by Patricia M. McDermott, Esq.
Arkansas Governor Asa Hutchinson has signed legislation that cuts the top individual income and corporate tax rates; conforms with IRC § 179, which provides an income tax deduction for the expensing of certain property; and provides an inflationary relief income tax credit for full-year Arkansas residents. (L. 2022, S1 (3rd Extra. Sess.) (Act 2), effective 08/11/2022 and as otherwise noted.)
Rates.
The top individual income tax rate in Arkansas is reduced from 5.5% to 4.9% for tax years beginning on or after January 1, 2022, and the corporation income tax rate imposed on both domestic and foreign corporations is reduced from 5.9% to 5.3% for tax years beginning on or after January 1, 2023. The change accelerates rate reductions that originally were scheduled to take effect in the 2025 tax year.
Individual income tax bracket adjustments.
The legislation recalculates the bracket adjustments based on the reduced tax rates. Every resident, individual, trust, or estate having net income greater than or equal to $84,501 but less than $89,100 (previously, $90,600) will reduce their income tax due by the appropriate bracket adjustment amount.
Deduction for depreciation and expensing of property.
The legislation conforms with IRC § 179 as in effect on January 1, 2022, for the purpose of computing Arkansas income tax liability for property purchased in tax years beginning on or after January 1, 2022. This raises the Arkansas depreciation deduction limitation for the expensing of certain property from $25,000 to $1 million. Furthermore, prior to amendment, Arkansas reduced the deduction available in any year based on the amount by which the cost of property placed into service by the business during that year exceeded $200,000. Under IRC § 179, the threshold is $2.5 million.
Credit for inflation relief.
For the tax year beginning January 1, 2022, a resident individual taxpayer who files an Arkansas full-year resident income tax return, other than a joint return, having net income up to $101,000 is allowed an individual income tax credit. The top credit amount is $150 for individual taxpayers with net incomes up to $87,000. The credit gradually decreases and fully phases out for individual taxpayers with net incomes of $101,001 or more.
Spouses filing separately: Spouses filing separately on the same income tax return each may claim one credit against the tax on the return of each spouse.
Joint returns: For the tax year beginning January 1, 2022, resident individual taxpayers who file a joint Arkansas full-year resident income tax return having net income up to $202,000 are allowed an individual income tax credit. The top credit amount is $300 for taxpayers with net incomes up to $174,000. The credit gradually decreases and fully phases out for individual taxpayers with net incomes of $202,001 or more. Spouses filing jointly on the same income tax return will only receive one credit against their aggregate tax.
Claiming the credit: The credits cannot be claimed by a taxpayer for any tax year other than the tax year beginning on January 1, 2022, or who files a nonresident return or a part-year resident return. The amount of the income tax credit that may be claimed by the taxpayer in a tax year must not exceed the amount of income tax due by the taxpayer.
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