Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business’s legal form. In most states corporations are subject to a corporate income tax, while income from “pass-through entities” such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states. Corporate rates, which most often are flat regardless of the amount of income, generally range from roughly 4% to 10%. Personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.
Currently, six states – Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming – do not have a corporate income tax. However, four of those states – Nevada, Ohio, Texas, and Washington – do have some form of gross receipts tax on corporations. Moreover, five of those states – Nevada, South Dakota, Texas, Washington, and Wyoming – as well as Alaska and Florida currently have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.
Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a franchise tax or privilege tax. This is frequently justified as a tax simply for the privilege of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.
Arkansas has both a corporation franchise tax and a graduated corporate income tax. Your business may be subject to one, both, or neither of these taxes depending on its legal form. Additionally, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
Arkansas’s corporation franchise tax applies to the most common types of stock corporations as well as to LLCs. For stock corporations, the tax is 0.3% of the value of the corporation’s outstanding stock with a minimum tax of $150. LLCs are required to pay the minimum $150 franchise tax. The franchise tax is due on May 1st.
The corporate income tax is a graduated tax on net income: the rates incrementally increase for higher amounts of income, with the highest bracket being net income of more than $100,000; rates range from 1% to 6.5%. The specific breakdown is as follows:
Quarterly estimated payments of the corporate income tax are due on or before the 15th day of the 4th, 6th, 9th,and 12th months of the corporation’s tax year.
Here’s a brief look at additional details for five of the most common forms of Arkansas business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Arkansas corporations are subject to both Arkansas’s corporation franchise tax and Arkansas’s graduated corporate income tax.
Example: For the latest tax year, your Arkansas corporation had a taxable income of $50,000 and the value of the corporation’s outstanding stock was also $50,000. Other things being equal, your corporation will owe Arkansas corporate income tax in the amount of $2,440 ($940 plus 6% of the amount over $50,000 (which is $25,000)). Your corporation also owes corporation franchise tax in the amount of $150 (0.3% of $50,000).
S Corporations. An S corporation is created by first forming a traditional corporation and then filing a special form with the IRS to elect S status. Unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax. Rather, taxable income from an S corporation is passed through to the individual shareholders, and each shareholder is subject to federal tax on his or her share of the corporation’s income. In other words, S corporations are pass-through entities. (Note that a shareholder’s share of the S corporation’s income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.)
As of 2018, Arkansas recognizes the federal S election, and Arkansas S corporations are not required to pay income tax to the state. However, individual S corporation shareholders will owe state tax on their share of the company’s income. Prior to 2018, Arkansas did not automatically recognize the federal S election. Instead, in addition to the federal form, you were required to file state Form AR1103, and include with the state form a copy of the federal form.
Like regular corporations, Arkansas S corporations are required to pay the state’s corporation franchise tax. However, an Arkansas S corporation does not pay the state’s corporate income tax. Instead, an individual S corporation shareholder will owe tax on his or her share of the company’s income.
Example: For the latest tax year, your S corporation had net income of $100,000 and the value of the corporation’s outstanding stock was also $100,000. The $100,000 in net income will be allocated to you and your fellow shareholders, and you will each pay tax on your own portions on your respective state tax returns. The rate will vary depending on your overall net income for the year. Also, the S corporation will have to pay a franchise tax of $300 (0.3% of $100,000) by May 1st.
Limited Liability Companies (LLCs). Like S corporations, standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of Arkansas. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them. Also, as mentioned above, standard Arkansas LLCs are required to pay the minimum corporation franchise tax of $150.
Note that while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, disregarded entities), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would also be subject to Arkansas’s corporation net income tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow LLC members, and you will each pay tax on your own portions on your respective state tax returns; the rate will vary depending on your overall net income for the year. Also, the LLC will have to pay minimum franchise tax of $150 by May 1st.
Partnerships. Income from partnerships is distributed to the individual partners, who then pay tax on the amount distributed to them on both their federal and state tax returns.
Example: For the latest tax year, your partnership had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow partners, and you will each pay tax on your respective portions on your respective state tax returns; the rate will vary depending on your overall net income for the year.
Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.
Example: For the latest tax year, your sole proprietorship had net income of $100,000. The $100,000 in net income is distributed to you personally, and you pay tax on that income on your individual state tax return; the rate will vary depending on your overall net income for the year.
Note on Multistate Businesses and Nexus
Our primary focus here is on businesses operating solely in Arkansas. However, if you’re doing business in several states, your business may be considered to have nexus with those states, and therefore may be obligated to pay taxes in those states. Also, if your business was formed or is located in another state, but generates income in Arkansas, it may be subject to Arkansas taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, you should consult with a tax professional.
For further guidance on Arkansas’s corporation franchise tax check the Secretary of State website, and for further guidance on the corporate income tax check the Department of Finance and Administration website. And, if you’re looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business, by Frederick Daily (Nolo).