With the legislature in recess before returning for sine die in early May, here is a summary of the 2017 income tax legislation. Particularly significant adjustments have been made to passthrough taxation in terms of (1) federal S corporation election conformity, (2) passthrough entity-level apportionment instead of separate allocation, and (3) passthrough withholding on nonresident corporate partners; all are effective January 1, 2018. (If an effective date is not specifically listed, it should be 90 days after adjournment sine die, on or around July 30, 2017.)
Act 48 accelerates the extension of the corporate income tax return deadline from March 15 to April 15, so that it applies for tax years beginning on or after January 1, 2016, instead of tax years beginning on or after January 1, 2017, as provided in 2015 legislation.
Acts 78 and 79 enact identical House and Senate bills that implement the Governor’s $50 million income tax cut for low-earners. The Acts reduce rates for individuals with income under $21,000 across the board, as well as providing a small reduction to the first marginal rate bracket for “middle class” persons earning between $21,000 and $75,000. Effective for tax years beginning on and after January 1, 2019. Unfortunately, Arkansas continues to have one of the most complicated bracket systems in the country.
These Acts also create a 16-member Arkansas Tax Reform and Relief Legislative Task Force to consider tax reforms ahead of the 2019 legislative session. The task force will convene within 30 days of adjournment sine die. An interim report is due by December 1, 2017, and a final report is due by September 1, 2018.
Act 141, effective for tax years and periods beginning January 1, 2018, was the second part of the Governor’s tax package. It exempts military retirement benefits from income tax.
To preserve revenue-neutrality, the Act imposes income tax on unemployment benefits, imposes sales and use tax on digital products, and increases tax on candy and soft drinks from the low grocery tax rate to the higher general rate.
The Act also reduces the soft drink tax and exempts from that tax simple syrup used in making tea. The effective date of this simple syrup for tea exemption was accelerated by Act 596, which made it 90 days after adjournment—likely July 30, 2017.
Act 155 is an Internal Revenue Code conformity bill that updates numerous cross-references in the Arkansas income tax laws. In addition, Act 155 specifically provides that child support payments are not includable in income, and it allows netting of gambling winnings and losses. Effective for tax years beginning on or after January 1, 2015.
Act 433 moves up the deadline for filing an employer’s wage withholding statement from February 28 to January 31, which will tie to the federal deadline. As a practical matter, January 31, 2018, will be the first deadline affected by Act 433.
Act 434 eliminates the separate Arkansas S corporation election. Effective for tax years beginning on or after January 1, 2018, the federal S corporation election will control.
Act 481 allows a 4-year carry-forward of Section 529 tuition savings plan contribution deductions, which are capped at $5,000 per taxpayer annually. Effective for the 2017 tax year.
Act 482 changes Arkansas law to require pass-through entities taxable in multiple states to determine Arkansas income using Arkansas’s UDITPA statute (with throwback and double-weighted sales factor) instead of the current law requiring separate accounting. The resulting Arkansas income will continue to be allocated up to the owners; apportionment factors do not and will not flow up. The practical effect of Act 482 may be limited because many or most multistate pass-through businesses currently use some form of de facto apportionment in determining Arkansas income. Act 482 is effective for tax years beginning on or after January 1, 2018.
Act 666 allows up to a $500 deduction by teachers for purchases of supplies and equipment for students. Effective for tax years beginning on or after January 1, 2017.
Act 760 changes Arkansas income tax withholding laws so that nonresident C corporation owners of pass-through entities are subject to withholding. Until now, C corporations had been exempt from pass-through withholding. Corporations can avoid withholding by participating in a composite return or by filing a form agreeing to be subject to Arkansas income tax. Effective for tax years beginning on or after January 1, 2018.
Act 763 provides an income tax exemption for rural physician community match income incentives. Effective for tax years beginning on or after January 1, 2017.
Act 883 allows taxpayers to deduct up to $3,000 from Arkansas income tax for contributions to an out of state tuition savings program, unless the contribution has already been deducted from the income tax owed to the other state. Deductions of up to $7,500 are permitted for rollovers from out-of-state plans to Arkansas plans. Effective for tax years beginning on or after January 1, 2017.
HB 2100 did not pass but is worth noting. It was a bill to adopt the Multistate Tax Commission’s recommended amendments to UDITPA, such as the broader “apportionable income” classification, market-based sourcing of services and intangibles, and adjustments to the alternative apportionment provisions. HB 2100 also would have adopted a throwout rule for services and would have broadened the throwback rule. The HB 2100 proposals are likely to return in some form as part of the tax reform task force and in the 2019 regular legislative session.