The Meaning of Basic Research in Arkansas: Maximizing the 33% R&D Tax Credit Through University Partnerships

I. Executive Summary: The Definition and Strategic Value of Basic Research in Arkansas Tax Law

Basic Research is defined as any original investigation for the advancement of scientific knowledge not having a specific commercial objective.1 In the state of Arkansas, qualifying for this category of research enables a business to claim a powerful 33% income tax credit when payments or qualifying contributions are directed toward research performed by accredited state universities.2

Contextual Overview of the Arkansas Incentive Structure

Arkansas utilizes its Research and Development (R&D) Tax Credit Program to foster technological advancement and industry-university collaboration within the state.4 The program offers several distinct incentives, differentiated by credit rate and qualification criteria, all authorized under Ark. Code Ann. § 15-4-2708 and related provisions in Title 26.3 While the standard In-House R&D credit offers a 20% rate on incremental salaries, the state deliberately targets fundamental investigations—defined broadly as “Basic Research” and “University-Based R&D”—with the highest non-capped credit rate of 33%.3

These programs are collaboratively managed by the Arkansas Economic Development Commission (AEDC) and the Arkansas Science and Technology Authority (ASTA), which review and approve projects before they are eligible for the tax benefits. The final claiming of the credit is processed through the Arkansas Department of Finance and Administration (DFA).3 This multi-agency oversight emphasizes that the compliance process relies heavily on meticulous front-end documentation and pre-approval from the ASTA/AEDC.

II. Statutory and Regulatory Foundation of Basic Research

Understanding the application of the Basic Research credit in Arkansas requires a thorough grounding in its federal definition, which acts as the legal cornerstone for state applicability.

The Federal Mandate: IRC Section 41 and Basic Research Payments

The authoritative definition of Basic Research within the United States tax framework is provided by Internal Revenue Code (IRC) Section 41(e)(7). According to the federal statute, the term “basic research” means any original investigation for the advancement of scientific knowledge not having a specific commercial objective.1

Analysis of the Federal Standard

Two elements of the federal definition are paramount for qualifying expenditures:

1. Original Investigation Standard: This criterion necessitates that the activity be a fundamental inquiry seeking new, general scientific understanding. Activities that involve routine modification, replication, or adaptation of existing commercial products are generally disqualified. The focus must be on advancing scientific theory rather than practical, immediate problem-solving.
2. Exclusion of Specific Commercial Objective: This is the most restrictive aspect of the federal rule. Research that has a stated goal of developing a specific new business component, product, or process for the taxpayer is generally excluded from the definition of Basic Research.6 Qualifying research must be exploratory, seeking broad theoretical understanding that may or may not eventually lead to commercial applications.

Federally, Basic Research Payments (BRPs) are further restricted to amounts paid in cash by a corporation to a qualified organization (such as a university or scientific research organization) pursuant to a required written agreement.6

Arkansas Legislative Framework and Definition

The Arkansas R&D Tax Credit Program, authorized under Act 759 of 1985, explicitly uses the concept of Basic Research to structure its University-Based incentive.4 The state’s internal definition, while echoing the federal language, offers a slightly broader focus in some official guidance.

The state defines “Basic Research” as “any original investigation for the advancement of scientific or technological knowledge”.7 Crucially, the written rules governing the program state its purpose is to provide incentive for Arkansas industry to participate in the Science & Technology Authority’s Applied Research Grant Program, Basic Research Grant Program, or similar research programs.4

This linkage imposes an administrative check: although the explicit negative constraint (“not having a specific commercial objective”) is simplified in the state definition, the requirement that the project align with ASTA’s foundational grant programs ensures that the research maintains a public-benefit or purely foundational focus. This alignment keeps the intent of the Arkansas program consistent with the spirit of the rigorous federal definition while granting the state administrative control over project approval.

Eligibility for the Credit

The credit is available to taxpayers defined as “Industry,” a term that includes a broad range of entities such as manufacturing facilities, agricultural facilities, corporate management offices, warehouses, distribution facilities, and repair/maintenance facilities.4 The program allows credits against a taxpayer’s Arkansas state income tax for making qualified research expenditures, as well as certain donations or sales below cost of new machinery and equipment to a qualified research program at an Arkansas college or university.4

III. The Arkansas R&D Tax Credit Architecture

The Basic Research pathway, often referred to as the University-Based Research and Development credit, represents a strategically superior option for companies engaged in foundational science compared to other available incentives.

Delineation of Arkansas R&D Credit Programs

Arkansas maintains several distinct R&D incentives, each offering a different rate and compliance burden:

1. In-House R&D Tax Credit: This program is intended for mature companies performing ongoing R&D.8 The credit allowed is 20% of the incremental amount spent on qualified in-house research expenditures that exceeds a baseline established in the preceding year, for a period of five years.2 Furthermore, qualified expenditures for this credit are strictly limited to qualified R&D salaries; supplies, equipment, and buildings do not qualify.8 The focus on incremental spending and limited QRE types complicates the calculation and limits the total potential benefit.
2. Research and Development in Area of Strategic Value: This program offers a 33% income tax credit on qualified research expenditures.2 However, this credit is subject to a strict statutory maximum of $50,000 per tax year.2
3. University-Based R&D (The Basic Research Incentive): An eligible business that contracts with one or more Arkansas colleges or universities for research may qualify for a 33% income tax credit.2 This credit rate is high, and critically, it applies to the total amount expended for the qualified research program, not just an incremental increase above a base year.3

The Financial Mechanics of the 33% University-Based Credit

The primary financial advantage of the University-Based R&D program stems from the combination of a high credit rate (33%) and a non-incremental expenditure base. Whereas the 20% in-house credit requires a taxpayer to constantly exceed prior-year spending to realize any benefit, the 33% University-Based credit applies to 33% of the entire Qualified Research Expenditure (QRE) incurred each year, for up to five years, provided the research is conducted pursuant to a financial incentive agreement.3 For any project involving fundamental scientific inquiry, contracting with an Arkansas university is demonstrably the pathway that yields the highest return on investment, maximizing the available QRE base without the complexities of incremental baselines.

Qualified Expenditures (QREs) for the 33% Credit

The definition of qualified expenditures for the University-Based credit is significantly broader than the typical in-house QRE definition (which is limited to salaries).8 The program allows for three categories of contributions that qualify for the 33% credit 4:

1. Qualified Research Expenditures (QREs): Cash amounts expended by the taxpayer in the tax year on the qualified research program.4
2. Donation of New Machinery or Equipment: The credit is 33% of the cost of the new machinery or equipment donated to the qualified research program.4
3. Sale Below Cost of New Machinery or Equipment: The credit is 33% of the amount by which the cost is reduced in the sale to the qualified research program.4

The inclusion of donations of new machinery and equipment creates a powerful tax planning opportunity. Standard R&D credits, both federal and state (such as the Arkansas in-house credit), specifically exclude capital expenditures and depreciable property from QRE calculation.8 By allowing a 33% credit on the cost basis of donated new equipment, Arkansas effectively monetizes contributions of fixed assets for research purposes, directly incentivizing the equipping of state university labs by private industry.

IV. State Revenue Office Guidance and Administrative Compliance

Compliance for the Arkansas R&D Tax Credit, particularly the Basic Research component, is highly administrative and front-loaded, relying on pre-certification rather than post-audit substantiation by the Department of Finance and Administration (DFA).

Administrative Roles and the Pre-Certification Mandate

The claim process requires coordination among three separate state entities, highlighting the performance-based nature of the incentive programs.9

• Arkansas Science and Technology Authority (ASTA) / Department of Higher Education (ADHE): These agencies establish the program rules and determine if a research project qualifies under the ASTA’s Basic Research Grant Program criteria.4 They are responsible for reviewing the application, project plan details (including the intent of the research project, expenditures planned, and start/end dates) 8, and approving the research as eligible Basic Research.
• Arkansas Department of Finance and Administration (DFA): The state revenue office manages the final claim submission. DFA guidance mandates that to claim the authorized credits, the taxpayer must attach a copy of the Certificate of Tax Credit issued by the Arkansas Science and Technology Authority to their annual tax return.5

The requirement for an issued Certificate of Tax Credit is a central feature of the Arkansas compliance framework. This structure means that the determination of whether the research is genuinely “Basic Research” and whether the expenditures are “Qualified” is decided by the ASTA/AEDC during the application review process, prior to the credit being claimed. The DFA’s role is primarily ministerial, verifying the presence of the required certificate. Therefore, taxpayers must focus administrative efforts on meticulous documentation during the application stage, as failure to secure the pre-certification renders the credit impossible to claim.

Timing, Carryforwards, and Restrictions

Arkansas provides generous provisions for the utilization and lifespan of the R&D tax credit:

• Credit Claiming: The credit must be claimed in the tax year in which the expense incurred for the qualified research is actually paid.7
• Carryforward Period: Unused credits, whether derived from qualified expenditures or equipment donations, may be carried forward for nine (9) tax years next succeeding the tax year of the payment or donation.5 This extensive carryforward period significantly increases the value of the credit, allowing companies with fluctuating income tax liabilities to fully utilize the benefit over nearly a decade.
• Tax Offset Limit: The tax credits may be used to offset up to 100% of a business’s annual income tax liability.2
• Prohibition on Double Benefit: State law prohibits taking a double benefit. Any person claiming the credit granted by Act 759 of 1985 shall not take any corresponding deduction under the Arkansas Income Tax Law for the same expense or contribution.7

Required DFA Forms

Taxpayers claim the certified credit by attaching the ASTA Certificate of Tax Credit to the relevant Arkansas income tax schedules. Corporate filers, in particular, would utilize schedules such as the AR1100BIC, which is used for listing various Business Incentive Credit Types.10

V. R&D Tax Credit Administrative Flow and Agency Roles

The following table summarizes the mandatory compliance workflow for accessing and claiming the University-Based (Basic Research) R&D Tax Credit in Arkansas.

R&D Tax Credit Administrative Flow and Agency Roles

VI. Case Study: Basic Research Payment Calculation and Strategic Advantage

This hypothetical case study illustrates the strategic financial benefits of utilizing the Basic Research pathway (University-Based R&D) compared to the standard In-House R&D credit.

Scenario Setup: Advanced Computing Corporation (ACC)

Advanced Computing Corporation (ACC), based in Little Rock, engages in both incremental internal development and foundational research during the 2024 tax year.

• Internal R&D Activities (Incremental): ACC conducts in-house development resulting in incremental QRE salaries that exceed the established base year expenditure by $150,000.
• Basic Research Contract (Cash Payment): ACC enters a written agreement with the University of Arkansas to perform foundational research aimed at understanding novel semiconductor failure mechanisms (an ASTA-approved Basic Research project). The cash payment to the university is $350,000.
• Equipment Donation: ACC donates new, highly specialized computing machinery (not yet depreciated) to the university lab to assist with the project. The cost basis of this new machinery is $50,000.

Calculation of Eligible Credit Components

ACC must calculate its credits separately based on the qualification pathway and rates:

The total R&D tax credit available to ACC for the year is $162,000.

Comparative Financial Analysis

The distribution of the tax benefit clearly demonstrates the strategic advantage of the Basic Research incentive:

R&D Credit Strategic Summary

For $400,000 expended through the Basic Research pathway, ACC generated $132,000 in credit. By comparison, $150,000 in qualifying incremental in-house expenditure yielded only $30,000 in credit.

This difference illustrates that the Basic Research credit offers a dramatically higher rate of return on investment for foundational work—33% of the total expenditure, compared to 20% of only the incremental expenditure for the standard in-house credit. This structure strongly directs corporate R&D funds toward university collaboration, which fulfills the state’s purpose of stimulating the transfer of science and technology by enhancing research support from industry to colleges and universities.4 Furthermore, the ability to claim a credit on the cost of donated equipment represents a significant opportunity to monetize fixed asset contributions, an avenue not available through other state R&D incentives.

VII. Conclusion and Strategic Recommendations for Arkansas Businesses

The Arkansas R&D Tax Credit program is carefully designed to incentivize specific types of research that align with the state’s goals for technological advancement. Basic Research, as defined federally and administered through the state’s University-Based R&D program, is the highest-value tax incentive available, offering a 33% flat credit rate on qualified expenditures, including cash payments and new equipment donations, without the constraint of establishing an incremental baseline.

Synthesis of the Basic Research Incentive

The core of the University-Based R&D credit rests on the principle of advancing foundational scientific or technological knowledge through external partnerships. The program’s structural advantage—the 33% flat rate applied to total expenses—provides a far superior economic outcome compared to the 20% incremental rate offered by the in-house credit. The eligibility for non-cash contributions (donations of new machinery) further distinguishes this incentive as a unique mechanism for corporations to support and benefit from academic research.

Compliance and Strategic Action Plan

Taxpayers seeking to maximize the Basic Research incentive must adhere to a specialized compliance strategy focused on pre-approval and proper expenditure categorization:

1. Prioritize Pre-Certification: The receipt of the Certificate of Tax Credit from the ASTA is the prerequisite for claiming the credit with the DFA.5 Therefore, meticulous preparation of the R&D application, including a detailed project plan clearly identifying the foundational intent, expenditures, and timelines, must be treated as the most critical compliance step.
2. Meticulous Documentation of Payments: While the calculation is simpler (a 33% flat rate), taxpayers must ensure that all QREs and contributions are documented according to the terms of the written agreement with the qualified institution, aligning with the federal standard for Basic Research Payments.6
3. Financial Strategy and Carryforward: Given the potential for large credits resulting from the 33% rate, businesses should leverage the generous nine-year carryforward provision.7 This allows for efficient long-term planning, ensuring the credit offsets up to 100% of state income tax liability even if the business lacks sufficient liability in the initial year of the expenditure.2

Enforce Prohibition on Double Dipping: Internal accounting procedures must be established to ensure that any expenditure, contribution, or sale below cost claimed for the 33% tax credit is expressly excluded from any corresponding deduction under the Arkansas Income Tax Law.7

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/