Are R&D Tax Credits Available in Arkansas?

Yes. The state of Arkansas provides the Research and Development (R&D) Tax Credit for qualified research expenses (QREs) occurring within the state. Taxpayers must invest in a project under one or more of the R&D programs offered by the Arkansas Science and Technology Authority (ASTA) when the projects directly involve an Arkansas business and must be approved by its Board of Directors. The credit may be earned for the first five years following the signing of a financial incentive agreement with the Arkansas Department of Economic Development (ADED).

Some highlights of the Arkansas R&D tax credits include:

  • In-House Research and Development: Businesses conducting research qualifying for federal R&D tax credits may claim a credit of 20% of QREs that exceed the base year, for a period of three years and the incremental increase in QREs for the succeeding two years. For a new in-house research facility, the base year is zero. Therefore, in the first three years following the date of the financial incentive agreement, all eligible expenditures can qualify for the credit. QREs in the 3rd and 4th years are used as the base year to calculate the credits in the 4th and 5th years, respectively. The agreement may be renewed for up to 5 years. May not be used with In-House Research by a Targeted Business Credit.
  • Research and Development in Area of Strategic Value: This credit is equal to 33% of in-house QREs (up to $50,000 per taxpayer per year) in conducting research qualifying for federal R&D credits. Research must be in an area of strategic value OR for a project offered by the Arkansas Economic Development Commission (AEDC). Research in an area of strategic value means research in fields having long-term economic or commercial value to the state, and that has been identified in an AEDC-approved R&D plan. May not be used with In-House Research by a Targeted Business Credit.
  • University-Based Research and Development: An eligible business that contracts with an Arkansas college or university in performing research qualifying for federal R&D credits may qualify for a 33% credit for QREs. May be used with other In-House R&D Credits.
  • In-House Research by a Targeted Business: Upon application and approval by the AEDC Executive Director, targeted businesses may claim a credit of 33% of the QREs incurred each year for up to five years. QREs include expenses incurred in the conduct of research qualifying for federal R&D tax credits. This credit may be sold upon application and approval by AEDC. A targeted business claiming this credit is prohibited from earning job creation tax credits for the same expenses and may not be used with other In-house R&D credits. To qualify as a targeted business, companies must: 1) be less than 5 years old, 2) show proof of an equity investment of at least $250,000, 3) pay at least 150% of the lesser of the state or county average hourly wage where the business is located, 4) meet requisite payroll thresholds, AND 5) additional eligibility criteria for individually targeted programs (sales and use tax refund for targeted businesses, payroll income tax credit for targeted businesses, payroll rebate for targeted businesses and targeted ArkPlus). A targeted business must also be classified by AEDC in one of the 6 targeted emerging technologies: 1) Advanced Materials & Manufacturing Systems, 2) Agricultural, Food and Environmental Sciences, 3) Bio-Based Products, 4) Biotechnology, Bioengineering and Life Sciences, 5) Information Technology, OR 6) Transportation Logistics.

Utilization: The Arkansas R&D tax credit, including any carry forward amount, may be used to offset 100% of Arkansas state tax liabilities. Any amount in excess of the tax liability may be carried forward for a maximum of 9 consecutive tax periods.

Application Required: Taxpayers must apply to the ADED in order to qualify for the Arkansas R&D tax credit for research under programs of the ASTA. Application for this credit must include a project plan that clearly identifies the intent of the project, the expenditures planned, the project start and end dates, and a total project cost estimate. The ASTA specifies the application format for its programs. The ASTA must approve any research for which a taxpayer is seeking credit under this incentive. To claim a credit, a taxpayer must file the Certificate of Tax Credit issued by the ASTA with the tax return on which the credit is first claimed. (Reg. VIIE4b, Consolidated Incentive Act (Act 182 of 2003) Regulations, Research Under ASTA Programs)

Exclusive Provision: Taxpayers claiming the Arkansas R&D credit cannot receive the credit granted by Sec. 26-51-1102(b), A.C.A. for the same expenditures.

What are the Potential Benefits of this Tax Credit?

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies)

Arkansas R&D Tax Credit Case Study

A medical research company in Fort Smith, Arkansas had never claimed the R&D Tax Credits before. This project involved the tax year 2021. The Company qualified for the federal R&D Tax Credit of $75,000 and an additional $99,000 of state R&D Tax Credit in Arkansas.

FEDERAL
ARKANSAS
Year
Total QREs
Credit
Total QREs
Credit
2021
$750,000
$75,000
$300,000
$99,000

You can read more about this Arkansas case study here.