Taxes on Business Income in Arkansas
Arkansas imposes a corporate income tax on Arkansas business income that is computed at rates of 1 percent to 6.5 percent of corporate taxable net income. If you operate your business as a sole proprietorship or as a pass-through entity, you will report your business income on your personal tax return. Personal income tax is computed at rates of 1 percent to 7 percent of taxable individual income in Arkansas.
In Arkansas, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.
Corporate Income Is Taxed at Corporate Tax Rates
All domestic (corporations organized in Arkansas) and foreign corporations (corporations organized in a state other than Arkansas) doing business within the state, are subject to a tax on net income at the following rates:
Corporate Tax Rates for 2012 and 2013
|Amount of Taxable Income ||Tax Rate |
|$0-$3,000 ||1.0% |
|$3,001-$6,000 ||2.0% |
|$6,001-$11,000 ||3.0% |
|$11,001-$25,000 ||5.0% |
|$25,001- $100,000 ||6.0% |
|$100,001 or more ||6.5% |
S Corporation Income is Taxed At Individual Rates
If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate-level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.
In Arkansas any corporation that has elected S corporation status for federal income tax purposes may elect to be an Arkansas S corporation. S corporations are exempt from the Arkansas corporate income tax, except for taxes required under federal law. The S corporation's income passes through to its shareholders.
Partnership Income Is Taxed At Individual Rates
If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Arkansas taxable adjusted gross income their distributive share of partnership income.
LLC Income Is Taxed At Individual Rates
Arkansas law recognizes businesses operating as limited liability companies (LLCs). In Arkansas every limited liability company (LLC) having two or more members must prepare a partnership income tax return. The income and expenses of every LLC having only one member must be reported on the member's individual income tax return. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Arkansas taxable adjusted gross income their distributive share of LLC income.
However, if the LLC has made an election to be taxed as a corporation for federal income tax purposes, Arkansas will honor the election and tax the LLC as a corporation.