1. (a) Definitions — Arkansas Code § 26-51-404(a)(1).

   1. (1) Corporation income tax is imposed upon net income.

   2. (2)

      1. (A) In the computation of the tax, various classes of income must be considered.
      2. (B)

2. (i) "Gross income" means all income that flows to the taxpayer, other than a return of capital, and includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets.

   1. (ii) Many factors must be taken into consideration in accurately determining gross income, among which are:
3. (a) (a) Inventories;

4. (b) (b) Accounts receivable;

   1. (c) (c) Property exhaustion;

      1. (d) (d) Accounts payable for expenses incurred; and

5. (e) (e) Exemptions as allowed by Arkansas law.

   1. (C)

      1. (i) "Net income" is gross income less statutory deductions.

         1. (ii) The statutory deductions are generally, though not exclusively, expenditures (other than capital expenditures) connected with the production of income.

6. (b) Receipt of income — Arkansas Code § 26-51-404(a)(1).

   1. (1) Income that is credited to the account of or set apart for a taxpayer and that may be drawn upon by it at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession.

   2. (2) To constitute receipt in such a case, the income must be:

      1. (A) Credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made; and
      2. (B) Made available to the taxpayer so that it may be drawn upon at any time.
   3. (3) The income must be brought within the taxpayer's own control and disposition.
   4. (4) A book entry, if made, should indicate an absolute transfer from one (1) account to another.

   5. (5) Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt.

      1. (c) Manufacturing, merchandising, and mining — Arkansas Code § 26-51-404(a)(1).
   6. (1) In the case of a manufacturing, merchandising, or mining business, "gross income" means the total sales less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources.

   7. (2) In determining the gross income, subtractions should not be made for:

      1. (A) Depreciation;
      2. (B) Depletion;
      3. (C) Selling expenses;
      4. (D) Losses; or

      5. (E) Items not ordinarily allowable in computing the cost of goods sold.

         1. (d) Contract with United States Government — Arkansas Code § 26-51-404(a)(1). The income of an independent contractor from a contract with the United States Government must be included in gross income.

7. (e) Payment in forms other than cash — Arkansas Code § 26-51-404(a)(1).

   1. (1)

      1. (A) Where services are paid for with something other than money, the fair market value for the item taken in payment is the amount to be included as income.
      2. (B) Unless there is evidence to the contrary, services rendered at a stipulated price will be presumed to be the fair market value of the compensation received.

   2. (2) Compensation paid to an employee of a corporation in the corporation's own stock is to be treated as if the corporation:

      1. (A) Sold the stock for its fair market value; and
      2. (B) Then paid the employee in cash.

8. (f) Promissory notes — Arkansas Code § 26-51-404(a)(1).

   1. (1) Notes or other evidence of indebtedness, received as payment for goods or services or other types of income and not merely as security for such payment, constitute income to the amount of their fair market value.

   2. (2)

      1. (A) Such notes not bearing interest shall be discounted at the fair market rate and the discounted value recognized as income at the time of receipt.
      2. (B) The amount of the discount of such notes is amortized and recognized as income when received by the taxpayer.
9. (g) Leased property — Arkansas Code § 26-51-404(a)(1). Rents received by a lessor corporation that are based on a rate of dividend or interest on capital stock or outstanding indebtedness, including any fixed tax or insurance payments, shall be reported by the lessor corporation as rental income.

10. (h) Sale of stock shares — Arkansas Code § 26-51-404(a)(1). The proceeds from the sale by a corporation of its capital stock, either through original issue or secondary transactions, whether in excess of or less than par value or purchase cost:

    1. (1) Constitute a capital transaction of the company; and

    2. (2) Will not produce taxable income nor a deductible loss for the corporation.

       1. (i) Corporate bonds — Arkansas Code § 26-51-404(a)(1).
    3. (1) When bonds are originally issued by a corporation at a fair market value that results in a premium or a discount compared to face value, the premium (income) or discount (expense) should be prorated or amortized over the life of the bonds.

    4. (2)

       1. (A) When a corporation purchases and retires any of its bonds at a fair market price greater than or less than the issuing price:

          1. (i) The amount of the purchase price over the issue price (excess amount) is a deductible expense for the tax year; or
          2. (ii) The amount of the issue price over the purchase price (lesser amount) is income for the tax year.

       2. (B) The deductible excess amount is:

          1. (i) Reduced by any previously amortized issue discount; or
          2. (ii) Increased by any previously amortized issue premium of the bonds.

       3. (C) The taxable lesser amount is:

          1. (i) Increased by any previously amortized issue discount; or
          2. (ii) Reduced by any previously amortized issue premium.

11. (j) Farming — Arkansas Code § 26-51-404(a)(1).

    1. (1) The term "farm" is to be interpreted in its ordinary, accepted sense.

    2. (2) A farm is used to produce agricultural products such as:

       1. (A) Livestock (including fish);
       2. (B) Dairy products;
       3. (C) Crops;
       4. (D) Fruits; and
       5. (E) Nuts.
    3. (3) A taxpayer engaged in forestry or the growing of timber or trees is not engaged in farming.
    4. (4) A person cultivating or operating a farm for recreation or pleasure rather than a profit is not engaged in the business of farming.
    5. (5) See I.R.C. Regulations § 1.61-4(d) and § 1.175-3.

12. (k) Sale of property — Arkansas Code § 26-51-404(a)(1).

    1. (1) When property is acquired and later sold for an amount in excess of the cost or other basis, the gain on the sale is income.
    2. (2) When a taxpayer sells its capital assets in whole or in part, it shall include in its gross income for the tax year in which the sale was made the gain from such sale computed as provided in Arkansas Code §§ 26-51-411 – 26-51-413.

    3. (3) If the purchaser takes possession of the assets and assumes the liability, then the amount so assumed is part of the selling price.

       1. (l) Corporate dissolution — Arkansas Code § 26-51-404(a)(1).
    4. (1) When a corporation is dissolved, its affairs are usually settled by a receiver or trustee in dissolution.
    5. (2) The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and the receiver or trustee may act for the corporation for such purposes.
    6. (3) Any sale of property by them is to be treated as if made by the corporation for the purpose of ascertaining the gain or loss.

    7. (4) No gain or loss is realized by a corporation from the distribution of its assets in a partial or complete liquidation, even though the assets may have appreciated or depreciated in value since their acquisition.

       1. (m) Voluntary shareholder payments — Arkansas Code § 26-51-404(a)(1).
    8. (1) Where a corporation requires additional funds for conducting its business and obtains such funds through voluntary pro rata payments by its shareholders and the amount so received is credited to its surplus account or to a special capital account, such amounts will not be considered income, even though there is no increase in the outstanding shares of stock of the corporation.

    9. (2) The payments in such circumstances:

       1. (A) Are in the nature of voluntary assessments that represent an additional price paid for the shares of stock held by the individual shareholder; and
       2. (B) Will be considered as an addition to and a part of the operating capital of the company.
13. (n) Trusts — Arkansas Code § 26-51-404(a)(1). If a corporation, for the purpose of ensuring payment of its bonds or other indebtedness, places property in trust or sets aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation and any gain arising therefrom is income of the corporation and shall be included as such in its gross income.

14. (o) Annuities — Arkansas Code § 26-51-404(a)(1).

    1. (1) Amounts received as an annuity are subject to tax except receipts that are considered to represent a reduction or return of consideration paid.

    2. (2)

       1. (A) The proportionate part of each annuity payment that is excludable from gross income is a fraction.
       2. (B) The numerator is the investment in the contract on the annuity starting date.
       3. (C) The denominator is the expected return under the contract on that date.
    3. (3) Investment in the contract is the total amount paid, less amounts received prior to the annuity starting date that were not included in gross income.

    4. (4) The annuity starting date is the later of the:

       1. (A) First day a benefit payment is received under the annuity contract; or
       2. (B) Fixed date in the contract. Example: Brown received ten thousand dollars ($10,000) on a ten- year endowment contract that matured in 1993. He had paid premiums of eight thousand five hundred dollars ($8,500) and had received dividends of two hundred dollars ($200) before the contract matured. Brown’s cost to be recovered tax free is eight thousand three hundred dollars ($8,300) ($8,500 minus $200). If payments are received in installments, eighty-three percent (83%) of each payment (8,300 ÷ 10,000) will be a nontaxable return of consideration paid and the remaining seventeen percent (17%) will be taxable.

15. (p) Real estate — Arkansas Code § 26-51-404(a)(1).

    1. (1) Where a tract of land is purchased with the intent of selling subdivided lots or parcels, the cost or other basis shall be:

       1. (A) Equitably apportioned to the several lots or parcels; and
       2. (B) Made a matter of record on the books of the taxpayer.
    2. (2) To the extent that any gain derived from the sale of any such lots or parcels constitutes taxable income, it may be reported as income for the tax year in which the sale is made.

    3. (3)

       1. (A) This section contemplates that there must be a measure of gain or loss on every lot or parcel sold, and not measured on the entire tract as a whole.
       2. (B) The sale of each lot or parcel must be treated as a separate transaction and gain or loss computed accordingly.

16. (q) Lease of buildings — Arkansas Code § 26-51-404(a)(1).

    1. (1) When buildings are erected or improvements made by a lessee pursuant to an agreement with the lessor and such buildings or improvements are not subject to removal by the lessee, the lessor may report the income therefrom upon either of the following bases:

       1. (A) The lessor may report as income, at the time when such buildings or improvements are completed, the fair market value of such buildings or improvements subject to the lease; or
       2. (B) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each tax year of the lease an allocated part thereof.

    2. (2)

       1. (A) If the lease is terminated and the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the tax year in which the lease is so terminated to the extent that the value of such buildings or improvements exceeds the amount already reported as income on account of the erection of such buildings or improvements.
       2. (B) No appreciation in value due to causes other than the premature termination of the lease shall be included.
    3. (3) Conversely, if the buildings or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the tax year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value and only to the extent that such loss was not compensated for by insurance.

17. (r) Long-term contracts — Arkansas Code § 26-51-404(a)(1).

    1. (1) Income from long-term contracts is taxable for the period in which the income is generated.
    2. (2) The determination of taxable income is dependent upon the nature and terms of the contract.
    3. (3) Arkansas taxpayers must use the same accounting method as that used for federal income tax purposes.
    4. (4) "Long-term" contracts are contracts that will take more than one (1) year to be fully and completely performed.

18. (s) Stock distributions — Arkansas Code § 26-51-404(a)(1).

    1. (1)

       1. (A) The issuance of its own stock by a corporation as a dividend to its shareholders does not result in taxable income to such shareholders.
       2. (B) However, any gain derived from the sale of such stock by the shareholders is taxable to the shareholders.
    2. (2) Distributions received by shareholders from regulated investment companies are, by reason of the shareholder's option to receive the equivalent of cash or new stock, deemed to be a cash dividend and are therefore taxable.
19. (t) Receipt of income — Arkansas Code § 26-51-404(a)(2). All items of gross income received by a taxpayer must be included in the taxpayer's gross income for the tax year in which such items were received.

20. (u) Installment sales of personal property — Arkansas Code § 26-51-404(a)(2).

    1. (1) Dealers who sell personal property on an installment plan must include all installment payments received during any given tax year in the dealer's gross income for such tax year.
    2. (2) The income from installment sales cannot be reported evenly over the life of the installment contract when payments are accelerated or delayed compared to the contractual amortization.
    3. (3) A dealer is one who is engaged in buying and selling personal property of the same type or real estate as his or her principal business.

    4. (4) For treatment of gain or loss on such sales, see 26 CAR § 130-120(d).

       1. (v) Installment sales of real estate — Arkansas Code § 26-51-404(a)(2).
    5. (1) A taxpayer that sells real estate on an installment plan must include all installment payments received during any given tax year in the taxpayer's gross income for such tax year.
    6. (2) The income from installment sales cannot be reported evenly over the life of the installment contract when payments are accelerated or delayed compared to the contractual amortization.

21. (w) Gain on compulsorily or involuntarily converted property — Arkansas Code § 26-51-404(b)(1).

    1. (1) Section 1033 of the Internal Revenue Code of 1986, as in effect on January 1, 1997, relating to the exclusion from gross income of gain resulting from the involuntary conversion of a taxpayer's property, has been adopted for the purpose of computing Arkansas income tax liability.

    2. (2) Refer to Treasury Regulations § 1.1033(a)-1 et seq., for guidance on such matters.

       1. (x) Life insurance proceeds — Arkansas Code § 26-51-404(b)(3).

    3. (1)

       1. (A) Proceeds of life insurance policies paid by reason of death of the insured to his or her estate or any beneficiary either in a lump sum or otherwise, except a transferee for valuable consideration, is excluded from the gross income of the beneficiary.
       2. (B) Interest paid on the proceeds is included in gross income.
    4. (2) Transferees for valuable consideration and recipients, paid due to reasons other than insured death, of life insurance, endowment, or annuity contracts include in gross income the proceeds and interest that are in excess of the total consideration, premiums, and other sums paid to obtain the contract.

22. (y) Interest on United States Government obligations — Arkansas Code § 26-51-404(b)(5).

    1. (1) Interest earned on obligations of the United States or its possessions is not included in gross income.

    2. (2) "Obligations of the United States" means any United States Government obligation used to finance the national debt, such as:

       1. (A) United Sates Treasury bills;
       2. (B) United States Treasury savings bonds; or
       3. (C) Any other instrument acknowledged by the United States Secretary of the Treasury as an obligation of the United States.

    3. (3) These obligations must:

       1. (A) Be specifically exempt from state taxation by federal law; or

       2. (B)

          1. (i) Meet the four (4) criteria established by Smith v. Davis, 323 U.S. 111, 89 L Ed 107, 65 S Ct 157 (1944).
          2. (ii) The requirements are that the obligations must:
23. (a) (a) Be in writing;

24. (b) (b) Bear specific interest;

    1. (c) (c) Bind the United States Government to pay specific sums at specific dates; and

       1. (d) (d) Have congressional authority to pledge the full faith and credit of the United States in support of the promise to pay.

          1. (iii)
25. (a) (a) For example, interest received from the Federal National Mortgage Association, Government National Mortgage Association, and Federal Home Loan Mortgage Corporation does not meet all four (4) of the above stated requirements and therefore is not tax exempt.
26. (b) (b) This is not intended to be an all-inclusive list.

27. (z) Interest on State of Arkansas obligations — Arkansas Code § 26-51-404(b)(6).

    1. (1) Interest earned on obligations of the State of Arkansas or any political subdivision thereof is not included in gross income.
    2. (2) "Obligations of the State of Arkansas" means any obligation backed by credit of the State of Arkansas.
    3. (3) "Any political subdivision" means a county, city, or town, including special assessment districts such as road, water, sewer, reclamation, drainage, levee, school, or similar districts.

28. (aa) Cancellation or forgiveness of indebtedness — Arkansas Code § 26-51-404(b)(11).

    1. (1) The cancellation and forgiveness of indebtedness may amount to a payment of income, a gift, or a capital transaction, depending upon the circumstances.
    2. (2) If, for example, an individual performs services for a creditor in exchange for cancellation of a debt, income equal to the debt is realized by the debtor as compensation for his or her services.
    3. (3) If, however, a creditor merely desires to benefit a debtor, and, without any consideration therefore, cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the debtor's gross income.
    4. (4) If a shareholder in a corporation that is indebted to him or her gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation.

Codification Notes: I.R.C. Regulations § 1.61-4(d) and § 1.175-3 are codified at 26 C.F.R. § 1.61-4(d) and § 1.175-3. Treasury Regulations § 1.1033(a)-1 et seq., are codified at 26 C.F.R. § 1.1033(a)-1 et seq.