Partnership income must be allocated to the state where it was actually earned. All partnership income from activities carried on within Arkansas shall be allocated to Arkansas. For example, a partnership comprised of two (2) partners earned $100,000.00 during the tax year. One partner resides in Arkansas and the other in Louisiana. $30,000.00 of the partnership's income is allocable to activity carried on in Arkansas by, or on behalf of, the partnership. Each partner's distributive share of the partnership's income is 50%. Therefore, the Arkansas based partner would report $15,000.00 in gross income on his resident Arkansas individual income tax return and the Louisiana based partner would report $15,00.00 in gross income on his nonresident Arkansas individual income tax return.

Because a portion of the partnership's income was allocable to Arkansas, the partners will need to file a partnership tax return (AR1050) with the State of Arkansas.

Before the Department will allow a composite individual income tax return (“block filing”), certain conditions must be agreed to. Those conditions are as follows:

A partnership must keep records showing the participation of the partners, the interest owned by them, duties performed and services rendered in the operation of the business. A partnership as such is not subject to taxation but it must make a return of income, which return properly reflects the net income for each partner. Individuals carrying on business in partnership are taxable upon their distributive shares of the net income of such partnerships, whether distributed or not, and are required to include such distributive shares in their individual returns.

The distributive share of the net income of the partnership which a partner is required to include in his return is his proportionate share of the net income of the partnership, either:

Amounts earned and distributed to a partner by a partnership after the end of its taxable year and before the end of his corresponding taxable year should be accounted for both by the partnership and by the partner in their returns for their next succeeding taxable year. Where the results of partnership operation is a net loss, the loss will be divisible by the partners in the same proportion as net income would have been divisible (or, if the partnership agreement provides for the division of a loss in a manner different from the division of a gain, in the manner so provided), and may be taken by the individual partners in their returns of income.