Arkansas Administrative Code
Agency 168 - Arkansas Economic Development Commission
Rule 168.00.12-001 - Amended Rules for the Consolidated Incentive Act of 2003
Current through Register Vol. 49, No. 9, September, 2024
I. Introduction
Act 182 of 2003 consolidates six previously existing incentives into one incentive package. The consolidated incentives include:
* Enterprise Zone (Advantage Arkansas);
* Economic Investment Tax Credit (InvestArk);
* Economic Development Incentive Act (Create Rebate);
* Arkansas Economic Development Act (AEDA);
* Emerging Technology Development Act; and
* Biotechnology Training and Development Act.
The Consolidated Incentive Act of 2003 also provides incentives for targeted businesses that allow earned income tax credits to be sold, which will allow these targeted businesses to realize the benefits of the incentive earlier. In addition, it expands the opportunities for qualified businesses to earn income tax credits based on research and development expenditures.
Other benefits of consolidating incentives include the uniformity of definitions and administration of the various incentives.
A financial incentive agreement will be signed with each eligible business that qualifies for an incentive under this act and is approved by the Commission. The financial incentive agreement will be the primary document outlining the benefits to be received and the start and end date of the project. It will also serve as the primary source document when the Department of Finance and Administration audits the business to verify compliance.
The financial incentive agreement shall:
* Specify the effective date of the agreement;
* Specify the term of the agreement, which shall be calculated from the date the agreement is signed by the business and the Commission;
* Specify the incentive the business is to receive;
* Specify the investment and/or payroll threshold requirements necessary to qualify for eligibility.
* Specify the eligible business' responsibilities for certifying eligibility requirements; and
* Specify the approved business' responsibilities for failure to meet or maintain eligibility requirements.
II. Definitions
Development Commission;
Development Commission;
Department of Finance and Administration to refund local sales and use taxes to the approved business. A municipality or county can authorize the refund of a tax levied by it but may not authorize a refund of any tax not levied by it.
III. Tiers
Except for the retention investment credits (InvestArk) in § 15-4-2706(c), the research and development credits in § 15-4-2708, and the payroll income tax credit for targeted businesses in § 15-4-2709; all benefits provided in this act are determined in relation to the tier of the county in which the project is located. The state's 75 counties are divided into four tiers, with Tier 1 counties being the most prosperous counties and Tier 4 counties being the least prosperous counties. Tiers are determined annually by the Arkansas Economic Development Commission by ranking four variables: poverty rate, population growth, per capita income and unemployment rate. A county ranking is determined for each of these variables using a consistent source and the four rankings are totaled and divided by four to obtain an overall ranking. It is the intention of the Arkansas Economic Development Commission to place 15 counties in Tier 1 and 20 counties in Tiers 2, 3 and 4. If there is a tie between two or more counties for overall rankings at the break point for tiers, the counties with a tie score will be placed in the higher tier.
A county's tier ranking, determined on the effective date of any incentive agreement under the Consolidated Incentive Act, shall establish the thresholds and benefits for the term of the agreement.
A county's tier might be moved to one higher tier if the county has experienced a sudden and severe period of economic distress, as indicated by a loss of more than five percent of the employed labor force. The most recent Labor Market Information publication, published by the Arkansas Department of Workforce Services, is used as the reference to determine a loss of five percent of the employed labor force. The movement to a higher tier is authorized by action of the Arkansas Economic Development Council after having received a request from a county official from within the county in question. A business that had signed a financial incentive agreement with the Commission prior to the action of the Council to move a county to a higher tier, shall receive the benefit assigned to it at the time of the signing of the financial incentive agreement for the duration of the agreement, regardless of any subsequent change of a county's tier assignment.
IV. Powers and Duties of the Economic Development Commission
The Commission shall administer the provisions of the Consolidated Incentive Act of 2003 and shall have the following powers and duties in addition to those mentioned in other laws of the state:
V. Administration
VI. Coordination with other economic development incentives
To provide an orderly transition between the Consolidated Incentive Act of 2003 and the six incentive programs it incorporates from previous legislative actions, § 15-4-2714 specifies that any eligible business that signs a financial incentive agreement with the Commission prior to the effective date of the Consolidated Incentive Act of 2003 (March 3, 2003) shall be provided only the benefits authorized under one of the following six existing incentives:
Eligible businesses signing an agreement after the effective date of the Consolidated Incentive Act of 2003 (March 3, 2003) shall receive only the benefits for which they qualify, or are approved for, under the Consolidated Incentive Act of 2003. Benefits for the same project cannot be obtained under the Consolidated Incentive Act of 2003 and any of the incentives, enumerated above, which it replaced.
In the section that follows, each incentive program will be addressed individually and restrictions on the use of that incentive with other incentives will be noted.
VII. Incentive programs contained within the Consolidated Incentive Act of 2003
The incentive programs below require that a potentially eligible business submit an application and a project plan to the Commission prior to incurring project costs and hiring new employees associated with the project. In some cases, once an application is processed and signed by the Commission, the application, with supporting information, becomes a financial incentive agreement.
The date an application is received by the Commission is the earliest date benefits may be accrued. An application should be submitted prior to incurring any project cost or hiring new employees associated with the project.
The Advantage Arkansas program provides an Arkansas income tax credit based upon a percentage of the annual payroll paid to the new full-time permanent employees hired as a result of an approved project. The tier in which the project is located determines the qualifying payroll threshold as well as the income tax benefit calculation.
Pursuant to Act 716 of 2009 for agreements with an effective date on or after July 31, 2009, in all tiers, in order to qualify for the benefits of this program, the proposed average hourly wage of the eligible business applying for these benefits must be equal to, or greater than, the lowest county average hourly wage calculated by the Commission based on the most recent calendar year data published by the Arkansas Department of Workforce Services.
The date of the financial incentive agreement is the beginning date in determining when the payroll threshold must be met. Only those employees hired after the date of the financial incentive agreement are eligible for the income tax credits (except as provided in Section II (15)).
The income tax credit earned cannot be used to offset more than 50% of a business' income tax liability in any one tax year. Any unused credits can be carried forward for nine (9) years beyond the year in which they were earned or until exhausted, whichever occurs first.
Income tax credits are earned in the tax year in which the new full-time permanent employees qualify after the financial incentive agreement was signed with the Commission. At the end of each tax year, during the term of the agreement, it is the responsibility of the qualified business to file the Advantage Arkansas Program Employee Payroll Certification Audit Request with the Department of Finance and Administration (DF&A) . This certification provides the number of new permanent employees and their payroll during the preceding tax year and is the mechanism to initiate the verification audit. Therefore, the company must certify annually at the end of each tax year to DF&A.
The Company shall be entitled to receive income tax credits for which it has remained eligible under the Act and for which has provided timely certification in support thereof, for each subsequent tax year during the term of the agreement. The term of the financial incentive agreement shall be for a period of sixty (60) months, beginning on the date of the approved financial incentive agreement.
The income tax credit for the tax year in which new employees qualify will be based on the payroll paid to each new full-time permanent employee from their hire date to the end of the tax year. In order to be counted as a new full-time permanent employee during any tax year, the employee must have worked a minimum of twenty-six (26) consecutive weeks with an average of at least thirty (30) hours per week. The payroll threshold of the new full-time permanent employees must be met by the business within twenty-four (24) months following the date the financial incentive agreement was signed (except as provided in Section V (1).
The threshold for qualifying for the Advantage Arkansas job creation tax credit and the benefit received is dependent upon the tier in which the project is located on the effective date of the financial incentive agreement:
Example: An eligible business intends to expand its operation in a Tier 3 county and will be adding 25 new full-time permanent employees earning $15 per hour. In a Tier 3 county, a payroll threshold of $75,000 must be met in order to qualify for the job creation tax credit equal to three percent of payroll. ($15 per hour × 2080 hours = $31,200 per employee × 25 jobs = $780,000 annual payroll × 3% = $23,400 income tax credit earned for each of the next five years.) This example assumes that all 25 new full-time permanent employees were hired at the beginning of the first year and worked forty (40) hours per week.
Notes: Benefit calculations could change given the following circumstances:
* The number of jobs is increased or decreased;
* If all of the new jobs are not filled at the beginning of the first year;
* The pay level is decreased or increased; and
* If the payroll falls below the $75,000 required for qualification in a Tier 3 county, the business may request an extension of up to 24 months to regain the minimum payroll threshold. If the business fails to regain the threshold amount, the business shall be liable for repayment of any benefits received after it no longer qualified.
Combination with other incentives: The job creation income tax credit (Advantage Arkansas) authorized in § 15-4-2705 may be combined with:
* The research and development income tax credit for university based research authorized by § 15-4-2708(a);
* The research and development income tax credit for in-house research authorized by § 15-4-2708(b); and
* Either the retention investment incentive (InvestArk) authorized in §15-4- 2706(c); or
* The sales and use tax refund investment incentive (Tax Back) authorized by § 15-4-2706(d).
The payroll rebate incentive, also known as "Create Rebate", is offered only at the discretion of the Director. Like the Advantage Arkansas job creation income tax credit, the payroll rebate is based on the payroll of new full-time permanent employees.
The date of the financial incentive agreement is the beginning date in determining when the payroll threshold must be met. Only the payroll of those employees hired after the date of the financial incentive agreement is eligible for the rebate (except as provided in Section II (15)). A minimum payroll of two million dollars ($2 million), (payroll threshold) for new full-time permanent employees is required in order to qualify for this incentive.
The payroll rebate for the tax year in which new employees qualify will be based on the payroll paid to each new full-time permanent employee from their hire date to the end of the tax year. In order to be counted as a new full-time permanent employee during any tax year, the employee must have worked a minimum of twenty-six (26) consecutive weeks with an average of at least thirty (30) hours per week. The payroll threshold of the new full-time permanent employees must be met by the business within twenty-four (24) months following the date the financial incentive agreement was signed (except as provided in Section V (1).
The incentive payment amount shall be subject to the terms provided in the financial incentive agreement and may be reduced based upon the audited performance of the eligible business.
It is the responsibility of the qualified business to file the Create Rebate Program New Full Time Permanent Employee Payroll Certification with the Department of Finance and Administration (DF&A) when the requisite two million dollars ($2 million) payroll threshold has been attained. This certification provides the number of new full-time permanent employees hired, together with the dollar amount of their payroll. Thereafter, the Company shall recertify the number of new full-time permanent employees and payroll amounts annually at the end of each tax year. The certification to DF&A is the mechanism to initiate the verification audit. Therefore, the company must certify annually at the end each tax year to DF&A.
Pursuant to Act 625 of 2009 for financial incentive agreements with an effective date on or after July 31, 2009, failure of the company to certify and recertify payroll amounts annually to the Department of Finance and Administration will result in the Department of Finance and Administration reducing the amount of rebate earned by ten percent (10%) if not claimed within twelve (12) months from the end of the tax year in which the rebate was earned; or a one hundred percent (100%) forfeiture of the earned rebate if not claimed within twenty-four (24) months from the end of the tax year in which the rebate was earned. The offering of this incentive is intended to provide benefits to companies locating or expanding in Arkansas. In the event the approved company ceases the operations of the facility for which the incentives are offered, the incentive agreement will be terminated and any benefits accrued and not claimed as of the date of closure will be forfeited.
The payroll rebate (Create Rebate) benefit can only be authorized at the discretion of the Director in the form of a written proposal and may be offered for up to ten (10) years. The term of the agreement depends on the benefit to the state as determined by a cost-benefit analysis performed by the Commission. If the proposal is accepted by the company, a financial incentive agreement is signed by the Commission and the company. The provisions of the financial incentive agreement will be based upon the eligible businesses' proposed job creation and average hourly wage information provided in the written proposal from the Director. With the exception of targeted businesses, the benefit allowed is dependent upon the tier in which the business locates as follows:
Payroll Rebate for Targeted Businesses:
The payroll rebate incentive payment for targeted businesses is equal to five percent (5%) of the payroll of the new full time permanent employees for a period not to exceed ten (10) years provided that the following conditions are met:
The payroll rebate for targeted businesses may not be used in conjunction with the income tax credit provided in Section D of these rules and regulations.
Example: An eligible business plans on locating in a Tier 2 county and plans to hire 65 employees at an average wage of $19 per hour. In Tier 2 a payroll rebate of 4.25% of payroll of new full-time permanent employees may be granted. A minimum annual payroll of $2 million is required to qualify for this incentive. In this example, the Director agrees to award the payroll rebate for a period of three (3) years. ($19 per hour × 2080 = $39,520 per employee × 65 jobs = $2,568,800 annual payroll × 4.25% = $109,174 payroll rebate for each of the next three years.) This example assumes that all 65 new full-time permanent employees were hired at the beginning of the first year and worked forty (40) hours per week.
Notes: Benefit calculations could change given any of the following circumstances: *The business decided to locate in another tier;
* The Director awards a shorter or longer term for the benefit;
* The payroll increases due to either raises being given or new employees added to the payroll;
* The payroll decreases (if the payroll falls below the $2 million threshold for qualification, the business may request an extension of up to 24 months to regain the payroll threshold; and
* If the business fails to regain the payroll threshold amount, the business shall be liable for repayment of all benefits previously received.
Combination with other incentives: The payroll rebate (Create Rebate) incentive authorized in § 15-4-2707, if offered by the Director, may be combined with:
* Either the retention investment incentive (InvestArk) authorized by § 15-4-2706(c) or the sales and use tax refund incentive (Tax Back) authorized by § 15-4-2706(d), the approved business would choose between these two, but cannot take both;
* The ArkPlus investment incentive authorized by § 15-4-2706(b), if approved by the Director;
* The research and development income tax incentive for university based research authorized by § 15-4-2708(a); and
* The research and development income tax incentive for in-house research authorized by § 15-4-2708(b).
The qualifications and benefits for this incentive are the same in all four tiers. In order to qualify, a business must:
In order to obtain benefits under the InvestArk program, a business must apply to the Commission, using forms provided by the Commission, and be approved based on the qualifications submitted in the application and the accompanying project plan. With the exception of preconstruction costs, only those costs incurred after the Commission's approval are eligible in calculating the benefit of this program.
The project plan shall clearly identify the scope of the project, the time frame in which the project is to be started and completed and a complete listing of estimated project expenditures. All project costs must be incurred within four (4) years from the date the project is approved by the Commission. However, a qualified business that enters into a lease for building or equipment for a period in excess of five (5) years may count the lease payments for the first five (5) years of the lease agreement as qualifying expenditures. The first five (5) years of qualified lease payments should be claimed in the expenditure year in which the lease is signed.
The project plan may be revised by written amendment filed with the Commission. The Commission's approval of an amendment will not extend the time period in which project costs may be incurred. Amendments that exceed 25% of the original project plan's estimated cost will not be considered and shall be submitted as a new project.
The benefit of the InvestArk program is a sales and use tax credit based on a percentage of qualified expenditures. The percentage used to determine the amount of sales and use tax credits earned is one-half of one percent (0.5%) above the state sales and use tax rate in effect at the time the financial incentive agreement is signed with the Commission.
The credit may be applied against the business' direct-pay state sales and use tax liability in the year following the year of expenditure. Any unused credits may be carried forward for a period of up to five (5) years. In any year, tax credits taken under this program cannot exceed 50% of the business' sales and use tax liability on taxable purchases.
Once a business has qualified for the benefits of the InvestArk incentive, the Commission will notify the Arkansas Department of Finance and Administration that the project has been approved and will transmit the documents upon which the qualification was based.
The Commission's approval of any application is for content only. It does not constitute approval of all items listed on the application or the project plan. These items will be reviewed and either approved or ruled ineligible by an audit by the Revenue Division of the Department of Finance and Administration (DF&A) .
DF&A is authorized to conduct an audit to determine eligibility of reported project expenditures. The audit may be conducted after credits have been issued and used. If expenditures upon which credits have been issued are determined to be ineligible, the amount of credit will be adjusted, which may result in the repayment of all taxes.
It is the responsibility of the qualified business to file a Annual Project Expenditure Report (Form InvestArk 2000) annually at the end of each calendar year with the Department of Finance and Administration to report the eligible project expenditures incurred during the preceding calendar year. Upon determining the amount of credit earned during that calendar year, the Department of Finance and Administration shall issue a memorandum of credit to the qualified business. The issuance of the credit does not imply the eligibility of the expenditures, which are subject to audit at a later date.
Example: A manufacturing firm is adding a new product line and will require additional space as well as new processing equipment. The total cost of the project, with land, building and equipment, totals $7,754,000. The business has been in operation for over 15 years in Arkansas, meeting the two-year residency requirement of this incentive. After being approved by and signing a financial incentive agreement with the Commission, the manufacturing firm is eligible for a sales and use tax credit of 6.5% (one-half a percent over the rate of 6.0% as of July 1, 2007). At the end of each calendar year, until project completion, the business shall certify to the Department of Finance and Administration the amount of project expenditures incurred during the previous calendar year and shall be granted a sales and use tax credit. If the business had spent $7,754,000 in eligible expenditures in the previous calendar year, the total sales and use tax credit based upon a sales tax rate of 6.0% ($7,754,000 × 6.5%) would be $504,010, which could be used the following year and any unused credit could be carried forward for an additional five years. In any year, the amount of the sales and use tax credit used cannot exceed 50% of the business' sales and use tax liability on taxable purchases.
Notes: The benefit calculations above could change given any of the following circumstances:
* The sales tax rate was increased or decreased prior to the signing of a financial incentive agreement with the Commission. Once a business has signed a financial incentive agreement with the Commission, the sales tax rate and benefit will be "locked in" regardless of any subsequent change to the sales tax rate during the term of the project.
* The project fails to reach the minimum investment threshold of $5 million. Should benefits be received for project expenditures and the threshold expenditure of $5 million not be met, the recapture provisions of Section V of these regulations may be invoked by the Department of Finance and Administration.
Combination with other incentives: The retention tax credit (InvestArk) authorized in § 15-4-2706(c) may be combined with:
* The job creation tax credit (Advantage Arkansas) as authorized in §15-4- 2705;
* The payroll rebate (Create Rebate), if offered by the Director, as authorized in § 15-4-2707;
* The research and development income tax incentive for university based research authorized by § 15-4-2708(a); and
* The research and development income tax incentive for in-house research authorized by § 15-4-2708(b).
This incentive is awarded only at the discretion of the Director. In order to qualify, the business must meet both the investment and payroll thresholds for the tier in which it locates.
The benefit is an income tax credit equal to ten percent (10%) of the investment in land, buildings, equipment and costs relating to licensing and protecting intellectual property (which would include license fees, patent fees and attorney fees to maintain or enhance the patent's or trademark's application). The benefit is the same regardless of the tier in which the business locates.
The business must reach the investment threshold for the tier in which it is located within four (4) years from the date of the signing of the financial incentive agreement. All project costs must be incurred within four (4) years from the date the project is approved by the Commission however a qualified business that enters into a lease for building or equipment for a period in excess of five (5) years may count the lease payments for the first five (5) years of the lease agreement as qualifying expenditures. The first five (5) years of qualified lease payments should be claimed in the expenditure year in which the lease is signed.
It is the responsibility of the qualified business to file a ArkPlus Program Annual Incentive Plan Expenditure Report (Form ArkPlus 2000) and a ArkPlus Program New Full Time Permanent Employee Payroll Certification with the Department of Finance and Administration (DF&A) when the investment threshold is met. This certification provides the amount of eligible project cost incurred in the previous tax year as well as the number of new full-time permanent employees hired, together with the dollar amount of their payroll. Thereafter, the Company shall recertify eligible project costs and the number of new full-time permanent employees and payroll amounts annually at the end of each tax year. The certification to DF&A is the mechanism to initiate the verification audit.
The income tax credit earned cannot be used to offset more than 50% of the business' income tax liability in any one tax year. Any unused credits can be carried forward for nine (9) years beyond the year in which they were earned or until exhausted, whichever occurs first. In order to qualify for this incentive, the business must meet the investment and payroll threshold for the tier in which the business locates or expands:
Example: A new eligible business plans to begin operations in a Tier 4 county. It plans on hiring 50 new full-time permanent employees at an average wage of $15 per hour. ($15/hr. × 2080 hours = $31,200 avg. annual salary × 50 employees = $1,560,000 annual payroll) It will invest $3,500,000 in land, buildings and equipment for the new operation. The $1,560,000 annual payroll exceeds the $800,000 payroll threshold for a Tier 4 county and the capital investment of $3.5 million exceeds the $2 million investment threshold allowing the business to meet minimum qualifications for the incentive. Should the Director approve the business' application for this incentive program, and should the business spend precisely $3.5 million, it would earn an income tax credit of $350,000 that could be carried forward for nine years beyond the year it was first earned. This example assumes all new full-time permanent employees were hired at the beginning of the first year and work forty (40) hours per week.
Notes: The benefit calculation noted above could change given any of the following circumstances:
* The business fails to reach either the investment or payroll threshold required to receive the benefit of this incentive program.
* Failure to meet investment or payroll requirements could necessitate the implementation of recapture provisions provided for in Section V of these regulations.
Combination with other incentives: The investment income tax credit authorized by § 15-4-2706(b), if approved by the Director, may be combined with:
* The payroll rebate (Create Rebate) authorized by § 15-4-2707, if approved by the Director;
* The research and development income tax incentive for university based research authorized by § 15-4-2708(a); and
* The research and development income tax incentive for in-house research authorized by § 15-4-2708(b).
At the discretion of the Director, a targeted business may earn an income tax credit or a sales and use tax credit based upon new investment. The targeted business must:
The credit earned by the targeted business shall be based upon a percentage of the investment as follows:
Prior to the execution of the financial incentive agreement, the targeted business must elect to receive the tax credits as sales and use tax credits or income tax credits.
The percentage of the targeted business' tax liability that may be offset is determined by the average hourly wage paid to the new full time permanent employees as follows:
The approved targeted business must certify eligible project expenditures annually with the Department of Finance and Administration. Upon verification of eligibility, the Department of Finance and Administration shall issue the credit according to the tax type specified in the financial incentive agreement.
The income tax credit may be applied against the approved company's Arkansas income tax liability. Any unused credit may be carried forward for a period not to exceed nine (9) tax years after the tax year in which it was first earned.
The sales and use tax credit may be applied against the company's State sales and use tax liability as reported on its monthly sales and use tax report in the calendar year following the calendar year of expenditure.
The tax liability reported on the company's monthly sales and use tax that may be offset by the credit may be derived from:
The credit may not be applied against any taxes collected from the company by the seller. Any unused credit may be carried forward for a period not to exceed nine (9) calendar years after the calendar year in which it was first earned.
This incentive program is available to all eligible businesses that meet the qualifications for investment and payroll thresholds for the tier in which it locates or expands and are approved for benefits by the Commission. The Commission's approval is contingent upon receipt of a completed application and a local endorsement resolution from the city, county or both which authorizes the refund of its local taxes to the eligible company.
To qualify, the eligible business must invest in excess of one hundred thousand dollars ($100,000) and meet the eligibility criteria of the Advantage Arkansas (§ 15-4-2705), or Create Rebate, (§ 15-4-2707), job creation incentive programs.
The financial incentive agreement for the job creation tax credit (Advantage Arkansas) or payroll rebate (Create Rebate) must be signed within 24 months of signing a financial incentive agreement for a sales and use tax refund unless the eligible business has met the requirements of a job creation financial incentive agreement under § 15-4-2705 or § 15-4-2707 within the previous forty-eight months.
In the event an eligible business has an existing Tax Back agreement, the business may apply for additional Tax Back if it has signed a job creation financial incentive agreement under § 15-4-2705 or § 15-4-2707 within the previous forty-eight (48) months.
In the event the business does not have an existing Tax Back agreement, the business may apply for Tax Back benefits if it has signed a job creation financial incentive agreement under § 15-4-2705 or § 15-4-2707 within the previous forty-eight (48) months.
An application, accompanied by local endorsement resolution must be filed with the Commission. The application should clearly identify the intent of the project, the expenditures planned, the start and end date of the project and an estimate of total project costs. The local endorsement resolution from the governing authority (city council, quorum court or both) in which the project is located must authorize the refund of its local sales and use taxes.
The purpose of the resolution is to:
This incentive program grants a refund of state and local sales and use taxes paid on the purchases of the material used in the construction of a building or buildings or any addition, modernization or improvement to a new or expanding eligible business. A sales and use tax refund is also allowed for the purchases of taxable machinery or equipment associated with the building or project.
A refund shall not be authorized for:
For projects approved on or after July 1, 2005 the refund of state sales and use taxes shall not include the refund of taxes dedicated to the Educational Adequacy Fund provided in § 19-5-1227 or the taxes dedicated to the Conservation Tax Fund provided in § 19-6-484.
All project costs must be incurred within four (4) years from the date the project is approved by the Commission. The project plan may be revised by written amendment filed with the Commission. The Commission's approval of an amendment will not extend the time period in which project costs may be incurred. Amendments that exceed 25% of the original project plan's estimated cost will not be considered and shall be submitted as a new project.
Eligible Businesses Tax Back Refunds
In order for an eligible business to receive a refund, the business must file an Annual Sales and Use Tax Refund Request Form (Form Tax Back 1000) and schedules (Schedule A) listing the qualified purchases at the end of each calendar year.
An approved eligible business may receive a sales and use tax refund on eligible purchases made by a contractor or developer performing work, or building a structure for lease or sale to the approved eligible business provided the eligible business submits to the Department of Finance and Administration, Tax Credits/Special Refunds Section a notarized Contractor's/Developer's Waiver of Refund Form (Form Tax Back 1100) completed by the contractor or developer waiving any and all rights to claim a refund of sales and use taxes.
An approved business is prohibited from claiming a refund for the same amount of local tax that:
Example: An eligible business approved for the Tax Back program makes a purchase of eligible items on an invoice totaling $10,000. Assuming a local tax rate of 1%, the total local tax due is $100. The local tax cap for business purposes is limited to the tax due on $2,500. If the business claims a local tax cap rebate for the $75 (the tax paid in excess of the tax due on $2,500) on its Sales and Use Tax Report or as a refund from the Sales and Use Tax Section; the business' Tax Back refund is limited to $25 for this invoice. If the business has not claimed, or does not plan to claim, the local tax cap rebate, it may claim the full amount of local tax paid on its Tax Back Sales and Use tax refund request.
Refunds to Developers/Contractors
Developers building a structure for lease to an approved eligible business and contractors performing work for an approved eligible business may be permitted to receive a sales and use tax refund on eligible purchases directly from the state only when the approved eligible business requests the Department of Finance and Administration, Tax Credits/Special Refunds Section, in writing, that this be permitted and states the basis for this request. This request must be approved by DFA prior to the signing of the financial incentive agreement.
The Department of Finance and Administration, Revenue Division, will authorize this procedure only when it is satisfied that:
If a developer or contractor has been authorized by the Department of Finance and Administration to receive the refund, the developer or contractor must file an Annual Sales and Use Tax Refund Request by Developer Form (Form Tax Back 1200) and schedules (Schedule A) listing the qualified purchases.
A developer or contractor is prohibited from claiming the same amount of local tax that it has received, or will be receiving, for a local tax cap rebate on qualifying Tax Back purchases, either on its Sales and Use Tax Report or as a refund from the Sales and Use Tax Section.
Example: A developer or contractor makes a purchase of eligible items on an invoice totaling $10,000. Assuming a local tax rate of 1%, the total local tax due is $100. The local tax cap for business purposes is limited to the tax due on $2,500. If the developer or contractor claims a local tax cap rebate for the $75 (the tax paid in excess of the tax due on $2,500) on its Sales and Use Tax Report or as a refund from the Sales and Use Tax Section; it's Tax Back refund is limited to $25 for this invoice. If the contractor or developer has not claimed, or does not plan to claim, the local tax cap rebate, it may claim the full amount of local tax paid on its Tax Back Sales and Use tax refund request.
Filing Requirements
It is the responsibility of the eligible business to file a Annual Sales and Use Tax Refund Request Form (Tax Back 1000) and supporting schedules (Schedule A) with the Department of Finance and Administration at the end of each calendar year.
Upon determining the amount of eligible refund, the Department of Finance and Administration shall issue a refund to the eligible business.
All claims for sales and use tax refunds under this incentive program must be filed within three (3) years from the date of the qualified purchase or purchases or those claims will be denied.
Example: A relatively new eligible business is planning to expand its operations in a Tier 3 county. The business plans to hire seven new full-time permanent employees at $12 per hour. ($12/hr. × 2080 hours = $24,960 average annual wage × 7 new employees = $174,720 annual payroll). The business would meet the payroll threshold for a Tier 3 county. The business will renovate an existing building in the community and will spend approximately $125,000 in renovation costs. This investment is above the threshold required. The sales tax paid on all renovation costs subject to the sales tax is eligible to be refunded at the sales or use tax rate in effect at the time of the purchase, excluding the taxes dedicated to the Educational Adequacy Fund and the Conservation Tax Fund. The eligible business must file for the sales or use tax refund within three years of purchase or the claim will be denied. This example assumes all new full-time permanent employees are hired at the beginning of the first year and work forty (40) hours per week.
Notes: The refund of sales and use tax for eligible businesses is dependent upon the following conditions:
* The refund is made contingent upon the signing of a financial incentive agreement for a jobs creation incentive (Advantage Arkansas, or Create Rebate) within 24 months of signing a financial incentive agreement for a sales and use tax refund for new and expanding eligible businesses;
* The items purchased being subject to the sales or use tax;
* The payroll threshold under the Advantage Arkansas or Create Rebate job creation financial incentive agreements being met within twenty-four (24) months of the signing of the financial incentive agreement; and
* The documentation of the minimum investment ($100,000) needed to qualify for the sales and use tax refund.
Combination with other incentives: The sales and use tax refund for new and expanding eligible businesses, authorized by § 15-4-2706(d), may be combined with:
* Advantage Arkansas as authorized by § 15-4-2705 or Create Rebate as authorized by § 15-4-2707, if approved by the Director; and
* The research and development income tax credit for university based research authorized by § 15-4-2708(a); and
*The research and development income tax incentive for in-house research authorized by § 15-4-2708(b).
This incentive program extends the benefits of the Tax Back sales and use tax refund program to a category of new and expanding eligible businesses referred to as "targeted businesses". This incentive is a discretionary incentive and is offered only at the discretion of the Director. Targeted businesses are found within six growing business sectors that include:
To qualify as a targeted business, the Commission must determine that the business falls within one of the six categories noted above, the business must have been in operation for five years or less and must pay, at minimum, 150% of the lesser of the state or county average wage. In addition, the targeted business must have an annual payroll of at least one hundred thousand dollars ($100,000) and demonstrate evidence of an equity investment in the targeted business of at least two hundred fifty thousand dollars ($250,000). A targeted business with an annual payroll in excess of one million dollars ($1,000,000) will not qualify for the targeted business sales and use tax refund, but may be eligible for other incentives offered through the Consolidated Incentive Act of 2003 (Act 182 of 2003).
In addition to meeting the targeted business eligibility requirements, the business must invest in excess of one hundred thousand dollars ($100,000) and meet the eligibility criteria of the Targeted Business payroll income tax credit incentive program (§ 15-4-2709). A signed financial incentive agreement for targeted payroll income tax credits must be signed within 24 months of signing a financial incentive agreement for a sales and use tax refund.
An application accompanied by a local endorsement resolution must be filed with the Commission. The application should clearly identify the intent of the project, the expenditures planned, the start and end date of the project and an estimate of the total project costs. The local endorsement resolution from the governing authority (city council, quorum court or both) in which the project is located must authorize the refund of its local sales and use taxes. The purpose of the resolution is to:
This incentive program grants a refund of state and local sales and use taxes paid on the purchases of the material used in the construction of a building or buildings or any addition, modernization or improvement to a new or expanding eligible business. A sales and use tax refund is also allowed for the purchases of taxable machinery or equipment associated with the building or project.
A refund shall not be authorized for:
For projects approved on or after July 1, 2005 the refund of state sales and use taxes shall not include the refund of taxes dedicated to the Educational Adequacy Fund provided in § 19-5-1227 or the taxes dedicated to the Conservation Tax Fund provided in § 19-6-484.
All project costs must be incurred within four (4) years from the date the project is approved by the Commission. The project plan may be revised by written amendment filed with the Commission. The Commission's approval of an amendment will not extend the time period in which project costs may be incurred. Amendments that exceed 25% of the original project plan's estimated cost will not be considered and shall be submitted as a new project.
It is the responsibility of the qualified targeted business to file a Targeted Business Tax Back Program Annual Sales and Use Tax Refund Request (Form Target 1000) annually at the end of each calendar year to the Department of Finance and Administration to request a refund of sales and use taxes paid on eligible project expenditures incurred during the preceding calendar year. Upon determining the amount of the eligible refund, the Department of Finance and Administration shall issue a refund to the qualified business. All claims for sales and use tax refunds under this incentive program must be filed within three (3) years from the date of the qualified purchase or purchases or those claims will be denied.
Example: A new start-up computer software design firm is beginning business. It has received an equity investment from a venture capital firm in the amount of $750,000 to help it get started. It plans on hiring six new full-time permanent employees at an average hourly wage of $28 per hour. The average hourly wage for the tier 1 county in which the business plans to locate is $15 per hour. ($15/hr. × 150% = $22.50 per hour) The business' average hourly wage of $28 per hour is above the threshold wage to qualify in this tier 1 county. ($28/hr. × 2080 hrs. = $58,290 average annual salary × 6 employees = $349,440 annual payroll). The business' annual payroll exceeds the threshold of $100,000 so the business meets the payroll, investment and average wage requirements necessary to qualify for the sales and use tax refund. Eligibility is also dependent upon being approved by the Director of the Commission. All eligible expenditures subject to the sales or use tax may be refunded under this incentive. The eligible targeted business must file for the sales or use tax refund within three years of purchase or the claim will be denied. This example assumes all new full-time permanent employees are hired at the beginning of the first year and work forty (40) hours per week.
Notes: The refund of sales and use tax for eligible targeted businesses is dependent upon the following conditions:
* The refund is made contingent upon the signing of a financial incentive agreement for a targeted payroll income tax credit for targeted businesses incentive within 24 months of signing a financial incentive agreement for a sales and use tax refund for a targeted business;
* The items purchased being subject to the sales or use tax;
* The business meeting the average wage requirement;
* The payroll threshold being met within twenty-four (24) months of the signing of the financial incentive agreement; and
* The documentation that the targeted business has received an equity investment in excess of $250,000.
Combination with other incentives: The sales and use tax refund for targeted businesses authorized by § 15-4-2706(d) may be combined with, if approved by the Director:
* The targeted job creation income tax credit as authorized by § 15-4-2709; and
* The targeted research and development tax credit authorized by § 15-4-2708(c).
The payroll income tax credit for targeted businesses is offered to assist with the start-up of businesses in targeted sectors that pay significantly more than the state or county average wage of the county in which the business locates. This incentive is offered only at the discretion of the Director. In order to qualify for this incentive, the business must be included in one of six targeted business sectors that include:
The business must also have an annual payroll of not less than one hundred thousand ($100,000) or more than one million dollars ($1,000,000), show proof of an equity investment of at least two hundred fifty thousand dollars ($250,000) and pay average hourly wages in excess of 150% of the county or state average hourly wage, whichever is less.
The benefit for a targeted business is an income tax credit based on 10% of its annual payroll, with a cap of $100,000 per year in earned income tax credits for a business that qualifies and is approved for this incentive. Any unused credits can be carried forward for nine (9) years beyond the year in which they were earned or until exhausted, whichever occurs first.
The incentive may be offered for a period not to exceed five (5) years. The five-year period begins on January 1st of the year in which the financial incentive agreement is signed and may not extend beyond 60 months from that date. Unlike the other incentives, the calculation of this income tax credit may include existing employees in the calculation of payroll to qualify for this benefit. In order to claim these benefits, the targeted business must sign a financial incentive agreement with the Commission.
Income tax credits are earned in the tax year in which the new full-time permanent employees qualify after the financial incentive agreement was signed with the Commission. At the end of each tax year, during the term of the agreement, it is the responsibility of the qualified targeted business to file the Targeted Business Payroll Tax Credit Employee Annual Payroll Certification with the Department of Finance and Administration (DF&A). This certification provides the number of new permanent employees and their payroll during the preceding tax year and is the mechanism to initiate the verification audit. Therefore, the company must certify annually at the end each tax year to DF&A.
A unique feature of this incentive is the ability of the business that earns the targeted business income tax credit to sell the credits. The business must make application to the Commission for the sale of credits. Upon approval by the Commission, the business may sell earned income tax credits and the credits may only be sold one time. The Commission may assist the business in finding a buyer for the tax credits. Any sale of tax credits through this incentive will be fully documented by the Commission and that information will be transmitted to the Revenue Division of the Department of Finance and Administration.
The buyer of the tax credit shall be subject to the same provisions for carry forward of the tax credits as the business that originally earned the credits. Since one of the allowable costs under the research and development tax credits is the salary of a person performing research, a business earning payroll income tax credits for targeted businesses is prohibited from earning research and development tax credits, as authorized by § 15-4-2708 or by § 26-51-1102(b) for the same expenditure.
Example: A new biotechnology firm, which is a client of the BioVentures Incubator, is leaving the incubator to expand its business. It has received a Small
Business Innovation Research (SBIR) grant of $700,000 to continue its efforts with assistance from the National Institutes of Health. Currently, the business has one employee, a former UAMS research scientist who holds the patent on the biomedical device that is to be the company's first product. The business plans on hiring four new full-time permanent employees for a total of five new full-time permanent employees. The average hourly wage of the five employees will be $45 per hour. ($45/hr. ×2080 = $93,600 avg. annual salary × 5 employees = $468,000 annual payroll) The SBIR grant allows the new company to meet the equity investment threshold and the annual payroll is well above the $200,000 minimum to qualify. The $45 per hour wage is more than the 150% requirement. The new targeted business would earn a tax credit of $46,800 which may be sold to a willing buyer. If this business were granted the payroll income tax credit for the maximum time allowable (5 years), the credit in subsequent years would be based on 10% of the annual payroll in years two through five. This example assumes all new full-time permanent employees are hired at the beginning of the first year and work forty (40) hours per week.
Notes: The calculation of the benefit for an income tax credit for new targeted businesses is dependent upon the following conditions:
* A minimum payroll of $100,000 being maintained during the term of the agreement;
* The business operations must continue in one of the six targeted areas;
* The average hourly wage threshold being maintained; and
*The business continues to operate in accordance with the qualification requirements throughout the term of the financial incentive agreement.
Combination with other incentives: The payroll income tax credit for targeted businesses authorized by § 15-4-2709 may be combined with, if approved by the Director:
* The sales and use tax refund for targeted businesses as authorized by §15- 4-2706(e); and
*The research and development income tax credit for targeted businesses as authorized by § 15-4-2708(c).
Section E deals with incentives for research and development. The different 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. It is important for the applicant to understand the different incentives and to select the most appropriate for the eligible research and development activity. In summary:
It is the responsibility of the company to apply for research and development income tax credits offered by Act 182 of 2003 (Consolidated Incentive Act of 2003). Unless otherwise specified, the application and research and development project plan shall be the basis for the Commission's decision to approve tax credit treatment for research and development expenditures. It is the responsibility of the company to claim any research and development income tax credits that may have been earned under authority granted by Act 182 of 2003. At the discretion of the Commission, an approved application and project plan may serve as the financial incentive agreement. Claims for research and development tax credits may require the company to file with its tax return a Certificate of Tax Credit issued by the Arkansas Science and Technology Authority.
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 sixty (60) months from that date.
The specific requirements to qualify for research and development incentives follow.
An eligible business that contracts with one or more Arkansas colleges or universities in performing research may qualify for a 33% income tax credit as authorized in § 26-51-1102(b) for qualified research expenditures. The income tax credit may be carried forward for nine years beyond the year in which the credit was earned.
In order to qualify for the income tax credit for research and development with universities, an eligible business must submit an application and project plan to the Commission. The Arkansas Science and Technology Authority will review the applications and project plans so submitted and advise the Commission on (1) the eligibility of the project plan and (2) approval of the financial incentive agreement.
To claim a credit earned through this incentive, the business shall file with its income tax return the Certificate of Tax Credit issued by the Arkansas Science and Technology Authority.
If approved, the 33% income tax credit for research and development expenditures with an Arkansas college or university will be granted regardless of the business location or other qualifications.
Example: An Arkansas seed company contracts with the Division of Agriculture at the University of Arkansas to engineer a new drought resistant soybean seed. The seed company spends $1 million with the University of Arkansas to research and develop a soybean seed with the characteristics desired by the seed company. This expenditure for this project could result in an earned income tax credit of $330,000 that could be taken over a ten-year period (the year in which it was earned, plus nine years of carry forward).
Notes: It is suggested that any business wishing to take advantage of this income tax credit first visit with the Authority's staff (501-683-4400) to help insure the success of the research and development effort. It should also be noted that this incentive is subject to the limitations established in § 26-51-1103:
* Amount of credit which may be claimed in any year is limited to 100% of tax liability;
* The credits may be used in the year earned, plus a nine-year carry forward period; and
* This incentive cannot be used with other income tax benefits for the same expenditure.
This incentive must also adhere to the documentation requirements of § 26-51-1104:
* Must demonstrate proof of approval by the Arkansas Science and Technology Authority as a qualified research project;
* Must document expenditures with the university or college; and
* Must file copies of the two above-mentioned documents with the Department of Finance and Administration when claiming the credit.
Combination with other incentives: The income tax credit for research and development with universities authorized by § 15-4-2708(a) may be used with:
* The in-house research and development incentive as authorized by §15-4- 2708(b), (c), and (d)(1)(A); but
* May not be used with any other incentive authorized in Act 182 of 2003 (Consolidated Incentive Act of 2003) for the same expenditures.
A new eligible business that conducts "in-house" research within a research facility that is operated by the eligible business that qualifies for federal research and development tax credits may qualify for in-house research income tax credits. The eligible business must make an application to the Commission generally describing the research to be undertaken and the estimated expenditures to be made on in-house research. The credit allowed for approved in-house research is twenty percent (20%) of the amount spent on qualified in-house research expenditures that exceeds the base year, for a period of three (3) years and the incremental increase in qualified research expenditures for the succeeding two (2) years.
Example:
For a new in-house research facility, the base year is zero (0). Therefore, in the first three (3) years following the date of the financial incentive agreement, all eligible expenditures will qualify for credit.
The amount of qualified research expenditures incurred in the third year shall be used to calculate the tax credit in the fourth year.
The amount of qualified research expenditures incurred in the fourth year shall be used to calculate the tax credit in the fifth year.
Existing eligible businesses that conduct in-house research in a research facility operated by the business and that qualify for federal research and development tax credits may qualify for an income tax credit equal to twenty percent (20%) of the amount spent on research that exceeds the base year for a period of three (3) years and the incremental increase in qualified research expenditures for the succeeding two (2) years, subject to the limitations under § 26-51-1103.
Example:
For an existing in-house research facility, the base year amount shall be the amount of eligible research expenditures incurred in the year prior to the year in which the financial incentive agreement was signed by the Commission.
The amount of qualified research expenditures incurred in the third year shall be used to calculate the tax credit in the fourth year.
The amount of qualified research expenditures incurred in the fourth year shall be used to calculate the tax credit in the fifth year.
The term of the financial incentive agreement for in-house research and development shall be for a period not to exceed five (5) years beginning on the first day of the business's tax year in which the financial incentive agreement is signed. The financial incentive agreement may be renewed for a period not to exceed five (5) years upon the submittal of a new application and project plan.
The approved business shall certify annually at the end of each tax year, to the Commission, the amount expended on in-house research.
The income tax credit earned for in-house research and development may be used to offset one hundred percent (100%) of the eligible businesses' state income tax liability.
Any unused credit may be carried forward for a period not to exceed nine (9) years.
To claim the credit earned through this incentive, the business shall file with its return the Certificate of Tax Credit issued by the Arkansas Science and Technology Authority. The Commission will adhere to some of the federal guidelines for qualifying research for federal tax credits as a guide in determining eligibility for this state income tax credit.
Qualified research expenditures include in-house expenses for taxable wages paid, usual fringe benefits, and supplies used in the conduct of qualified research. Qualified research must satisfy all of the following tests in order to qualify:
* 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 of the 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.
The following activities are specifically excluded from the definition of qualified research:
* Any research conducted after the beginning of commercial production;
* Research adapting an existing product or process to a particular customer's need;
* Duplication of an existing product or process;
* Surveys or studies;
* Research related to certain internal-use computer software;
* Research in the social sciences, arts or humanities;
* Research conducted outside of Arkansas. However, both the Director of the Commission and the President of the Arkansas Science and Technology Authority may agree to make an exception for research and development activities occurring outside of Arkansas for an agreed upon transition period if the following conditions exist:
* 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.
The qualified services must be in the direct support of either:
Direct support of research activities does not include general administrative services or other services only indirectly of benefit to the research activity.
Notes:
* The carry forward for this income tax credit is limited to nine (9) years beyond the year in which the credit was earned.
* Documentation must also be provided that shows that the Arkansas Science and Technology Authority has approved the research expenditures as part of a qualified research program.
* It is the intent of the Commission to adhere to some of the federal guidelines for research conducted within an eligible business.
Combination with other incentives: The in-house research income tax credit may not be combined with:
* Other in-house research and development incentives as authorized by §15- 4-2708(c) or § 15-4-2708(d)(1)(A); or
* Any other incentive in Act 182 of 2003 (Consolidated Incentive Act of 2003) for the same expenditures.
Businesses deemed by the Commission to fit within the six business sectors classified as "targeted businesses" may enter into a financial incentive agreement for income tax credits based on qualified research and development expenditures. A targeted business may be approved for an income tax credit each year equal to 33% of the qualified research and development expenditures incurred each year for the first (5) years of the financial incentive agreement. This incentive is a discretionary incentive and is offered only at the discretion of the Director. The application for this 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. The targeted business applying for in-house research and development income tax credits shall comply with all of the qualifications required of targeted businesses to qualify for a job creation income tax credit:
The Commission will adhere to some of the federal guidelines for qualifying research for federal tax credits as a guide in determining the eligibility for this state income tax credit.
Qualified research expenditures include in-house expenses for taxable wages paid, usual fringe benefits, and supplies used in the conduct of qualified research. Qualified research must satisfy all of the following tests in order to qualify:
* Your 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 your new or improved business component; and
* Substantially all of the activities related to your research effort must constitute elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.
The following activities are specifically excluded from the definition of qualified research:
* Any research conducted after the beginning of commercial production;
* Research adapting an existing product or process to a particular customer's need;
* Duplication of an existing product or process;
* Surveys or studies;
* Research related to certain internal-use computer software;
* Research in the social sciences, arts or humanities; and
* Research conducted outside of Arkansas. However, both the Director of the Commission and the President of the Arkansas Science and Technology Authority may agree to make an exception for research and development activities occurring outside of Arkansas for an agreed upon transition period if the following conditions exist:
Qualified wages are taxable wages 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.
The qualified services must be in the direct support of either:
Direct support of research activities does not include general administrative services or other services only indirectly of benefit to the research activity.
As with the payroll income tax credits for targeted businesses, the income tax credit for research and development earned by targeted businesses may be sold.
The business must make application to the Commission for the sale of credits earned under this section within one year of issuance. Upon application and approval by the Commission, the business may sell earned income tax credits. The credits may only be sold one time. The Commission may assist the targeted business in finding a buyer for the tax credits. Any sale of tax credits through this incentive will be fully documented by the Commission and that information will be transmitted to the Revenue Division of the Arkansas Department of Finance and Administration. The same benefits accrue to a project regardless of the tier in which the business is located.
To claim a credit earned through this incentive, the business shall file with its income tax return the Certificate of Tax Credit issued by the Arkansas Science and Technology Authority.
The buyer of the tax credit shall be subject to the same provisions for carry forward of the tax credits as the business that originally earned the credits. A targeted business earning research and development tax credits is prohibited from earning job creation tax credits, as authorized by § 15-4-2709 or research tax credits as authorized by § 15-4-2708(a), for the same expenditure.
Example: A new photonics company that has recently left the Genesis Technology Business Incubator and has applied for and been approved for in-house research income tax credits as a targeted business, is in need of further research to refine a process for using lasers in space applications. It plans to spend $200,000 on an in-house research and development project that has been approved by the Arkansas Science and Technology Authority as a qualified research program. The $200,000 expenditure would be eligible for a 33% tax credit, entitling the photonics company to earn $66,000 in income tax credits in the year of the expenditure. The credits may be carried forward nine years. At the discretion of the photonics company and with the approval of the Commission, the credits may be sold within one year to allow the photonics company to realize the benefit of the credit. The purchaser of the credits would be able to carry the credit forward for nine years.
Notes:
* The carry forward for this incentive is nine (9) years beyond the year in which the credit was first earned.
* A buyer of the credit is limited to the same carry forward period. A sale of the tax credit does not alter the time frame for using the credits.
* It is the intent of the Commission to adhere to some of the federal guidelines for research conducted by an eligible targeted business.
Combination with other incentives: The income tax credit for research by a targeted business authorized by § 15-4-2708(c) may not be used with:
* Other in-house research and development incentives as authorized by §15- 4-2708(b) or § 15-4-2708(d)(1)(A); or
* Any other incentive in Act 182 of 2003 (Consolidated Incentive Act of 2003) for the same expenditures.
An income tax equal to 33% of qualified research expenditures may be allowed for an Arkansas taxpayer that invests in:
The company must apply to the Commission in order to qualify for the income tax credit for research in an area of strategic value. Research area of strategic value means research in fields having long-term economic or commercial value to the state, and that have been identified in the research and development plan approved from time to time by the Board of Directors of the Arkansas Science and Technology Authority. The tax credit for research in an area of strategic value may be earned for the first five years following the signing of a financial incentive agreement with the Commission. The income tax credit earned cannot offset more than 100% of a business' income tax liability in any one tax year and the benefits can be carried forward for nine (9) years beyond the year in which they were earned or until exhausted, whichever occurs first.
The maximum tax credit that may be claimed by a company under this program is $50,000 per tax year. The application for this 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.
To claim a credit earned through this incentive, the company shall file the Certificate of Tax Credit issued by the Arkansas Science and Technology Authority with the tax return on which the credit is first claimed.
Qualified research expenditures for research in an area of strategic value include in-house expenses for taxable wages paid (wages subject to withholding) and supplies used in the conduct of qualified research. Qualified research must satisfy all of the following tests in order to qualify:
* Your 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 your new or improved business component; and
* Substantially all of the activities related to your research effort must constitute elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.
The following activities are specifically excluded from the definition of qualified research:
* Any research conducted after the beginning of commercial production;
* Research adapting an existing product or process to a particular customer's need;
* Duplication of an existing product or process;
* Surveys or studies;
* Research related to certain internal-use computer software;
* Research in the social sciences, arts or humanities; and
* Research conducted outside of Arkansas. However, both the Director of the Commission and the President of the Arkansas Science and Technology Authority may agree to make an exception for research and development activities occurring outside of Arkansas for an agreed upon transition period if the following conditions exist:
Qualified wages are taxable wages paid to a new full-time permanent employee 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.
The qualified services must be in the direct support of either:
Direct support of research activities does not include general administrative services or other services only indirectly of benefit to the research activity.
A company claiming a credit through this incentive shall be prohibited from receiving the research tax credit authorized by § 26-51-1102(b) for the same expenditures.
Example: A defense contractor located in Arkansas has decided to conduct research in the state to improve the function of microelectronic components in advanced weapons systems. The company has been approved for this research as being "research in an area of strategic value" by the Board of Directors of the Arkansas Science and Technology Authority. The Authority's Board of Directors envisioned many non-defense applications of the proposed research and felt as though it was very complementary to other work being done in Arkansas in the field of microelectronics. The defense contractor will spend $1 million in qualified research expenditures in Arkansas in conjunction with the Authority approved program of in-house research. Assuming the entire $1 million is expended on qualified items over the five-year period at the rate of $200,000 per year, the defense contractor would generate a potential credit on the qualified annual expenditure of ($200,000 × 33% = $66,000) and earn an actual income tax credit of $50,000 per tax year, due to the limit established. The credits earned in each year may be carried forward for nine (9) years beyond the tax year in which they were first earned.
Notes:
* The carry forward for this incentive is nine (9) years beyond the year in which the credit was first earned.
* The Arkansas Science and Technology Authority must approve any research for which a business is seeking a credit under this incentive.
* It is suggested that any business wishing to take advantage of this income tax credit first visit with the Authority's staff (501-683-4400) to help insure the success of the research and development effort.
Combination with other incentives: The income tax credit for research in an area of strategic value may not be used in combination with:
* Any other research and development incentive as authorized by §15-4- 2708; or
* Any other incentive in Act 182 of 2003 (Consolidated Incentive Act of 2003) for the same expenditures.
The company must apply to the Commission in order to qualify for the income tax credit for research under programs of the Arkansas Science and Technology Authority. The application for this 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. The Authority specifies the application format for its programs. The tax credit may be earned for the first five years following the signing of a financial incentive agreement with the Commission. The income tax credit earned cannot offset more than 100% of a business' income tax liability in any one tax year and the benefits can be carried forward for nine (9) years beyond the tax year in which they were earned or until exhausted, whichever occurs first. The maximum tax credit that may be claimed by a company under this program is $50,000 per tax year.
To claim a credit earned through this incentive, the company shall file the Certificate of Tax Credit issued by the Arkansas Science and Technology Authority with the tax return on which the credit is first claimed.
Example: A new medical device company had only a few assets and employees and it did not qualify for any of the other research and development incentives. As a start-up company, it had been seeking outside investors in its revolutionary circulatory system implant. The company received a $3,000 technology transfer assistance grant from the Arkansas Science and Technology Authority to help the company prepare its first Small Business Innovation Research (SBIR) proposal to a federal agency. As part of its assistance to the company, the Authority's staff encouraged the company to prepare an application and project plan (which was actually the company's commercialization and business plan) for the research and development incentive under programs of the Authority. The application and project plan were approved by the Commission and became the five-year financial incentive agreement with the company. The agreement includes a timetable for commercializing the company's technology that would begin with the notice of the SBIR phase I award.
The financial incentive agreement includes a $20,000 university research project under the Authority's Applied Research Grant Program in support of the phase I SBIR effort, a $50,000 product development project under the Authority's Technology Development Program, $180,000 under the Authority's Applied Research Grant and Technology Development Programs in support of a future SBIR phase II award, and a $300,000 investment under the Authority's Seed Capital Investment Program in support of SBIR phase III. Qualification for tax credit consideration for these R&D activities is contingent on the company's performance under the federal SBIR program and decisions to fund phase I and II projects by the federal agency. It is also dependent on raising risk capital investments from individual investors who must decide that the potential benefit from sales of the implant is worth the risk.
The medical device company has been notified that it has been approved for its first SBIR award of $60,000. A local individual investor has decided, on the strength of the SBIR award and the financial incentive agreement, to become part of the company with a $100,000 investment. In the first year after the SBIR award notice, the investor put $20,000 into university research and $50,000 into product development. The Authority's Board of Directors has approved both projects. The $70,000 qualifies under the financial incentive agreement for a 33% tax credit equal to $23,100, which is under the $50,000 per year cap.
The company submitted an application for a phase II SBIR project to extend its commercialization work. Tax credits in the remaining four years will depend on decisions by the federal agency regarding the phase II application and the investor (or investors) regarding additional investments.
Notes:
* The carry forward for this incentive is nine years beyond the year in which the credit was first earned.
* The Arkansas Science and Technology Authority must approve any research for which a company is seeking a credit under this incentive.
* It is suggested that any company wishing to take advantage of this income tax credit first visit with the Authority's staff (501-683-4400) to help insure the success of the research and development effort.
Combination with other incentives: The income tax credit for research and development under programs of the Arkansas Science and Technology Authority may not be used in combination with:
*Any other research and development incentive as authorized by § 15-4-2708 or *Any other incentive in Act 182 of 2003 (Consolidated Incentive Act of 2003) for the same expenditures.
