 if no par value | = | Total value of issued and outstanding capital stock |
| Total value of issued and outstanding capital stock | x | Percentage of assets applicable to Arkansas | = | Arkansas capital stock |
| Arkansas capital stock | x | 0.0027 | = | Franchise tax due |
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 $100 regardless of valuation. No corporation shall pay a tax of less than $50 or more than $1,075,000.
Corporate Income Tax
Domestic corporations and all foreign corporations doing business in Arkansas are subject to tax on net income at the following 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.
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 may carry forward the loss for ten 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.
Arkansas has adopted the provisions of Subchapter S of the Federal Internal Revenue Code of 1986 (Title 26, U.S.C., Sections 1361 through 1379).
Subject to specific conditions, income tax credits are offered through certain incentives, which are described in the "Incentives" section of the web site.
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, 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% |
3. 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).
4. Arkansas corporate income tax computations based on $234,375 and Arkansas tax rates:
| Income Amount | Amount of Tax |
|---|---|
| $234,375 | $14,174 |
Personal Income Tax
Resident and nonresident individuals, estates, and trusts deriving income from within the state are subject to a tax on their net income at the following rates:
| Net Taxable Income | Rate | Net Taxable Income | Rate |
|---|---|---|---|
| First $2,999 | 1.0% | Next $6,000 | 4.5% |
| Next $3,000 | 2.5% | Next $10,000 | 6.0% |
| Next $3,000 | 3.5% | $25,000 & 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' personal income tax.
A credit is allowed 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 are allowed:
| Single individuals - Blind or deaf, additional $20 - Blind and deaf, additional $40 |
$20 |
| Head of Household | $40 |
| Dependents with gross income of less than $3,000 | $20 |
| Fiduciaries | $20 |
| 65 or older head of household - Spouse 65 or older, additional $20 |
$40 |
| Credit for "developmentally disabled" dependent in home | $500 |
Property Tax
The State of Arkansas does not have a property tax; however, Arkansas cities and counties do collect a property tax, which is the principal source of revenue for funding local public schools.
The tax is calculated based on 20% of the fair 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.
Payment in Lieu of Property Taxes (PILOT)
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.
Sales and Use Taxes
The Arkansas sales tax is 6.0 percent of the gross receipts from the sales of tangible personal property and certain selected services. The tax is paid by the consumer at the point of final sale and is computed on the total consideration received without any deduction for expenses. "Sale" includes the lease or rental of tangible personal property.
Taxable services include sales of gas, water, electricity, telephone and telegraph service and repair services.
The Arkansas compensating use tax of 6.0 percent is levied on tangible personal property purchased from outside the state of Arkansas for use, storage, or consumption within the state of Arkansas.
Exemptions from Sales and Use Taxes
- For office sector businesses, all 1-800 calls
- 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 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
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 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 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.
Specific exemptions include the following:
- Sales of 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
- Electricity used in the production of aluminum metal by the electrolytic reduction process
- Barges, towboats and vessels of at least 50-ton load displacement
- Feedstuffs used in livestock production, including poultry
- Agricultural chemicals used in the commercial production of agricultural products
- Sewer and sanitation charges
- Sales of any item of new or used farm equipment or machinery
- Sales of aircraft manufactured or substantially completed in Arkansas and sold to a purchaser outside the state
- Chemicals, nutrients and other ingredients used in the commercial production of yeast
- Natural gas used as fuel in the process of manufacturing glass
- Waste fuel used for manufacturing
- 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
- Sale of newspapers and publications; sale of advertising space in newspapers and publications; and billboard advertising services
- Steel mills locating in the state between January 1, 2001 - December 31, 2006, and expending more than $200 million are exempt from sales tax on natural gas and electricity used in the steel-making process.
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. Local taxes have a cap of $25.00 per each 1 percent of tax assessed per "single transaction." The definition of "single transaction" is determined by each 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 3.7% on the first $10,000 of each employee's earnings until an employment record is established, usually within three to five years. Contribution rates range between 0.9% and 10.8%.
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.
Capital Gains Tax Reduction
The Capital Gains Tax Reduction afforded in the 1999 legislative session allows for an exemption of 30% of capital gains after January 1, 1999, if the taxpayer has a capital gains tax liability. 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.
Profits from Arkansas venture capital investments are also exempt from the capital gains tax, provided that the investment was made in a business in Arkansas that is a qualified technology-based or biotechnology enterprise or a client of the Genesis Technology Incubator. Investments in companies registered on a National Securities Exchange are not eligible.