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Arkansas Business Tax – Complete Guide
Arkansas is considered a strategic and attractive location for starting a new business. It has a pro-business climate, driven by low business formation and operational costs, as well as easy access to a skilled workforce. There are several advantages that both new and existing businesses can utilize through tax incentive programs. When you form a new business or move your company to this state, one of the critical areas to focus on is the Arkansas business tax. Depending on the type of entity, the applicable taxes may vary. Hence, we have created a guide that will help you to use an Arkansas business tax Calculator while walking you through the different types of taxes in this state.
Arkansas Business Tax
The Internal Revenue Service (IRS) says that the form of business you operate in Arkansas will determine the type of taxes you have to pay. Most types of business entities in the United States, as well as in Arkansas, are required to file tax returns at various levels, including federal, state, and local or county levels. These levels and taxes will vary from one state to another. If you have registered a company in Arkansas, the taxes you pay may differ from those filed by businesses in other states.
An Arkansas business tax calculator will help you determine the exact tax amount. The Arkansas business tax rates, as well as the filing processes, will also differ from those in other states. However, it is also essential to consider that foreign entities will be required to file taxes in their home state (the state of formation) as well as in Arkansas (if this is the state of operation).
What taxes do businesses pay in Arkansas?
The Internal Revenue Service (IRS) states that all types of entity structures have to file some form of annual income tax return. Although property taxes in Arkansas are among the lowest in the nation, other forms of taxes have higher rates. When you register your company in this state, you may be required to file some form of Arkansas business tax.
There are several categories of taxes prevalent in this state. The entity structure you choose may also determine the taxes levied on your company, as corporations are required to file the Arkansas franchise tax. In contrast, it is not applicable for sole proprietorships. The type of tax may also vary based on specific indicators, such as primary business activity, whether the entity is domestic or foreign, assets owned, and even the number of employees. The business activity of any business is extremely important, as it will determine whether you will file a single tax return or multiple tax returns. The most common form of taxes applicable in the state is:
Corporate income tax
The Arkansas corporate income tax is also known as the Corporation Income Tax. As the name suggests, it is mainly applicable to corporations. This type of tax has a graduated rate, which is applied to the Arkansas Net Taxable Income (NTI). The graduated rate slabs are as follows –
- If your taxable income is $0-$3,000, then the tax rate is 1 percent
- If it is between $3,001-$6,000, then the rate is 2 percent
- If it is between $6,001-$11,000, then the rate is 3 percent
- If it is more than $11,001, the applicable rate is 4.3 percent
The top-end rate applicable was previously 4.8 percent and has now been reduced to 4.3 percent. Since it is a graduated rate, you will need to use an Arkansas business tax calculator for filing your taxes.
Franchise Tax
The Arkansas franchise tax is one of the most important forms of taxation in this state. This is an annual obligation that is imposed on most businesses registered in this state. The tax was established under the Arkansas Corporate Franchise Tax Act of 1979. It is a type of Arkansas corporate income tax that is applied to various entities, including corporations and limited liability companies (LLCs). The franchise tax supports various state services as well as oversight of corporate operations.
The Arkansas franchise tax rates vary according to the type of entity and are governed by Arkansas Code 26-54-104. It is typically filed along with the annual report, and certain entities are required to file this tax by May 1 of each year. Nonprofit organizations are exempt from filing this tax.
Sales and Use Tax
The sales and use tax is one of the essential taxes in this state. This is an Arkansas business tax applicable to entities only if they meet the specified criteria. Suppose your business activity revolves around retail sales, and sales of tangible personal property or services as governed by the state laws. The sales tax is also known as the Arkansas gross receipts tax. In addition to the sales tax, your company may be required to file use tax on products purchased or procured from out-of-state sources. You will need to use an Arkansas business tax calculator to calculate sales and use tax. Compliance with sales tax requirements in Arkansas is extremely important for businesses.
You will need to apply for and obtain a sales tax permit before filing this tax. Some of the most common services subject to the Arkansas gross receipts or sales tax include industrial laundry services, mini warehouses, self-storage rental services, pest control services, security and alarm monitoring services, and campground space rental. The Arkansas sales and use tax rate is six percent of the actual sales price at the state level, while sales of food are subject to a tax rate of two percent. You can obtain a detailed list, as well as tax rates, from the Arkansas Department of Finance and Administration regarding activities, tangible products, and services that are subject to this form of Arkansas business tax.
Are you thinking of forming a new company in Arkansas?
How are Arkansas Businesses taxed?
If you are forming a startup in Arkansas or moving your company to this state, then one of the essential annual requirements is filing tax returns. The type of Arkansas business tax and its respective rates may vary depending on the entity structure, business activity, and the location of the company. Hence, Arkansas LLC taxes and rates will differ from those of a sole proprietorship or a corporation. It is essential to note that your company may be required to file more than one tax return form. Let’s examine the various entities and their tax obligations in Arkansas.
Taxes for an LLC
If you plan to start a limited liability company in Arkansas, it will be considered a pass-through entity for taxation purposes. This means that the LLC will not be required to file federal taxes or Arkansas corporate income tax. Since an LLC is a flow-through entity, the income will pass through to the owners and other members. Arkansas Code of 1987 (2024), AR Code § 26-51-919 (2024) states that a pass-through entity will be required to withhold Arkansas income tax at the highest income tax rate levied under §§ 26-51-201, 26-51-202, and 26-51-205 on the share of income of the said entity. The state of Arkansas has graduated income tax rates ranging from 2 percent to 4.40 percent. This is one of the most important Arkansas LLC taxes, and members have to file it on their share of the LLC’s income using their tax return.
A limited-liability company can also elect to pay the pass-through entity tax (PET). This requires you to file a single income tax return on behalf of the LLC, and you can file the income tax on behalf of all owner members. The tax rates for capital gains vary from 2.45 percent to 4.9 percent on income. There are other forms of Arkansas LLC taxes that you may be required to file, like the sales and use tax (based on sales of specific goods and services), withholding tax (if your LLC has employees), and other industry-related or local taxes. Your LLC may also be subject to state franchise taxes.
Taxes for a C Corporation
If you are considering registering an Arkansas C corporation, your company may be subject to different taxes than those of an LLC or other entities. The foremost applicable tax is known as the Arkansas corporate income tax. This type of tax has a graduated tax rate that applies to the Arkansas Net Taxable Income (NTI), which ranges from 1 percent to 4.3 percent. This is a mandatory tax, and hence all forms of domestic and foreign C Corporations will need to file this tax. There are several other forms of Arkansas Corporation taxes that your company may be required to file. One such tax is the franchise tax.
You will need to file the franchise tax along with the Annual Report. If your company has issued stock, then the rate will be 0.3 percent of the outstanding capital stock or a minimum of $150. If your corporation does not have any stock options, then you will need to file the Arkansas franchise tax of $300. If your corporation is involved in selling specific tangible property or services, then you will need to file state sales and use tax. The sales tax rate is 6.5 percent of the gross receipts from such sales or services.
Apart from this, your corporation may also be required to file local sales and use tax depending on the city or county in which you are operating. It is essential to note that you must obtain a sales tax permit before filing this tax. A C corporation may also be required to file other Arkansas Corporation taxes, like Withholding Tax and other miscellaneous taxes and fees.
Taxes for S Corporation
If you elect S Corporation tax status in Arkansas, then one of the benefits is that you will not be required to file the Arkansas corporate income tax. However, an S corporation can elect to file the Pass-through Entity Tax (PET). The pass-through entity tax is typically due by the 15th day of the fourth month following the end of the taxable year. This type of Arkansas Corporation tax must be filed through quarterly installments, as this will help avoid any underpayment penalties. The pass-through entity tax will be subject to all interests as well as penalty provisions of the Arkansas Tax Procedure Act (ATPA).
If your S Corporation is involved in selling tangible property and specific services, then you will be required to file a type of Arkansas corporate income tax, also known as the sales and use tax. You will need to apply for a sales tax permit first. As an Arkansas employer, you will also need to withhold taxes from the wages of each of your employees. You will need to submit the tax to the Department of Finance and Administration, and this is known as the withholding tax. You may also be required to collect unemployment insurance tax in this state.
Taxes for a Sole Proprietorship
A sole proprietorship is one of the simplest forms of business that you can establish and operate in the state of Arkansas. A sole proprietorship is owned and operated by an individual or a single owner. Hence, this type of entity is required to file individual income tax. The tax rate will be the same as the rate of Arkansas LLC taxes, which varies from 2 percent to 4.40 percent. A sole proprietorship may also be required to file sales and use tax depending on the business activity and the location in which it operates.
Taxes for Partnerships
If you form an Arkansas partnership company, the applicable taxes may be similar to those of LLCs and sole proprietorships. The primary form of Arkansas business tax applicable to a partnership is individual income tax. Each partner is required to file returns based on the income earned through the entity. A partnership company can also elect to be a Pass-Through Entity Tax (PET), and the rate will be similar to that of LLCs or S Corporations.
An interesting aspect is that the Arkansas franchise tax will not be applicable to general partnerships, but if you form or operate a Limited Liability Partnership (LLP), then you will need to file $15 as the tax amount. Apart from this, other taxes that you may need to file include sales and use tax as well as withholding taxes.
Ready to Incorporate Your Arkansas Company?
There are different types of entity structures that you can choose to operate in the state of Arkansas. Each type of structure has its advantages and limitations. Whatever structure you choose, you will need to be compliant with the annual requirement of filing the Arkansas business tax. IncParadise, one of the top incorporation service providers in this state, can provide you with information about state and local taxes. We can assist you in registering your LLC or corporation in Arkansas.
IncParadise offers additional services to fulfill such requirements, like Arkansas foreign qualification and filing a DBA, among others.