Incentives

Targeted Business Incentives

Summary

Offered at the discretion of the director of the Arkansas Economic Development Commission. Businesses that qualify as "targeted businesses" may qualify for three special incentives designed to help new, knowledge-based businesses in their early years.

These discretionary incentives are for start-up companies in emerging sectors:

A refund of sales and use taxes paid on the purchase of building materials and machinery and equipment associated with the approved project
A transferable income tax credit equal to 10% of payroll for up to five years
A transferable income tax equal to 33% of eligible research and development expenditures

The income tax credits earned under this program may be sold upon approval by the Economic Development Commission.

Eligibility

Companies must meet the following requirements and do business in one of the six targeted emerging technology sectors listed below:

Be less than 5-years old
Have an annual payroll between $100,000 and $1 million
The business must show proof of an equity investment of at least $400,000
Pay at least 150% of the lesser of the state or county average hourly wage where the business is located
Meet requisite payroll thresholds

Emerging technology sectors are:

Advanced materials and manufacturing systems, with emphases on the following:

Photonics
Nanotechnology
Electronics manufacturing
Environmental issues related to material and manufacturing

Agriculture, food and environmental sciences, with emphases on the following:

Rice
Poultry
Aquaculture
Toxicology
Agricultural medicine
Forestry
Nutrition
Waste minimization
Energy reduction
Distributed energy generation
Spatial technology

Biotechnology, bioengineering and life sciences, with emphases on the following:

Genetics
Oncology
Geriatrics
Neuroscience
Medical devices
Rehabilitation
Biopharmaceuticals and drug discovery
Protein structure and function
Cell molecular biology
Sensor technology

Information technology, with emphases on the following:

Knowledge and data engineering
Database systems
Distributed systems
Wireless systems
Software development
State of the art applications of information technology to:

Bioinformatics
Healthcare

Transportation logistics, with emphases on the following:

Intelligent material handling
Automated systems
Transportation management systems

Bio-based products, with emphases on the following:

Biodiesel
Ethanol
Methanol
Synthetic crude oil
Adhesives
Polymers
Automotive components
Engineered products from non-traditional biomass sources

If a business falls within one or more of the targeted areas, additional eligibility criteria are:

The business must have an annual payroll of not less than $100,000 or more than $1 million
The business must show proof of an equity investment of at least $400,000
The business must pay wages that are at least 150% of the lesser of the state or county average wage where the business is located

If a business meets all of the above criteria, the director of the Economic Development Commission may offer the business one or more of the following incentives:

Sales Tax Refund

Act 182 of 2003 § 15-4-2706(e)(1)

This incentive program provides a refund of sales and use taxes paid on the purchases of building materials and taxable machinery and equipment associated with the approved project for targeted businesses, as defined above. This incentive is not available unless the business has been offered and signed an incentive agreement under the job creation income tax credit for targeted businesses program as authorized by § 15-4-2709.

The application for a sales and use tax refund must be accompanied by an endorsement resolution from the local governing authority (city council or quorum court) that authorizes the refund of its local taxes.

Payroll Tax Credit

Act 182 of 2003 § 15-4-2709

The payroll income tax credit for targeted businesses is offered to assist with the start-up of businesses in targeted sectors that pay significantly more than the state or county average wage of the county in which the business locates. This incentive is offered only at the discretion of the Director. In order to qualify for this incentive, the business must be included in one of six targeted business sectors as defined above.

The benefit for a qualifying targeted business is a 10% income tax credit based on its annual payroll, with a cap of $100,000 per year in earned income tax credits for a business that qualifies and is approved for this incentive. The incentive may be offered for a period not to exceed five years. The five-year period begins on the date the financial incentive agreement is signed and may not extend beyond 60 months from that date. Unlike the other incentives, this targeted payroll income tax credit may include existing employees in the calculation of payroll to qualify for this benefit.

A unique feature of this incentive is the ability of the business that earns the targeted business income tax credit to sell the credits. The business must make application to the commission for the sale of credits earned under this section within one year of issuance. Upon approval by the commission, the business may sell earned income tax credits within one year of issuance. The commission may assist the business in finding a buyer for the tax credits.

Since one of the allowable costs under the research and development tax credits (discussed below) is the salary of a person performing research, a business earning job creation income tax credits for targeted businesses is prohibited from earning research and development tax credits, as authorized by § 15-4-2708 or by § 26-51-1102(b) for the same expenditure.

Targeted In-house R & D

Act 182 of 2003 § 15-4-2708(c)

Businesses deemed by the commission to fit within the six business sectors classified as "targeted businesses" may enter into a financial incentive agreement for income tax credits based on qualified research and development expenditures. An eligible business may be approved for an income tax credit each year equal to 33% of the qualified research and development expenditures incurred each year for the first five years of the financial incentive agreement. This incentive is a discretionary incentive and is offered only at the discretion of the Director. The application for this income tax credit shall include a project plan, which clearly identifies the intent of the project, the expenditures planned, the start and end dates of the project, and an estimate of total project costs. The Department is partnering with the Arkansas Science and Technology Authority which will review all applications for R&D tax credits and monitor projects if appropriate. The Commission will adhere to some of the federal guidelines for qualifying research for federal tax credits as a guide in determining the eligibility for this state income tax credit.

Qualified research expenditures include in-house expenses for taxable wages paid and supplies used in the conduct of qualified research. Qualified research must satisfy all of the following tests in order to qualify:

The activity must be undertaken for the purpose of discovering information which is technological in nature;
The application of technological information must be intended to be useful in the new or improved business component; and
Substantially all of the activities related to the research effort must constitute elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.

The following activities are specifically excluded from the definition of qualified research:

Any research conducted after the beginning of commercial production;
Research adapting an existing product or process to a particular customer's need;
Duplication of an existing product or process;
Surveys or studies;
Research related to certain internal-use computer software;
Research conducted outside of Arkansas; and
Research in the social sciences, arts or humanities.

Qualified wages are taxable wages paid to a full-time permanent employee for performing qualified services. Qualified services are services of employees who are:

Engaging in qualified research, which means the actual conduct of qualified research;
Engaging in the direct supervision of qualified research, which means the immediate supervision (first-line management) of qualified research; and
Engaging in the direct support of research activities that constitute qualified research.

The qualified services must be in the direct support of either A) persons engaging in the actual conduct of qualified research or B) persons who are directly supervising persons engaging in the actual conduct of qualified research.

Direct support of research activities does not include general administrative services or other services only indirectly of benefit to the research activity.

As with the job creation income tax credits for targeted businesses, the income tax credit for research and development earned by targeted businesses may be sold. The business must make application to the commission for the sale of credits earned under this section within one year of issuance. Upon application and approval by the commission, the business may sell earned income tax credits within one year of issuance. The commission may assist the targeted business in finding a buyer for the tax credits.

A targeted business earning research and development tax credits is prohibited from earning job creation tax credits, as authorized by § 15-4-2709 or research tax credits as authorized by § 15-4-2708(a), for the same expenditure.

Combination with other incentives: The income tax credit for research by a targeted business authorized by 15-4-2708(c) may not be used with:

Other in-house research and development incentives as authorized by § 15-4-2708(b) or § 15-4-2708(d)(1)(A); or
Any other incentive in Act 182 of 2003 (Consolidated Incentive Act of 2003) for the same expenditures.