Arkansas follows section 1202 100% tax exclusion on capital gains from the sale of QSBS. Therefore, capital gains on the sale of QSBS will not only be excluded from federal income taxes but also state income taxes. The state of Arkansas also offers an Equity Investment Tax Credit to encourage angel investors to invest in innovative technology businesses that pay wages over the state or county wage averages. (Ark. Code Ann. § 26-51-815). What is the Arkansas Equity Incentive Tax Credit?
Federal QSBS Exclusions and State Tax Implications
Allowing capital gains tax exclusions for Qualified Small Business Stocks (QSBS) encourages investment in US small business. QSBS laws help provide capital for these businesses while offering a savvy tax strategy for investors who want to minimize capital gains taxes.
Investors who hold qualified small business stock for at least 5 years can exclude up to $10,000,000 or more of their recognized capital gains from their taxable income if certain criteria are met.
Each state has its own treatment of QSBS gains at the state income tax level. There are three ways in which states typically address the exclusion.
- Some states fully conform to the Federal QSBS guidelines, and therefore allow a full exemption if the stock meets the Section 1202 QSBS criteria. States conform to the federal tax code on either a static or rolling basis. “Static” conformity means the state starts conforming to the Internal Revenue Code as of a specific date. “Rolling” conformity means that the state adopts IRC changes as they occur. Alternatively, certain states do not have state income taxes and therefore there is no QSBS implication at the state level.
- Some states partially conform to the Federal QSBS guidelines, whereby the capital gains from QSBS are exempt if additional criteria beyond the Federal guidelines are met, such as only allowing exemptions if the QSBS gains were from a company doing business in that state.
- Lastly, certain states do not allow any capital gains exclusions for QSBS.
Arkansas QSBS Exemptions
Arkansas follows the Section 1202 100% tax exclusion on capital gains from the sale of QSBS. Therefore, capital gains on the sale of QSBS will not only be excluded from federal income taxes but also state income taxes.
Arkansas follows neither “Rolling” or “Static” conformity; rather, they use a state calculation (like Pennsylvania, New Jersey, and Mississippi). Arkansas conforms to the federal treatment of partial exclusions on the gains from QSBS for both Corporate and Individual levels (effective from the tax years beginning on or after January 1, 2017). See Ark. Code Ann. § 26-51-815(c), as amended by 2017 H.B. 1390. The amendment that happened in the House Bill 1390 changed the I.R.C. conformity date from Jan. 1, 1995 to Jan. 1, 2017.
Arkansas Capital Gains Tax Rates
The state of Arkansas allows for a 50% exemption of capital gains from income taxes because of The Capital Gains Tax Reduction Act of 2015. The other 50% of the gain will be taxed at the same rate as regular income. In addition, any net capital gain in excess of $10 million realized on or after January 1, 2014 is exempt from Arkansas state income tax. 100% of short-term capital gain is taxed as regular income.
Arkansas has four marginal tax brackets, ranging from 2% within the lowest state tax bracket to 6.6% within the highest state tax bracket. Both single filers and married couples filing jointly will only pay the marginal rate on earning within the applicable marginal bracket.
In comparison, federal capital gains tax rates have 3 brackets for single taxpayers which are:
- 0% for $0 to $39,375
- 15% for $39,376 to $434,550
- 20% for $434,551 or more
Entrepreneurship in Arkansas
Startup Junkie is a Northwest Arkansas nonprofit which offers consulting services at no-cost to entrepreneurs. They are working to build the entrepreneurial ecosystem in the area by offering consulting, events, workshops and programs as well as access to talent and capital funding.
Conductor is another member in the effort to strengthen the entrepreneurial environment in Central Arkansas. Dedicated to diversity and inclusion, they also provide free services with a mission to break down barriers and grow the economic impact of small businesses in the area.
Key Industries in Arkansas
According to expert Mark Greco, “real estate and construction activities have been leading the way for the past few years.”
Among other industries, the following industries in particular thrive in the state:
- Aerospace and Defense
- Food and Beverage
- Metals, Timber and Forest products
- Firearms and Ammunition
- Distribution and Logistics
- Transportation equipment
- Corporate and Shared services.
Non-QSBS Tax Credits in Arkansas
The state of Arkansas offers an Equity Investment Tax Credit to encourage angel investors to invest in innovative technology businesses that pay wages over the state or county wage averages.
Arkansas Opportunity Zones
Arkansas is home to approximately 90 “Opportunity Zones”.
Opportunity Zones (OZ) were created to help economically distressed areas by giving investors preferential tax treatment with new investments in these “specified” areas. Similar to QSBS, if the investment meets eligibility criteria and is held for at least 5 years, the investor can defer or be exempted from capital gains taxes (i.e. if held for at least 5 years, the taxpayer can exclude 10% of the gain and the percentage increases (or “steps up”) to 15% after 7 years).
Opportunity Zone investments can be in the stock of an OZ Qualified Business, an OZ partnership interest or an OZ business property.
To be a Qualified Opportunity Zone Business, the business must meet requirements such as at least 50% of the business’s total gross income being derived from within the Opportunity Zone. To learn more about Opportunity Zone qualifications, please refer to the Opportunity Zones and QSBS article.
Under ACA §26-51-460, Arkansas made Opportunity Zones, is also home to the associated tax relief incentives that accompany these zones which are effective for tax years beginning on or after January 1, 2018.
Some examples of Opportunity Zone projects in Arkansas include:
- A 104-acre real estate development for Harvey Couch Business Park
- A 76-acre real estate plot for Newport Airbase Industrial Park
See more at Opportunity Arkansas.
QSBS Experts in Arkansas
Mark Greco of BKD CPAs & Advisors
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.