Detailed Analysis of the Arkansas R&D Tax Credit for Donation or Sale Below Cost of New Machinery and Equipment

I. Executive Summary: The Strategic Value of the Equipment Incentive

The Arkansas Research and Development (R&D) Tax Credit Program includes a unique incentive for companies that donate or sell new machinery and equipment to qualified educational institutions below cost. This provision grants a 33% Arkansas income tax credit to taxpayers who transfer new machinery or equipment to qualified educational institutions for research purposes. The credit is calculated based on the difference between the taxpayer’s statutory “Cost”—a value defined distinctly for wholesalers versus manufacturers—and the equipment’s sale price, offering a powerful, high-rate incentive to support institutional R&D and technological advancement within the state.1

This tax incentive, codified under Arkansas Code Annotated (ACA) § 26-51-1101 et seq., is designed to foster university-based research by supplying new, industry-standard equipment to accredited institutions engaging in qualified research programs.3 Unlike traditional charitable deductions, this is a direct credit against income tax liability, calculated at a generous thirty-three percent (33%) rate based on the calculated reduction in cost.4 The compliance requirements are stringent, requiring mandatory application and certification by the Arkansas Economic Development Commission (AEDC) and specific, differentiated documentation proving the statutory “Cost” depending on whether the taxpayer is a retailer, wholesaler, or manufacturer.5

II. Statutory and Regulatory Foundation of the Credit

The framework for the Donation or Sale Below Cost credit is part of Arkansas’s broader strategy to incentivize technological innovation and academic-industry collaboration.

A. Legal Basis and Administrative Authority

The R&D tax credit program, including the donation provisions, is authorized under the Arkansas Code, originating from Act 759 of 1985.5 Specifically, ACA § 26-51-1101 through § 26-51-1105 governs the treatment of these contributions.8

The program is administratively overseen by the Arkansas Economic Development Commission (AEDC), primarily through the Division of Science and Technology (formerly the Arkansas Science & Technology Authority or the Arkansas Department of Higher Education).5 This administrative placement under the AEDC confirms that the credit is fundamentally an economic development tool aimed at strategically expanding research capacity across Arkansas’s educational institutions.3 The final decision to grant tax credits rests with the Board of Directors of the Authority, following a thorough staff investigation to ensure all eligibility criteria are met.5

B. Defining Eligible Recipients and Equipment

To qualify for the credit, the transaction must meet stringent criteria regarding the recipient and the nature of the property transferred:

1. Qualified Educational Institution (QEI): The new machinery or equipment must be donated or sold below cost to a qualified educational institution. These institutions are typically accredited Arkansas post-secondary educational institutions, and the donation must be made in conjunction with a qualified research program or educational program.2
2. Program Requirement: The educational institution must commit to using the machinery and equipment in connection with a qualified educational program or a qualified research program.2 A qualified research program may involve basic research (original investigation for scientific knowledge) or applied research (utilizing existing knowledge to resolve a specific problem).12
3. “New Machinery and Equipment”: The rules stipulate that the machinery and equipment must be “new” within the definition of the program.6 This typically precludes the use of used, refurbished, or previously capitalized equipment.

C. Strategic Implications of Program Design

The structure of the equipment incentive demonstrates a calculated state effort to promote specific behaviors. Because the law mandates that the applicant submit a detailed project plan for the research program receiving the donation, and this plan forms the basis for the Commission’s approval, the state maintains quality control over the utilization of the subsidized equipment.5 The non-automatic nature of the credit—requiring application and evaluation by the AEDC staff—ensures that the tax benefit aligns with the state’s strategic R&D goals, fostering collaboration between private industry and the state’s universities.3

Furthermore, the high rate of the credit—thirty-three percent (33%)—and its calculation based on the difference between cost and sales price makes it a substantial incentive. Unlike some other R&D programs offered in Arkansas (such as the credit for Strategic Value research, which caps at $50,000 per tax year 9), the equipment donation credit base is directly tied to the value of the machinery and is not explicitly subject to a statutory dollar limit per taxpayer, making it particularly advantageous for businesses transferring high-value equipment.

III. Deconstructing the Statutory Definition of “Cost”

The determination of the credit base hinges entirely on the statutory definition of “Cost,” which varies critically depending on the nature of the taxpayer’s business—wholesale/retail versus manufacturing. ACA § 26-51-1101 provides these specific definitions.14

A. Standard 1: Wholesale or Retail Business Cost

For a donation or sale below cost performed by a wholesale or retail business, “Cost” is defined in a straightforward manner:

“In the case of a donation or sale below cost by a wholesale or retail business, the amount actually paid by the wholesaler or retailer to the supplier for the machinery and equipment” [14, ].

This definition confines the cost basis strictly to the documented acquisition cost of the equipment incurred by the seller. Internal costs, overhead, labor, or any intended retail markup are excluded from this calculation. Compliance requires the taxpayer to provide documentation, specifically a copy of the invoice from the business’s supplier showing this actual acquisition cost.

B. Standard 2: Manufacturer Cost (The “Lowest Price” Deeming Provision)

The statutory definition of “Cost” for a manufacturer is more nuanced and often results in a significantly higher credit basis for the donor:

“In the case of a donation or sale below cost by a manufacturer of machinery and equipment, the enhanced value of the materials used to produce the machinery and equipment, which shall be deemed to be the lowest price at which the manufacturer sells the machinery and equipment” [, ].

The statute first establishes “Cost” as the “enhanced value of the materials.” However, recognizing the difficulty and complexity of defining this value through internal cost accounting (which might typically include only raw materials and minimal labor, excluding overhead and profit), the statute immediately employs a legal proxy. By deeming this value to be the lowest price at which the manufacturer sells the equipment, the legislature establishes a favorable market-value floor for the credit base.

This statutory choice is a deliberate incentive mechanism. If the cost were restricted solely to internal inventory costs, the credit generated would be low, as manufacturing costs often fall well below the retail or wholesale selling price. By equating the statutory Cost to the lowest selling price, the policy maximizes the financial benefit for manufacturers donating their proprietary products, making the incentive far more attractive than a standard cost-based calculation or a fair market value deduction.

To substantiate this cost, a manufacturer must submit a copy of the wholesale price list showing the lowest price for the machinery or equipment for which the credit is claimed.

Table 1 summarizes the specific cost definitions crucial for calculating the credit base.

Table 1: Definition of Statutory “Cost” for Arkansas R&D Equipment Credit

IV. Calculation Methodology and Quantification of the Credit

The R&D tax credit related to sales below cost is derived from the amount by which the statutory Cost is reduced during the transaction.

A. The Credit Base Formula

The credit is consistently set at thirty-three percent (33%) of the reduction amount. The statutory language specifies that the credit is $33\%$ of the “amount by which the cost is reduced”.

The Calculation Base ($B$) is determined by the following formula:

$$B = \text{Statutory Cost} – \text{Actual Sale Price}$$

The final Credit Amount ($C$) is then calculated as:

$$C = B \times 33\%$$

This calculation methodology applies regardless of whether the transaction is a full donation (where Actual Sale Price equals zero) or a sale below cost (where the price is greater than zero but less than the Statutory Cost).

1. Full Donation: In the case of a full donation of new machinery or equipment, the amount by which the cost is reduced is equal to the full Statutory Cost. The credit granted is $33\%$ of the full cost of the machinery and equipment donated [, ].
2. Sale Below Cost: In the case of a sale below cost, the credit is limited to $33\%$ of the differential between the Statutory Cost and the reduced sale price received by the taxpayer [, ].

B. Parallel Credit for Cash Donations

Arkansas law also provides a mechanism to encourage cash contributions aimed at equipment acquisition. A separate 33% credit is granted in the case of a cash donation, calculated based on the amount of the cash donation used by the qualified educational institution (QEI) to purchase new machinery and equipment from a wholesale, retail, or manufacturing business []. The credit base here is the amount actually paid by the QEI for the new equipment, as documented by itemized receipts.

This dual approach ensures flexibility. Businesses that possess the specific new equipment needed by a QEI can claim the Donation or Sale Below Cost credit. Businesses that wish to fund research infrastructure generally, but do not possess the precise machinery, can make a cash donation and receive a similar 33% credit, provided the QEI uses those funds for new equipment purchases.

Table 2: Arkansas Donation or Sale Below Cost Credit Calculation Basis

V. State Revenue Office Guidance and Compliance Requirements

Effective compliance requires navigating the requirements set forth by both the AEDC (for certification) and the Department of Finance and Administration (DFA) (for filing).

A. AEDC Application and Certification Requirements

The application process is critical and precedes the actual income tax filing. Taxpayers must apply for the credit to the AEDC (or the Authority). The application process ensures that the donation supports a pre-approved qualified research program.

The application packet must be submitted to the Executive Director of the AEDC and includes several mandatory documents :

1. Application Form: This requires essential information such as the name, address, and tax identification number of the applicant, along with the receiving educational institution, the title of the qualified research program, and the amount or value of the donation or sale below cost.
2. Research Proposal: A copy of the proposal for the research program receiving the donation is necessary. This allows Authority staff to investigate thoroughly and assure that the project meets eligibility criteria and supports approved basic or applied research.

Final decisions on granting tax credits are made by the Board of Directors of the Authority, who then notify the taxpayer by letter.

B. Documentation Mandates for the Tax Claim

The most rigorous aspect of compliance involves documenting the transaction, particularly substantiating the “Cost” and validating the receipt and intended use by the QEI.

For each piece of machinery or equipment donated or sold below cost, the taxpayer must provide:

1. Affidavit from the Qualified Educational Institution (QEI): This affidavit, provided by the receiving institution, is compulsory documentation. It must state:

• Confirmation that the educational institution received the machinery and equipment.
• A statement confirming the equipment is new within the meaning of the program.
• If applicable, a statement detailing the amount paid by the educational institution (for sales below cost).
• Confirmation that the educational institution will use the equipment or machinery in connection with a qualified education program or a qualified research program.

1. Cost Substantiation Documentation:

• Wholesale/Retail: A copy of the invoice from the business’s supplier showing the actual cost paid by the wholesaler or retailer.
• Manufacturer: A copy of the manufacturer’s wholesale price list showing the lowest selling price for the equipment.

C. The Prohibition on Double Benefit

A critical statutory rule prevents the taxpayer from claiming dual benefits for the same transaction. The law explicitly states:

“Any person claiming any credit granted by Act 759 of 1985 for any expense, or contribution, or sale below cost shall not take any deduction under the Arkansas Income Tax Law for the same expense or contribution”.

This provision is designed to ensure that the 33% income tax credit is the exclusive state tax benefit derived from the transfer. Taxpayers must meticulously track these transactions to avoid claiming the cost basis as a business expense or a state charitable deduction, which would violate this exclusivity mandate.

VI. Credit Utilization and Carryforward Rules

The generous utilization and carryforward provisions significantly enhance the value of the R&D equipment donation credit, providing substantial long-term tax planning flexibility.

A. Utilization Against Tax Liability

The total credit allowed for qualified research expenditures, donations, and sales below cost is robust:

The credit shall be allowed up to one hundred percent (100%) of the net tax liability of the taxpayer after all other credits and reductions in tax have been calculated.

This $100\%$ offset capability means that a sufficiently large equipment donation can entirely eliminate the taxpayer’s state corporate income tax or individual income tax liability in the year the transaction occurs.

B. Claiming and Carryforward Period

The credit must be claimed in the tax year of the donation or sale below cost. If the credit exceeds the tax liability in that year, the unused portion may be carried forward.

The current governing rules provide a substantial carryforward period:

All or any part of the unused credit may be carried over to and claimed in succeeding tax years until the credit is exhausted or until the end of nine tax years next succeeding the tax year of the donation or sale below cost, whichever occurs earlier.

While some earlier administrative rules referenced a shorter three-year carryforward , the prevailing and later-updated rules confirm the nine-year period for equipment donations and sales below cost. This extensive duration (a full decade including the year earned) provides businesses with ample time to realize the full benefit of a major equipment transfer, even if their state tax liability is modest in the year of the donation.

It is also important to note that credits issued under this program are not permitted to be sold or transferred to other entities.

C. Filing Forms

Once the taxpayer receives the official approval letter from the AEDC, the credit is claimed on the appropriate Arkansas tax schedules. For individual and corporate taxpayers, the credit amount is typically reported on the general Arkansas Schedule of Tax Credits and Business Incentive Credits, such as Form AR1000TC. The official DFA forms, coupled with the AEDC certification and supporting documentation, finalize the claim.

VII. Illustrative Practical Example and Calculation Scenario

To demonstrate the application of the specialized “Cost” definitions and the $33\%$ calculation, two distinct scenarios are provided.

A. Scenario 1: Retailer Sale Below Cost

ARK Retail Solutions, a technology wholesaler, decides to support a robotics research program at an Arkansas university by selling new testing machinery below cost.

• Taxpayer Type: Wholesale/Retail Business
• Equipment: New Calibration Unit
• Statutory Cost Basis: Amount paid by ARK Retail Solutions to its supplier.
• Data Points:

• Amount ARK Retail Solutions paid to the supplier (Statutory Cost): $150,000
• Sale Price to Qualified University: $50,000 (Sale Below Cost)
• Arkansas Income Tax Liability (Net): $35,000

Credit Utilization: The full $33,000 credit is applied against the $35,000 net tax liability, reducing the final liability owed to DFA to $2,000. No carryforward is necessary.

Compliance Requirement: ARK Retail Solutions must submit the AEDC application, provide the original supplier invoice ($150,000), and obtain an affidavit from the university confirming receipt and the $50,000 purchase price.

B. Scenario 2: Manufacturer Full Donation and Carryforward Generation

Delta Advanced Manufacturing, a maker of proprietary industrial robotics, donates a complex, specialized manufacturing arm to a QEI for materials research.

• Taxpayer Type: Manufacturer
• Equipment: Specialized Robotics Arm (Prototype/New)
• Statutory Cost Basis: Lowest price at which Delta sells the equipment.
• Data Points:

• Lowest Price on Delta’s Wholesale Price List (Statutory Cost): $600,000
• Delta’s Internal Manufacturing Cost (irrelevant for calculation): $220,000
• Sale Price to Qualified University: $0 (Full Donation)
• Arkansas Income Tax Liability (Net): $150,000

Credit Utilization and Carryforward:

In the year of the donation, Delta Advanced Manufacturing can offset $100\%$ of its $150,000 net tax liability.

• Credit Used in Year 1: $150,000
• Unused Credit to Carry Forward: $198,000 – $150,000 = $48,000

This remaining $48,000 credit can be carried forward for up to nine succeeding tax years, offsetting future Arkansas income tax liabilities until it is fully utilized. The use of the “lowest price” as the Statutory Cost in this manufacturing example yielded a credit based on the equipment’s market value, significantly maximizing the tax benefit compared to using the internal manufacturing cost of $220,000.

VIII. Conclusion and Strategic Recommendations

The Arkansas R&D Tax Credit for Donation or Sale Below Cost of new machinery and equipment is a critically valuable incentive for corporate and individual taxpayers seeking to monetize philanthropic or strategic equipment transfers to the state’s educational sector. The program’s strength lies in its high credit rate ($33\%$), its expansive utilization (100% tax offset), and its extensive nine-year carryforward period.

A. Summary of Program Advantages

For wholesale and retail businesses, the credit offers a significant return on their inventory investment when supporting research programs. For manufacturers, the statutory definition of Cost, which pegs the credit base to the lowest selling price rather than internal cost accounting, is a powerful policy choice that structurally enhances the credit value. This ensures that the state’s incentive is substantial enough to encourage the transfer of advanced, specialized, and often proprietary equipment necessary for cutting-edge institutional research.

B. Strategic Compliance Checklist for Tax Professionals

Taxpayers and their advisors must adhere rigorously to the administrative and legal requirements to successfully claim this credit:

1. Mandatory AEDC Pre-Approval: The taxpayer must ensure that the application, along with the detailed research program proposal from the QEI, is submitted to and formally approved by the AEDC (or its successor agency) before or concurrent with the transaction. The state requires evidence that the equipment transfer supports a qualified research program.
2. Rigorous Cost Documentation: The method of documenting the statutory “Cost” must strictly adhere to the taxpayer’s business type: retailers and wholesalers must retain the original supplier invoice, while manufacturers must maintain the official wholesale price list showing the lowest price.
3. Third-Party Affidavit Requirement: Securing the mandatory affidavit from the Qualified Educational Institution is non-negotiable. This document must confirm receipt, affirm the equipment’s “new” status, detail any purchase price received, and confirm its dedication to an eligible research or educational program.
4. Prohibition of Dual Claim: Taxpayers must implement internal controls to prevent claiming the cost reduction amount used for the $33\%$ credit as a charitable deduction or ordinary expense deduction under the Arkansas Income Tax Law.

Long-Term Credit Planning: Given the $100\%$ offset capability and the nine-year carryforward rule, large credits earned through high-value donations should be incorporated into the taxpayer’s state tax planning model for the full 10-year period (Year 1 plus nine carryforward years) to ensure maximum utilization.

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