006.05.308-26-51-404. GROSS INCOME GENERALLY
AR ADC 006.05.308-26-51-404Arkansas Administrative Code
Ark. Admin. Code 006.05.308-26-51-404
006.05.308-26-51-404. GROSS INCOME GENERALLY
1.26-51-404(a)(1) Definitions
Corporation income tax is imposed upon net income. In the computation of the tax, various classes of income must be considered.
(a) “Gross Income” means all income which flows to the taxpayer, other than a return of capital, and 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 gross income, among which are inventories, accounts receivable, property exhaustion, accounts payable for expenses incurred and exemptions as allowed by Arkansas law.
2.26-51-404(a)(1) Receipt of Income
Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by it 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 the taxpayer so that it may be drawn upon at any time. The income must be brought within the taxpayer's 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) 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) Contract with U.S. Government
The income of an independent contractor from a contract with the United States Government must be included in gross income.
5.26-51-404(a)(1) Payment in Forms Other than Cash
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. Unless there is evidence to the contrary, services rendered at a stipulated price will be presumed to be the fair market value of the compensation received.
Compensation paid to an employee of a corporation in the corporation's own stock is to be treated as if the corporation sold the stock for its fair market value and then paid the employee in cash.
6.26-51-404(a)(1) Promissory Notes
Notes or other evidence of indebtedness, received as payment for goods or services or other types of income and not merely as security for such payment, constitute income to the amount of their fair market value. Such notes not bearing interest shall be discounted at the fair market rate and the discounted value recognized as income at the time of receipt. The amount of the discount of such notes is amortized and recognized as income when received by the taxpayer.
7.26-51-404(a)(1) Leased Property
Rents received by a lessor corporation which are based on a rate of dividend or interest on capital stock or outstanding indebtedness, including any fixed tax or insurance payments, shall be reported by the lessor corporation as rental income.
8.26-51-404(a)(1) Sale of Stock Shares
The proceeds from the sale by a corporation of its capital stock, either through original issue or secondary transactions, whether in excess of or less than par value or purchase cost, constitute a capital transaction of the company and will not produce taxable income nor a deductible loss for the corporation.
9.26-51-404(a)(1) Corporate Bonds
When bonds are originally issued by a corporation at a fair market value which results in a premium or a discount compared to face value, the premium (income) or discount (expense) should be prorated or amortized over the life of the bonds.
When a corporation purchases and retires any of its bonds at a fair market price greater than or less than the issuing price, the amount of the purchase price over the issue price (excess amount) is a deductible expense for the tax year or the amount of the issue price over the purchase price (lesser amount) is income for the tax year. The deductible excess amount is reduced by any previously amortized issue discount or increased by any previously amortized issue premium of the bonds. The taxable lesser amount is increased by any previously amortized issue discount or reduced by any previously amortized issue premium.
10.26-51-404(a)(1) Farming
The term “farm” is to be interpreted in its ordinary, accepted sense. A farm is used to produce agricultural products such as livestock (including fish), dairy products, crops, fruits and nuts. A taxpayer engaged in forestry or the growing of timber or trees is not engaged in farming. A person cultivating or operating a farm for recreation or pleasure rather than a profit is not engaged in the business of farming. See IRC Regulations § 1.61-4(d) and § 1.175-3.
11.26-51-404(a)(1) Sale of Property
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 taxpayer 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 possession of the assets and assumes the liability, then the amount so assumed is part of the selling price.
12.26-51-404(a)(1) Corporate Dissolution
When a corporation is dissolved, its affairs are usually settled by a receiver or trustee in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and the receiver or trustee may act for the corporation for such purposes. Any sale of property by them is to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. No gain or loss is realized by a corporation from the distribution of its assets in a partial or complete liquidation, even though the assets may have appreciated or depreciated in value since their acquisition.
13.26-51-404(a)(1) Voluntary Shareholder Payments
Where a corporation requires additional funds for conducting its business and obtains such funds through voluntary pro rata payments by its shareholders and the amount so received is credited to its surplus account or to a special capital account, such amounts will not be considered income, even though there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments that represent an additional price paid for the shares of stock held by the individual shareholder, and will be considered as an addition to and a part of the operating capital of the company.
14.26-51-404(a)(1) Trusts
If a corporation, for the purpose of ensuring payment of its bonds or other indebtedness, places property in trust or sets aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation and any gain arising therefrom is income of the corporation and shall be included as such in its gross income.
15.26-51-404(a)(1) Annuities
Amounts received as an annuity are subject to tax except receipts which are considered to represent a reduction or return of consideration paid. The proportionate part of each annuity payment which is excludable from gross income is a fraction. The numerator is the investment in the contract on the annuity starting date. The denominator is the expected return under the contract on that date. Investment in the contract is the total amount paid, less amounts received prior to the annuity starting date which were not included in gross income. The annuity starting date is the later of the first day a benefit payment is received under the annuity contract, or the fixed date in the contract.
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). If payments are received in installments, 83% of each payment (8,300 / 10,000) will be a nontaxable return of consideration paid and the remaining 17% will be taxable.
16.26-51-404(a)(1) Real Estate
Where a tract of land is purchased with the intent of selling subdivided lots or parcels, 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 constitutes taxable income, it 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.
17.26-51-404(a)(1) Lease of Buildings
When buildings are erected or improvements made by a lessee pursuant to an agreement with the lessor and such buildings or improvements are not subject to removal by the lessee, the lessor may report the income therefrom upon either of the following bases:
If the lease is terminated and 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 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 and only to the extent that such loss was not compensated for by insurance.
18.26-51-404(a)(1) Long-Term Contracts
Income from long-term contracts is taxable for the period in which the income is generated. The determination of taxable income is dependent upon the nature and terms of the contract. Arkansas taxpayers must use the same accounting method as that used for federal income tax purposes.
“Long-term” contracts are contracts which will take more than one (1) year to be fully and completely performed.
19.26-51-404(a)(1) Stock Distributions
The issuance of its own stock by a corporation as a dividend to its shareholders does not result in taxable income to such shareholders. However, any gain derived from the sale of such stock by the shareholders is taxable to the shareholders. 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 are therefore taxable.
1.26-51-404(a)(2) Receipt of Income
All items of gross income received by a taxpayer must be included in the taxpayer's gross income for the tax year in which such items were received.
2.26-51-404(a)(2) Installment Sales of Personal Property
Dealers who sell personal property on an installment plan must include all installment payments received during any given tax year in the dealer's gross income for such tax year. The income from installment sales cannot be reported evenly over the life of the installment contract when payments are accelerated or delayed compared to the contractual amortization. A dealer is one who is engaged in buying and selling personal property of the same type or real estate as his principal business. For treatment of gain or loss on such sales, see 1.26-51-411(e).
3.26-51-404(a)(2) Installment Sales of Real Estate
A taxpayer who sells real estate on an installment plan must include all installment payments received during any given tax year in the taxpayer's gross income for such tax year. The income from installment sales cannot be reported evenly over the life of the installment contract when payments are accelerated or delayed compared to the contractual amortization.
1.26-51-404(b)(1) Gain on Compulsorily or Involuntarily Converted Property
Section 1033 of the Internal Revenue Code of 1986, as in effect on January 1, 1997 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. Refer to Treasury Regulations § 1.1033(a)-1 et seq. for guidance on such matters.
1.26-51-404(b)(3) Life Insurance Proceeds
Proceeds of life insurance policies paid by reason of death of the insured to his/her estate or any beneficiary either in a lump sum or otherwise, except a transferee for valuable consideration, is excluded from the gross income of the beneficiary. Interest paid on the proceeds is included in gross income.
Transferees for valuable consideration and recipients, paid due to reasons other than insured death, of life insurance, endowment, or annuity contracts include in gross income the proceeds and interest that are in excess of the total consideration, premiums, and other sums paid to obtain the contract.
1.26-51-404(b)(6) Interest on U.S. Government Obligations
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, such as U.S. Treasury bills, savings bonds or any other instrument acknowledged by the U.S. Secretary of the Treasury as an obligation of the United States.
These obligations must be specifically exempt from state taxation by federal law or must meet the four criteria established by Smith v. Davis, 323 U.S. 111, 89 L Ed 107, 65 S Ct 157 (1944). The requirements are that the obligations must:
For 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 therefore is not tax exempt. This is not intended to be an all inclusive list.
2.26-51-404(b)(6) Interest on State of Arkansas Obligations
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 a county, city or town, including special assessment districts such as road, water, sewer, reclamation, drainage, levee, school or similar districts.
1.26-51-404(b)(11) Cancellation or Forgiveness of Indebtedness
The cancellation and forgiveness of indebtedness may amount to a payment of income, a gift or a capital transaction, depending upon the circumstances. If, for example, an individual performs services for a creditor in exchange for cancellation of a debt, income equal to the debt 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 debtor'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.
Current with amendments received through February 15, 2024. Some sections may be more current, see credit for details.
Ark. Admin. Code 006.05.308-26-51-404, AR ADC 006.05.308-26-51-404
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