(a) Partnership income generally — Arkansas Code § 26-51-405.

1. (1) Partnership income must be allocated to the state where it was actually earned.
2. (2) All partnership income from activities carried on within Arkansas shall be allocated to Arkansas. Example: A partnership composed of two (2) partners earned one hundred thousand dollars ($100,000) during the tax year. One (1) partner resides in Arkansas and the other in Louisiana. Thirty thousand dollars ($30,000) of the partnership's income is allocable to activity carried on in Arkansas by, or on behalf of, the partnership. Each partner's distributive share of the partnership's income is fifty percent (50%). Therefore, the Arkansas-based partner would report fifteen thousand dollars ($15,000) in gross income on his or her resident Arkansas individual income tax return and the Louisiana-based partner would report fifteen thousand dollars ($15,000) in gross income on his or her nonresident Arkansas individual income tax return. Because a portion of the partnership's income was allocable to Arkansas, the partners will need to file a partnership tax return (AR1050) with the State of Arkansas.

(b) Partnership composite return — Arkansas Code § 26-51-405.

1. (1) Before the Department of Finance and Administration will allow a composite individual income tax return ("block filing"), certain conditions must be agreed to.

2. (2) Those conditions are as follows:

   1. (A) The Revenue Division of the Department of Finance and Administration must be provided with the names of all relevant partners;
   2. (B)

(i) Each composite or block return must be filed in the name of the partnership, and the partner that signs the return will be responsible for any assessments or deficiencies incurred by the return.

1. (ii) This requirement does not relieve any of the partners from their personal liability in any way;

   1. (C)

      1. (i) The total net taxable income in Arkansas must be reported on form AR1000.
      2. (ii) Tax will be computed at a flat seven percent (7%) tax rate;

   2. (D)

      1. (i) Partners who become or are residents of Arkansas, or who have income or losses from Arkansas sources other than from the partnership, will be excluded from the block filing.
      2. (ii) Only those partners who must file Arkansas nonresident individual income tax returns as a result of their interest in the partnership will be included in the proposed block filing; and

   3. (E)

      1. (i) The agreement to allow composite or block filing will be reviewed annually, and the agreement is revocable at the option of the division.
      2. (ii) Permission to file a composite return must be obtained from an Individual Income Tax Section Manager before such a return is filed.
      3. (c) Partnerships — Arkansas Code § 26-51-405(a).
2. (1) A partnership must keep records showing the participation of the partners, the interest owned by them, duties performed, and services rendered in the operation of the business.
3. (2) A partnership as such is not subject to taxation but it must make a return of income, which return properly reflects the net income for each partner.

4. (3) Individuals carrying on business in partnership are:

   1. (A) Taxable upon their distributive shares of the net income of such partnerships, whether distributed or not; and

   2. (B) Required to include such distributive shares in their individual returns.

      1. (d) Distributive share of partnership income — Arkansas Code § 26-51-405(a).

5. (1) The distributive share of the net income of the partnership that a partner is required to include in his or her return is his or her proportionate share of the net income of the partnership, either:

   1. (A) For the taxable year upon the basis of which the partner's net income is computed; or
   2. (B) If the partner's net income is computed upon the basis of a taxable year different from that upon the basis of which the net income of the partnership is computed, for the taxable year of the partnership ending within the taxable year upon the basis of which the partner's net income is computed.
6. (2) Amounts earned and distributed to a partner by a partnership after the end of its taxable year and before the end of his or her corresponding taxable year should be accounted for both by the partnership and by the partner in their returns for their next succeeding taxable year.

7. (3) Where the results of partnership operation is a net loss, the loss:

   1. (A) Will be divisible by the partners in the same proportion as net income would have been divisible or, if the partnership agreement provides for the division of a loss in a manner different from the division of a gain, in the manner so provided; and
   2. (B) May be taken by the individual partners in their returns of income.