006.05.307-26-51-404. GROSS INCOME GENERALLY
AR ADC 006.05.307-26-51-404Arkansas Administrative Code
Ark. Admin. Code 006.05.307-26-51-404
006.05.307-26-51-404. GROSS INCOME GENERALLY
1.26-51-404(a)(1) Classes of Income
The tax imposed by the Income Tax Act is upon net income. In the computation of the tax, various classes of income must be considered.
(a) Income, meaning all wealth which flows into the taxpayer other than a mere return of capital, includes the forms of income specifically described as gains and profits including gains derived from the sale or other disposition of capital assets. Many factors must be taken into consideration in accurately determining income, among which are inventories, accounts receivable, property exhaustion and accounts payable for expenses incurred.
2.26-51-404(a)(1) Income Credited to an Account
Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition. A book entry, if made, should indicate an absolute transfer from one account to another. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt.
3.26-51-404(a)(1) Gross Income -- Manufacturing, Merchandising and Mining
In the case of a manufacturing, merchandising or mining business, “gross income” means the total sales less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses, losses or for items not ordinarily allowable in computing the cost of goods sold.
4.26-51-404(a)(1) Gross Income -- Independent Contractor
The profit of an independent contractor from a contract with the United States Government must be included in gross income.
5.26-51-404(a)(1) Services Paid For With Other Than Money
Where services are paid for with something other than money, the fair market value for the item taken in payment is the amount to be included as income. If the services were rendered at the stipulated prices, in the absence of evidence to the contrary, such price will be presumed to be the fair value of the compensation received.
Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. When living quarters are furnished the employees for the convenience of the employer, the ratable value need not be added to the cash compensation of the employee; but where a person receives as compensation for services rendered a salary and in addition thereto living quarters, the value to such person of the quarters furnished constitutes income subject to tax.
Premiums paid by an employer on policies of group life insurance covering the life of its employees, beneficiaries of which are designated by the employees, are not taxable to the extent that these premiums cover the first $50,000.00 worth of coverage. premiums paid by an employer to purchase group life insurance in excess of $50,000.00 are reportable as excess compensation to the covered employee with the exception of:
6.26-51-404(a)(1) Notes of Indebtedness Used in Payment
Notes or other evidence of indebtedness received in payment for services and not merely as security for such payment constitutes income to the amount of their fair market value. The taxpayer receiving as compensation a note regarded as good for its face value at maturity, but not bearing interest, shall treat as income as of the time of receipt the fair discounted value of the note at such time. Thus, if it appears that such a note is or could be discounted on a six percent basis, the recipient shall include such note in his gross income as to the amount of its face value less discount computed at the prevailing rate for such transactions. If the payments due on a note so accounted for are made as they become due, they should be included as income in respect of such payment so much thereof as represent recovery of the discount originally deducted.
7.26-51-404(a)(1) Scholarships, Fellowships, Grants and Stipends
A scholarship is a grant of money to further the undergraduate education of the recipient without a quid pro quo to the University or the donor. A fellowship is a grant of money for the primary purpose of furthering the education and training of the recipient toward a higher degree or for independent research with no corresponding benefit to the donor. Stipend means wages, salary, or the equivalent thereof, where the context shows that it refers to something given as compensation for services, as for example, where a student for an advanced degree performs services of some type for a school or organization in return for room, board, tuition or other equivalent compensation. Grants made to students for scholarships and fellowships are gifts and therefore not included in taxable income, but stipends are fully taxable. The Director reserves the right to examine the substance of the transaction rather than the name given to it.
8.26-51-404(a)(1) Commissions, Tips and Other Types of Compensation
Commissions paid salesmen, compensation for services on the basis of percentage of profit, commissions on insurance premiums, tips, and pay of persons in the service of the State of Arkansas are income to the recipients. Marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other contributions received by clergymen, evangelists or religious workers for services rendered, are also income to the recipient.
9.26-51-404(a)(1) Farm - Defined
The term farm includes stock, dairy, poultry, fruit and truck farms, plantations, ranches and all land used for farming operations. The term farm does not include tree farms except those farms that have trees bearing fruit or nuts.
10.26-51-404(a)(1) Gain on Sale of Property or Capital Assets
When property is acquired and later sold for an amount in excess of the cost or other basis, the gain on the sale is income. When a corporation sells its capital assets in whole or in part it shall include in its gross income for the tax year in which the sale was made the gain from such sale computed as provided in ACA 26-51-411 through ACA 26-51-413. If the purchaser takes over all of the assets and assumes the liability the amount so assumed is part of the selling price.
11.26-51-404(a)(1) Annuities and Endowment Contracts
Amounts received as an annuity under an annuity or endowment contract are in general subject to tax to the extent that the aggregate amounts received by the annuitant exceed the amounts paid as a consideration of the contract.
An annuity contract charged upon devised property is taxable income to the annuitant whether paid by the devisee out of the income of such properties or other sources. The devisee is not required to return as gross income the amount of the proceeds paid to the donee annuitant and he is not entitled to deduct from his gross income any sums paid to the annuitant. The amounts received by an insured as a return of premiums paid by him under life insurance, endowment or annuity contracts, such as the so-called “dividend” of a mutual insurance company which may be credited against the current premium, are not subject to tax.
Example: Brown received $10,000.00 on a 10-year endowment contract which matured in 1993. He had paid premiums of $8,500.00 and had received dividends of $200.00 before the contract matured. Brown's cost to be recovered tax free is $8,300.00 ($8,500.00 minus $200.00).
The annuity starting date is the first day of the first period for which a benefit is received as a payment under the annuity contract or on the fixed date in the contract whichever is later.
Investment in the contract is the total aggregate premiums paid plus other consideration less amounts received prior to the annuity starting date which were not included in gross income.
12.26-51-404(a)(1) Cost Basis of Divided Tract of Land
Where a tract of land is purchased with an intent of dividing it into lots or parcels of ground to be sold as such, the cost or other basis shall be equitably apportioned to the several lots or parcels and made a matter of record on the books of the taxpayer, to the extent that any gain derived from the sale of any such lots or parcels which constitutes taxable income may be reported as income for the tax year in which the sale is made. This rule contemplates that there must be a measure of gain or loss on every lot or parcel sold, and not measured on the entire tract as a whole. The sale of each lot or parcel must be treated as a separate transaction and gain or loss computed accordingly.
13.26-51-404(a)(1) Buildings and Lease Hold Improvements
When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following basis:
If, for any other reason than a bona fide purchase from the lessee by lessor the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the tax year in which the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the premature termination of the lease shall be included. Conversely, if the buildings or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the tax year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance.
14.26-51-404(a)(1) Long-Term Contracts
Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. Arkansas taxpayers must use the same accounting method as that used for federal income tax purposes.
15.26-51-404(a)(1) Stock Dividends and Distributions from Regulated Investment Companies
The issuance of its own stock by a corporation as a dividend to its shareholders does not result in taxable income to such shareholders but the gain so derived or loss sustained from the sale of such stock, or from the sale of the stock in respect to which it is issued. Distributions received by shareholders from regulated investment companies are, by reason of the shareholder's option to receive the equivalent of cash or new stock, deemed to be a cash dividend and therefore taxable.
16.26-51-404(a)(1) Interest
When interest coupons have matured and are payable but have not been cashed, such interest, though not collected when due and payable, shall be included in gross income for the year during which the coupons mature, unless it can be shown that there are no funds available for payment of the interest during such year. The interest shall be included in gross income even though the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. Dividends on corporate stock are subject to tax when unqualifiedly made subject to the demand of the shareholder. As for the distributive share of the profits in a partnership, see 2.26-51-405(a). Interest credited on savings bank deposits, even though the bank has a rule, seldom or never enforced, that it may require so many days notice before withdrawals are permitted is income to the depositor when credited. An amount credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, shall be included in taxable income for the year of the credit. Where the amount of such accumulations does not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of the maturity of the share.
1.26-51-404(a)(2) Installment Sales - Personal Property
Dealers who sell personal property on the installment plan may elect to report the income on installment sales over the life of the installment contract provided the initial payment is thirty per cent (30%) or less. The rule prescribed is that a person who regularly sells or otherwise disposes of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, may report as income therefrom, in any tax year, the portion of the installment payments actually received in that tax year which the total or gross profit (i.e., payments less cost of goods sold) realized or to be realized when the property is paid for bears to the total contract price. Thus, the income of a dealer in personal property on the installment plan may be ascertained by taking as income that proportion of the total payments received in the tax year from installment sales (such payments being allocated to the tax year against the sales to which they apply) which the total or gross profit realized or to be realized on the total installment sales made during each tax year bears to the total contract price of all such sales made during that respective tax year. A dealer who desires to compute his income on the installment basis shall maintain books of account in such a manner as to enable an accurate computation to be made on such basis in accordance with the provisions of this regulation.
In the case of a casual sale or other casual disposition of personal property other than property of any kind which would properly be included in the inventory of a taxpayer if on hand at the close of the tax year, income may be reported on the installment basis. This method of reporting sales may be utilized provided the payments received in cash or property other than evidences of indebtedness of the purchaser during the tax year in which the sale or other disposition is made do not exceed thirty per cent (30%) of the sale price.
If for any reason the purchaser defaults in any of his payments and the vendor reporting income on the installment basis repossesses the property, the entire amount received in installment payments and retained by the vendor less the sum of the profits previously reported as income and an amount representing proper allowance for damage and use, if any, will be income of the vendor for the tax year in which the property is repossessed and the property repossessed must be carried on the books of the vendor at its original cost less proper allowance for damage and use, if any.
If the vendor chooses, as a matter of consistent practice to report the income from installment sales on the straight accrual or cash receipts and disbursement basis such a course is permissible.
Arkansas did not adopt the federal treatment of installment sales contained in IRC Sec. 453(c) referred to as installment receivables until 01/01/95. This regulation refers only to tax years beginning before 01/01/95.
2.26-51-404(a)(2) Installment Sales - Real Estate
Sales of real estate in which thirty per cent (30%) or less of the sale price is received in the year the sale is consummated may be reported on the installment basis. The vendor may report as income from such transaction in any tax year that proportion of the installment payment actually received in that tax year which the total profit realized, or to be realized when the property is paid for, bears to the total contract price.
In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall be included as a part of the selling price. However, the amount of the mortgage to the extent it does not exceed the price to the vendor of the property sold, shall not be considered as a part of the initial payments or of the total contract price in determining the application of installment basis in the reporting of income. Commissions and other selling expenses paid, or incurred by the vendor, are not to be deducted or taken into account in determining the amount of the initial payment, total contract price or selling price.
If for any reason the purchaser defaults in any of his payments and the vendor, reporting income on the installment basis, repossesses the property, the entire amount received in installment payments and reported by the vendor less the sum of the profits previously reported as income and an amount representing proper adjustment for exhaustion, wear and tear, obsolescence, amortization and depletion of the property while in the hands of the purchaser, will be income of the vendor for the tax year in which the property is repossessed. The basis of the property in the hands of the vendor will be the original basis at the time of the installment sale.
If the vendor consistently chooses to report the income from installment sales on the accrual or cash receipt and disbursement basis, the sales will not be treated as being on an installment plan.
Where real property is sold and the seller accepts indebtedness secured by the real property in return and later repossesses the property, the gain is limited and no loss shall result to the seller because of the repossession of the property.
Gain on repossession shall be limited to the lesser of:
Example: In 1990, Brown sold property for $60,000.00 having an adjusted basis of $48,000.00. Brown qualifies for reporting the $12,000.00 gain (20% of selling price) by accepting an initial payment of $10,000.00 and evidence of $50,000.00 liability secured by the property to be paid in five (5) annual payments of $10,000.00. In 1994, the purchaser defaulted and Brown, at a cost of $500.00, repossessed the property.
Prior to repossession, Brown had received payments amounting to $40,000.00 and had reported $8,000.00 as taxable gain.
Brown's recognized gain on repossession is as follows:
Gain on original sale (selling price less adjusted basis) | $12,000.00 |
Less: Gain previously reported | - 8,000.00 |
$ 4,000.00 | |
Less: Recognized expense | - 500.00 |
Recognized gain | $ 3,500.00 |
The basis of the repossessed property is $20,000.00.
Defaulted obligation | $20,000.00 |
Less: 20% gain included | - 4,000.00 |
Adjusted obligation | $16,000.00 |
Plus: Repossession gain | + 3,500.00 |
Plus: Repossession cost | 500.00 |
Basis of repossessed property | $20,000.00 |
This regulation only applies to tax years beginning before 01/01/95.
1.26-51-404(b)(1) Gain on Sale - Involuntary Conversion
Section 1033 of the Internal Revenue Code of 1986, as in effect on January 1, 1999 relating to the exclusion from gross income of gain resulting from the involuntary conversion of a taxpayer's property, has been adopted for the purpose of computing Arkansas income tax liability.
In any case where the taxpayer elects to replace or restore the converted property, but it is not practical to do so immediately, see 4.26-51-412(a) for procedure.
The special rules for property damaged in a Presidentially declared disaster are found at IRC Sec. 1033(h).
1.26-51-404(b)(2) Gain on Sale or Exchange of Principal Residence
Gross income shall not include the gain resulting from the sale or exchange of real estate located within Arkansas when all of the following conditions are met:
*This exclusion from gross income shall only apply to that portion of the “gain” actually used to purchase, build or restore the new parcel of real estate.
Gain shall be computed as set forth in ACA 26-51-411(d).
1.26-51-404(b)(3) Life Insurance Proceeds
Section 101 of the Internal Revenue Code of 1986, as in effect on January 1, 1997 has been adopted for the purpose of excluding from gross income the proceeds paid under life insurance policies on behalf of a chronically ill, terminally ill or deceased insured. For treatment of accelerated death benefits, see IRC Sec. 101(g)(1).
The proceeds of life insurance policies paid by reason of the illness or death of an insured to his estate or to any beneficiary (individual, partnership or corporation but not to a transferee for valuable consideration), directly or in trust, are excluded from the gross income of the beneficiary. It is immaterial whether the proceeds are received in a single sum or in installments. If, however, such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments must be included in gross income. Amounts received (other than amounts paid by reason of the illness or death of the insured and interest payments on such amounts) under a life insurance, endowment or annuity contract are excluded from gross income, but if such amounts (when added to amounts received before the tax year under such contract) exceed the aggregate premium or consideration paid (whether or not paid during the tax year) then the excess shall be included in gross income.
Example 1: Life insurance, endowment contracts, amounts paid other than by reason of the death of the insured.
Received in 1994 | $ 5,000.00 |
Received in prior years | 5,000.00 |
Total | $10,000.00 |
Aggregate premiums paid | $ 4,000.00 |
Taxable income | $ 6,000.00 |
Example 2: Under the terms of a life insurance policy, the beneficiary had an option of receiving $10,000.00 in a lump sum upon the death of the insured, or of receiving four (4) annual installments of $2,630.00 based on a certain guaranteed interest rate. The beneficiary elected to receive the installment method. During the first three (3) years, the beneficiary will have received tax-free $7,890.00. The beneficiary, at the end of the fourth year, will include in gross income the excess of amounts received plus amounts received tax-free in previous years over the lump sum option or $520.00 ($10,520.00 minus $10,000.00).
However, in the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of premium and other sums subsequently paid by the transferee are exempt from taxation.
Example 3: A taxpayer takes out a $20,000.00 life insurance policy. Six years later the surrender value of the policy is $7,000.00, and at that time the taxpayer assigns the policy to Mr. Doe, a creditor, for a consideration of $7,000.00. Mr. Doe pays $4,000.00 thereafter in premiums as they come due. The taxpayer dies. Mr. Doe receives the $20,000.00 insurance proceeds and has taxable income of $9,000.00 ($20,000.00 minus $7,000.00 and $4,000.00).
Example 4: Life insurance, endowment contract or annuities may be transferred for a consideration and the proceeds of the contract payable to a transferee for reasons other than the death of the insured. In 1994, transferee realized on maturity of the contract $75,000.00. At time of transfer, transferee paid $40,000.00 for the contract and paid subsequent premiums totaling $20,000.00.
Transferee's Gain | |
Amount realized | $75,000.00 |
Paid for contract | $40,000.00 |
Total premiums paid | 20,000.00 |
60,000.00 | |
Taxable Gain | $15,000.00 |
If the proceeds are received as an annuity over a fixed number of years, the annual payment is excludable from income until the aggregate payments equal the cost of the contract of $60,000.00.
1.26-51-404(b)(5) Gifts
A gift is where a capable donor with the intention of making a gift completes delivery of a property to a donee who, in turn, accepts the property. Property received as a gift is exempt from income tax although the income therefrom derived from investment, sale or otherwise, is taxable.
2.26-51-404(b)(5) Bequests, Devise or Descent
A bequest is a gift by will of personal property. A devise is a gift of real property by the last will and testament of the donor. A bequest or devise received by a legatee under the provisions of a will or by an heir in accordance with the statutes of descent and distribution is tax exempt, but not the income therefrom.
1.26-51-404(b)(6) Interest - Obligations of The United States or its Possessions
Interest earned on obligations of the United States or its possessions is not included in gross income.
“Obligations of the United States” means any U.S. Government obligation used to finance the national debt, e.g., U.S. Treasury bills, or any other instrument acknowledged by the U.S. Secretary of Treasury as an obligation of the United States.
These obligations must be specifically exempt from state taxation by United States Laws or must meet the four criteria established by Smith v. Davis, 323 U.S. 111, 114 (1944). The requirements are that the obligations must:
As an example, interest received from the Federal National Mortgage, Government National Mortgage and Federal Home Loan Mortgage Corporation do not meet all four of the above stated requirements and is not tax exempt. This is not intended to be an all inclusive list.
2.26-51-404(b)(6) Interest - Obligations of the State of Arkansas
Interest earned on obligations of the State of Arkansas or any political subdivision thereof, is not included in gross income.
“Obligations of the State of Arkansas” means any obligation backed by credit of the State of Arkansas.
“Any political subdivision” means any county, city or town obligations, including special assessment districts such as road, water, sewer, reclamation, drainage, levee, school or similar districts.
1.26-51-404(b)(7) Social Security Benefits
Social security benefits are excluded from gross income for state income tax purposes. Thus, amounts received as pensions or annuities under the Social Security Act or the Railroad Retirement Act are excluded from gross income.
2.26-51-404(b)(7) Unemployment Benefits Paid by Organized Union
Amounts paid by an organized union as unemployment benefits to its unemployed members are taxable where the benefits are paid through union dues. Where union members make special payments to a fund, unemployment benefits which they receive from the fund are includible in gross income only to the extent they exceed the recipient's contributions. The amounts contributed to the fund are not deductible.
3.26-51-404(b)(7) Unemployment Benefits Paid by State or Federal Agency
Unemployment insurance benefits received from a state agency from funds received from the Federal Unemployment Trust Fund are not taxable. Unemployment insurance benefits received from the Railroad Retirement Board are not includible in gross income. Unemployment compensation paid to federal employees by state or federal agencies is excludable from gross income.
1.26-51-404(b)(11) Cancellation or Forgiveness of Debt
The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor who in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor, and, without any consideration therefore, cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation.
1.26-51-404(b)(12) Cafeteria Plan and Flexible Spending Arrangements -- Taxability of Benefits
“Qualified benefits,” as defined in IRC Sec. 125(f), received through a cafeteria plan or flexible spending arrangement (FSA) are excluded from the taxpayer's gross income. However, the term “qualified benefits” does not include benefits paid by an employer towards long-term care insurance premiums or long-term care services. Such benefits paid on behalf of the employee/taxpayer through a cafeteria plan or FSA are includable in the taxpayer's gross income.
It should be noted that under certain circumstances, expenses incurred by a taxpayer for qualified long-term care services and eligible long-term care insurance premiums may be taken as an itemized deduction. This deduction for unreimbursed medical expenses can be taken only to the extent such expenses exceed 7.5% of the taxpayer's AGI. IRC Sec. 213(d)(1)(C) & (D).
“Qualified” long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, as well as maintenance or personal care services which:
“Eligible” long-term care insurance premiums may be deductible as medical expenses when such premiums are paid towards “qualified” long-term care insurance. The definition of “qualified” long-term care insurance is set forth in IRC Sec. 7702B(b)(1).
1.26-51-404(b)(15) Lawsuit Damages
Compensatory and punitive damages are includable in gross income unless the damages are received on account of a personal physical injury or physical sickness. If an action has its origin in a physical injury or physical sickness, then all damages (other than punitive damages) that flow from that injury or sickness are treated as payments received on account of physical injury or physical sickness, whether or not the recipient of the damages is the injured party. However, punitive damages are includable in gross income even if they are received on account of a personal physical injury or physical sickness. IRC Sec. 104(a)(2).
The taxability of damages remains the same whether the damages are received as a settlement or jury award.
Example: damages (other than punitive damages) received by an individual on account of a claim for loss of consortium due to the physical injury or physical sickness of that individual's spouse are excludable from gross income.
Current with amendments received through August 15, 2023. Some sections may be more current, see credit for details.
Ark. Admin. Code 006.05.307-26-51-404, AR ADC 006.05.307-26-51-404
| End of Document |