With the passage of the Tax Cuts and Jobs Act (TCJA) in late 2017, most of the talk regarding tax reform has focused on the changes to the federal tax laws under the Internal Revenue Code (IRC). However, during the 92nd General Assembly, which concluded on April 24, Arkansas prioritized and passed numerous changes to its own tax laws.
First and foremost, the legislative session produced the passage of Acts 182 and 822, which were both a product of the Arkansas Tax Reform and Relief Legislative Task Force. In general, they reduced the top individual income tax rate to 5.9% from 6.9%, consolidated the individual income tax brackets into three brackets (from six) and reduced the corporate income tax rate to 5.9% (from 6.5%). The rate reductions will be phased in for a period of two years beginning in 2020 for individuals and 2021 for corporations.
Second, Act 822 made a substantial change to the way businesses apportion their multistate income to the state of Arkansas. Under Act 822, beginning in 2021 a taxpayer’s multistate business income is apportioned to the state based upon a single-sales factor (rather than Arkansas’ previous “double-weighted sales” approach, which included not only a sales factor but also property and payroll factors). This means in 2021, a taxpayer will apportion its multistate business income to the state by dividing its Arkansas sales by its total multistate sales, then multiplying that fraction by its total income. The resulting income is allocable to the state and subject to Arkansas state income taxes (which may be good or bad depending upon tax rates in other states in which the business operates).
Third, Act 822 extended the net operating loss carryforward period to 10 years (from five). The extension of the net operating loss carryforward will be phased in for a period of two years beginning in 2020.
Act 822 also expanded Arkansas’ sales and use tax laws to require collection of sales or use tax by “remote sellers” who sell more than $100,000 in goods in Arkansas in a given year, or engage in more than 200 transactions. This change took effect July 1 and is generally in line with the United States Supreme Court’s decision in South Dakota v. Wayfair, a highly publicized case regarding the state taxation of an e-commerce retailer.
Finally, the legislative session also produced numerous smaller changes and clarifications to the Arkansas tax laws including, but not limited to, the following.
Franchise Tax Administration — Act 819, which shifts the administration of franchise taxes to the Arkansas Department of Finance and Administration (from the Arkansas Secretary of State).
Opportunity Zone Benefits — Act 201, which provides that the State of Arkansas will afford Arkansas state income tax benefits to taxpayers investing in qualified opportunity zones (the specifics of which have been detailed in this publication in prior months).
Arkansas Major Historic Rehabilitation Income Tax Credit Act — Act 855, which provides Arkansas state income tax benefits to those who substantially improve certain historic structures within the State of Arkansas (the details of which are provided in a separate act, Act 470).
Homestead Credit Changes — Acts 808 and 831, which provide that the homestead property tax credit available to property owners on their dwelling is increased to $375 (from $350) as of Jan. 1, and clarify that such homestead property tax credit may be claimed with respect to the property taxes payable by an irrevocable trust if such irrevocable trust confirms that its beneficiary uses the property as his/her principal place of residence.
Taxpayers and their advisers are almost through one cycle of changes under TCJA with the filing of business and personal returns for 2018 this year. They now have additional state considerations to review and address.
As the saying goes, the only thing that is constant is change.
The information is written by Attorney E. Conner McNair who is a tax attorney in the Mergers & Acquisitions Group of Friday, Eldredge & Clark, LLP. Conner focuses his practice on advising clients through mergers, acquisitions, divestitures and real estate transactions and providing advice and counsel regarding general corporate and partnership tax matters for small to mid-sized businesses.
This is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Mergers and Acquisitions Attorneys.