Arkansas Special Session Results in Major Tax Changes
The Arkansas Legislature on August 11, 2022, wrapped up a special session called by Governor Asa Hutchinson in which it passed several significant and important changes to the Arkansas tax code. These changes affect individual taxpayers, as well as businesses.
In a statement released by the Governor, Hutchinson said, "This has been a good day for the taxpayers of Arkansas with the passage of the $500 million tax relief bills in both the House and Senate with $400 million going to individuals this year. I am grateful for the overwhelming support of the General Assembly, and it could not come at a better time with the continued challenge of high food and gas prices."
On the individual side of things, there were a couple of important changes that will result in immediate tax savings for many Arkansans.
The most sweeping and impactful change is the accelerated implementation of individual income tax rate cuts that were previously scheduled to take place in later years. The State's top individual rates were scheduled to fall to 5.3% on January 1, 2023, 5.1% on the first day of 2024 and finally to 4.9% at the beginning of 2025.
Now, however, the top individual tax rate has been cut to 4.9% retroactive to the beginning of 2022, providing immediate tax relief for thousands of Arkansans. Essentially, anyone with taxable income over $23,600 will realize some amount of savings.
Another individual tax cut provision is a one-time temporary nonrefundable income tax credit to some, but not all, Arkansas taxpayers in 2022. A nonrefundable credit is one that can only be taken if some amount of income tax is actually imposed for the year. In other words, it cannot be refunded if there is no tax liability to begin with, unlike certain so-called "refundable" credits, such as the earned income tax credit, which are refunded, tax liability or no.
The credit is $150 for individual taxpayers with net income up to $87,000, subject to phase out for those having net income of up to $101,000. The credit is $300 for married taxpayers filing jointly with net income up to $174,000, subject to phase out for filers having net income up to $202,000. Also, only full-time residents of Arkansas can receive the tax credit.
Arkansas businesses also benefited from the special session.
Like individuals, previously scheduled tax rate cuts were accelerated, although not retroactive to the beginning of this year, as was the case for individuals. Instead, the new lower 5.3% top corporate income tax rate will take effect January 1, 2023, two years earlier than previously scheduled. The top rate for 2022 remains at 5.9%.
Another change affects businesses of all types, whether operating as a corporation, partnership, LLC or even sole proprietors. This change is the adoption of the 2022 federal Section 179 depreciation provision, which deals with the ability to immediately expense certain business property rather than depreciate those costs over a period of years.
Federal law, under Section 179, allows businesses to deduct the entire purchase price of new or used equipment up to $1.08 million for 2022, instead of capitalizing and depreciating the asset over the designated useful life of the asset. The $1.08 million deduction is, however, reduced dollar-for-dollar if asset purchases exceed $2.7 million for 2022.
Until this current change, Arkansas had only adopted federal Section 179 as it existed on January 1, 2009, when the dollar limitation on the deduction was a paltry $25,000 and the dollar-for-dollar phase-out started at $200,000. Because the state limit was so low, the result was often large disparate differences in the deduction a business could take on its federal return versus its Arkansas return. With this change, such differences will lessen.
While the federal limitation is adjusted for inflation each year, unfortunately, the Arkansas limitation has not been in the past. As far as I can tell from this new legislation, the state limits will still not be adjusted for inflation, meaning differences will again surface for some business after this year, unless future legislation changes this.
Still, this is a welcome change, both for business taxpayers and the tax preparers like me who serve them.