With session over, we will be posting a series summarizing the tax-related Acts of the 2019 Arkansas General Assembly, beginning with income and franchise tax legislation in this post. In addition to the focus of Arkansas tax reform on income and franchise taxes, there were a number of other notable changes, and particularly relating to Internal Revenue Code conformity (Acts 201, 870, and 2017).
Act 182 is the Governor's individual income tax cut plan, which is a modified version of the Task Force's recommended income tax cuts. (Recall that Arkansas is unique in having not only a progressive rate structure, but three different bracket schedules for low-, middle- and high-income individuals.) This package reforms the high-income bracket schedule, flattening the incremental rates and phasing in a reduction in the top individual marginal rate form the current 6.9% to 6.6% for tax years beginning January 1, 2020, and to 5.9% for tax years beginning January 1, 2021 or thereafter. It also made minor upward adjustments for inflation to the low- and middle-income bracket schedules.
Act 201 conforms Arkansas to the qualified opportunity zone (QOZ) provisions of I.R.C. § 1400Z-2, effective for tax years beginning on or after January 1, 2018, but only with respect to opportunity zones within Arkansas.
Act 669 clarifies the active duty military income tax exemption. Effective for tax years beginning on or after January 1, 2020.
Act 774 requires DFA to modify its individual income tax forms to allow payment of a refund into two different bank accounts. The intent is to encourage savings. Effective for tax years on or after January 1, 2020.
Act 819 contains several administrative recommendations of the Tax Reform Task Force. Among its provisions is the transfer of administration of the franchise tax from the Secretary of State to DFA, effective May 1, 2021.
Act 822 provides several major business income tax reforms recommended by the Tax Reform Task Force. These are the most pro-business Arkansas tax reforms in recent memory. The following income tax changes are adopted (in addition to various sales and use tax changes):
- Single sales factor apportionment for tax years beginning on or after January 1, 2021.
- Extension of net operating loss (NOL) carry forward from the current 5 years to 8 years for losses generated in tax years beginning in 2020, and to 10 years for losses generated in tax years beginning January 1, 2021, and thereafter.
- Reduction of the top corporate income tax rate from the current 6.5% to 6.2% for tax years beginning in 2021, and to 5.9% for tax years beginning on or after January 1, 2022.
Act 825 provided for deductions of up to $5,000 per year for contributions to Arkansas ABLE accounts. Effective for tax years beginning on or after January 1, 2019.
Act 870 is DFA's Internal Revenue Code conformity legislation. The bill adopts relatively few Tax Cuts and Jobs Act provisions and is not a major concern of the Arkansas business community. (Recall that Arkansas is a "building block" state that adopts only select parts of the Internal Revenue Code as of various effective dates.) Provisions include conformity to I.R.C. § 118 contributions to capital and to § § 174 and 280C deductibility of research and development costs. Effective for tax years beginning on or after January 1, 2019.
Act 1027 conforms Arkansas to federal grantor trust provisions for tax years beginning January 1, 2020 and thereafter. Historically, Arkansas has not conformed statutorily to federal grantor trust rules, but DFA regulations suggested conformity. This ambiguous situation has led to disputes between DFA and taxpayers.