1. (a) Types of deductions — Arkansas Code § 26-51-423(a).

   1. (1)

      1. (A) In computing an individual's taxable income, the individual is permitted to claim certain deductions.
      2. (B) Some of these deductions may be subtracted from gross income, while other types of deductions must be claimed as itemized deductions and subtracted from the individual's adjusted gross income.
      3. (C) A deduction from adjusted gross income is generally referred to as an itemized deduction.
      4. (D) To be deductible as a trade or business expense, an expense must be:

2. (i) An ordinary and necessary expense of the taxpayer's trade or business;

   1. (ii) Paid or incurred during the tax year in which it is deducted; and

      1. (iii) Connected with a trade or business conducted by the taxpayer.
   2. (2) The business expenses of a sole proprietorship or a statutory employee are claimed on Schedule C of Internal Revenue Service Form 1040.
   3. (3) A "trade or business", although not defined in the tax law, has been characterized as an activity carried on for a livelihood or for profit.

   4. (4)

      1. (A) A profit motive must be present, and some type of economic activity must be conducted.
      2. (B) With respect to the profit motive, an activity is considered a business if it is entered into and carried on in good faith for the purpose of making profit.

      3. (C) Moreover, a trade or business is characterized by:

         1. (i) Regularity of activities and transactions; and
         2. (ii) The production of income.

3. (b) Business expenses — Long-term care insurance premiums — Arkansas Code § 26-51-423(a)(1).

   1. (1) A self-employed taxpayer can deduct as a business expense on Internal Revenue Service Form 1040, Schedule C, a percentage of the premiums paid during the tax year for qualified long-term care insurance.
   2. (2) The definition of "qualified long-term care insurance” is set forth in I.R.C. § 7702B(b)(1).
   3. (3) The applicable percentage begins with forty percent (40%) for the 1997 tax year and increases up to a maximum of eighty percent (80%) in 2006.

   4. (4) The percentages are as follows: 1997 40% 2004 60% 1998 through 2002 45% 2005 70% 2003 50% 2006 or thereafter 80%

      1. (c) Medical expenses — Long-term care insurance premiums — Arkansas Code § 26-51-423(a)(2).

   5. (1)

      1. (A) Under certain circumstances, expenses incurred by a taxpayer for eligible long-term care insurance premiums may be taken as an itemized deduction.
      2. (B) This deduction for unreimbursed medical expenses can be taken only to the extent such expenses exceed seven and one-half percent (7.5%) of the taxpayer's AGI.
      3. (C) I.R.C. § 213(d)(1)(D).

   6. (2)

      1. (A) Eligible long-term care insurance premiums may be deductible as medical expenses when such premiums are paid towards qualified long-term care insurance.

      2. (B) The definition of “qualified long-term care insurance” is set forth in I.R.C. § 7702B(b)(1).

         1. (d) Travel and entertainment — Arkansas Code § 26-51-423(b).
   7. (1) For tax years beginning before January 1, 1995, I.R.C. § 274 as in effect January 1, 1989, shall apply.
   8. (2) For tax years 1995 and 1996, I.R.C. § 274 as in effect on January 1, 1995, shall apply.
   9. (3) Beginning with the 1997 tax year, I.R.C. § 274 as in effect on January 1, 1997, shall apply.
   10. (4) Eighty percent (80%) of qualified expenses will be allowed for tax years beginning before January 1, 1995, and fifty percent (50%) of qualified expenses will be allowed for tax years beginning on or after January 1, 1995.

4. (e) Business expenses — Medical care insurance premiums — Arkansas Code § 26-51-423(c)(1).

   1. (1) A self-employed taxpayer can deduct as a business expense on Internal Revenue Service Form 1040, Schedule C, a percentage of the premiums paid during the tax year for insurance that constitutes medical care for:

      1. (A) The taxpayer; or
      2. (B) His or her spouse and dependents.

   2. (2)

      1. (A) The applicable percentage begins with forty percent (40%) in 1997 and increases up to a maximum of eighty percent (80%) in 2006.
      2. (B) I.R.C. § 162(l).
   3. (3) The percentages are as follows: 1997 40% 2004 60% 1998 through 2002 45% 2005 70% 2003 50% 2006 or thereafter 80%

Codification Notes: “AGI” means adjusted gross income. I.R.C. § 7702B(b)(1) is codified at 26 U.S.C. § 7702B(b)(1). I.R.C. § 213(d)(1)(D) is codified at 26 U.S.C. § 213(d)(1)(D). I.R.C. § 274 is codified at 26 U.S.C. § 274. I.R.C. § 162(l) is codified at 26 U.S.C. § 162(l).