The Strategic Value of the “New Research Facility” Designation in Arkansas R&D Tax Policy

I. Executive Summary: The Strategic Advantage of the New Research Facility Designation

A. Initial Definition and Core Benefit

A New Research Facility in Arkansas is an eligible operation conducting in-house research that enters into a new financial incentive agreement with the Arkansas Economic Development Commission (AEDC).1 This designation triggers a critical tax calculation benefit by setting the research expenditure baseline to zero (0) for the first three years of operation, maximizing the annual R&D income tax credit.3

The designation of a “New Research Facility” is the key mechanism used by the state to provide aggressive financial support for new, significant R&D investment. Arkansas Code Annotated (ACA) § 15-4-2708, the statutory basis for the In-House Research Income Tax Credit, recognizes this status by granting a critical advantage over existing research operations. Specifically, for a new facility, the base year is stipulated as zero ($0). This provision ensures that the qualified business, identified as “new to the incentives,” applies the 20% credit rate to the entirety of its Qualified Research Expenditures (QREs) incurred during the initial three years following the execution date of the financial incentive agreement.1

B. Detailed Analysis: Overview of the Front-Loaded Incentive

The Arkansas R&D Tax Credit program, operating under the Consolidated Incentives Act of 2003, is strategically structured to offer substantial financial relief immediately upon market entry.1 For eligible businesses operating a New Research Facility, the zero-base rule provides a powerful, front-loaded financial mechanism intended to attract significant capital investment and high-wage R&D employment into the state.

This sustained three-year zero-base benefit, which is longer than many initial startup incentives observed nationwide, serves a critical strategic imperative: mitigating the substantial financial risk associated with establishing a large-scale R&D operation.3 R&D centers typically incur massive initial staffing costs (QREs) before generating substantial revenue or profits. By setting the base year to zero for years one through three, the state maximizes the potential tax offset during the most critical and capital-intensive phase. The policy effectively rewards the initial decision to establish and staff a new R&D center in Arkansas, contrasting sharply with the calculations required for existing facilities, which must utilize a historical baseline amount, substantially diluting the immediate credit value.3

However, this incentive is carefully constrained within a five-year term. While the initial three years reward volume, the structure mandates a pivot in calculation for the final two years, emphasizing the business’s commitment to sustained growth. This structural detail creates a predictable but sharp “incentive cliff”: the initial establishment benefit ends after Year 3, requiring continuous, aggressive QRE growth in Years 4 and 5 to maintain any substantial credit value.

II. The Statutory Definition and Context of the In-House R&D Tax Credit

A. Legal Authority and Program Scope

The In-House Research Income Tax Credit program is primarily authorized by ACA § 15-4-2708.3 This credit is a cornerstone of Arkansas’s comprehensive economic development strategy, governed by the Consolidated Incentives Act, and administered by the AEDC.1

The standard In-House R&D credit equals 20% of qualified expenditures that exceed the base year amount.6 The research must be conducted “in-house” within a research facility operated by the eligible business.3 The maximum term of the incentive agreement is five years, commencing on the first day of the business’s tax year in which the Financial Incentive Agreement is signed.2

B. Prerequisite for State Credit: Alignment with Federal Law

A fundamental prerequisite for claiming the Arkansas R&D credit is that the business and the R&D activities must first qualify for the federal Research and Development tax credit under the Internal Revenue Code (IRC) § 41.3

To qualify, the research must satisfy the IRS’s four-part test:

1. The activity must be undertaken for the purpose of discovering information that is technological in nature.2
2. The application of technological information must be intended to be useful in a new or improved business component.2
3. The activity must seek to eliminate uncertainty regarding the development or improvement of the business component.8
4. Substantially all related activities must constitute elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality.2

C. The Statutory Distinction: New vs. Existing Facilities

The distinction between a New Research Facility and an Existing Research Facility is codified entirely through the base year calculation, which is the mechanism used to determine the incremental expenditures eligible for the 20% credit.3

• New Research Facility: The base year is zero (0) for the first three years of the agreement.3 This applies to new eligible businesses that conduct in-house research in a facility operated by the business.3 The initial baseline for a qualified business “new to the incentives” offered under this subsection is the amount of research conducted in the state as claimed for federal research.1
• Existing Research Facility: The base year amount is determined by the historical amount of qualified research conducted in the state, generally involving a look-back period (not explicitly detailed in the zero-base statutes but implied by the statutory structure for existing facilities).3

The statutory emphasis on being “new to the incentives” suggests that the definition focuses on the inception of qualified R&D activities under the Arkansas program rather than strictly the construction of a physically brand-new building. A business purchasing an existing, non-R&D-related structure and converting it into a new, qualified R&D operation may qualify as “New” if they have no prior R&D history in Arkansas to set a positive base year. The AEDC’s discretionary authority to approve the application and project plan confirms that qualification relies heavily on securing this specific administrative designation based on the lack of previous qualifying R&D activity.2

Furthermore, eligible businesses must make a critical strategic election regarding which R&D incentive to claim. Arkansas offers various R&D credits, including the 20% In-House Credit and 33% credits for Targeted Businesses or Strategic Value research.7 The guidelines specify that in-house research incentives generally may not be combined with one another.10 While the 33% credit offers a higher rate, it is often capped at $50,000 per taxpayer annually for research in an area of strategic value.9 For enterprises establishing a New Research Facility with multi-million dollar R&D payrolls, the uncapped 20% credit calculated against a zero base for three years is likely far more financially beneficial than the capped 33% credit, necessitating a crucial strategic determination during the application process.

III. Detailed Mechanics: The Five-Year Zero Base Calculation and Transition

The financial design of the New Research Facility status is engineered to deliver a maximal, albeit finite, benefit period over the five-year incentive term.

A. Years 1-3: Maximizing the Credit Value

For the first three tax years following the date of the financial incentive agreement, the base year is set to zero ($0).3 Therefore, all eligible qualified research expenditures (QREs) incurred in these years qualify for the 20% income tax credit.1

This period of maximum credit generation commences upon the first day of the business’s tax year in which the financial incentive agreement is signed with the AEDC.2 The timing of signing the Financial Incentive Agreement is a critical strategic consideration. To maximize the zero-base benefit, a business should synchronize the execution date of the agreement with the beginning of the tax year in which the highest QREs are anticipated within the first three years, such as when R&D staffing is at full capacity. Since the incentive clock begins running on the first day of the tax year the agreement is signed, even a short delay in execution could inadvertently postpone the start date to the following fiscal year, potentially losing a year of the maximum available credit if the R&D ramp-up is completed early.2

B. Years 4 and 5: The Incremental Shift

The statutory structure dictates an abrupt shift in the calculation method after the third year, pivoting the incentive from rewarding volume to rewarding incremental growth.3

• Year 4 Calculation: The qualified research and development expenditures incurred in Year 3 are statutorily used as the base.3 The credit calculation shifts to 20% of the incremental QREs incurred in Year 4 that exceed the Year 3 QRE base amount.
• Year 5 Calculation: Similarly, the QREs incurred in Year 4 are established as the statutory base for Year 5.3 The 20% credit is applied only to the incremental increase of Year 5 QREs over Year 4 QREs.

This reset highlights the disproportionate importance of the QREs reported in Year 3. These expenditures simultaneously maximize the credit for Year 3 (due to the zero base) and set the permanent, high-water mark for the incremental calculation in Year 4. Consequently, the QRE documentation for Year 3 must be rigorously maintained and substantiated. An audit adjustment reducing the Year 3 QREs could result not only in a clawback of the Year 3 credit but also in a significant reduction of the Year 4 credit, which is penalized by having an artificially lower (and therefore harder to exceed) statutory base being established for the calculation.3 This structure necessitates hyper-vigilance in Year 3 QRE accounting and certification.

C. Administrative Guidance on Duration and Renewal

The term of the R&D financial incentive agreement under ACA § 15-4-2708 is defined as five years.2 The law permits the business to carry forward any unused credit amount for a maximum of nine consecutive tax periods.9

While administrative rules mention that the agreement may be renewed for up to five additional years, the initial zero-base structure is specific to the “New Research Facility” designation and its “new to the incentives” status.1 Any renewal would necessarily default to the incremental base year calculation applied to existing facilities, as the historical expenditure data from Years 1-5 would establish a positive, historical base, thus ending the unique zero-base benefit.

IV. Qualified Expenditure Definition and Critical Statutory Exclusions

A. Narrow Scope of Arkansas Qualified Research Expenditures (QREs)

Arkansas statutes impose a narrower definition of QREs compared to federal IRC § 41, primarily focusing on high-value labor inputs.7 Eligible expenditures that form the basis for the credit calculation are restricted to in-house expenses for taxable wages and usual fringe benefits paid to full-time employees or contractual employees performing, supervising, or directly supporting qualified research within Arkansas.2

B. The Critical Statutory Exclusions: The Facility Paradox

A critical compliance detail is the paradox surrounding the facility itself: while the status of having a “New Research Facility” triggers the maximal zero-base benefit, the cost of developing the physical facility is explicitly non-qualifying for the tax credit calculation.10

Arkansas law explicitly excludes the following activities and costs from the definition of qualified research for purposes of calculating the income tax credit 2:

• Construction or renovation of buildings.
• Purchase of land.
• Purchase of supplies.
• Purchase or rehabilitation of production machinery and equipment.
• Any research conducted after the beginning of commercial production.

This distinction confirms that the incentive is designed solely to reward the generation of Arkansas intellectual capital through labor (wages and fringe benefits), not fixed asset acquisition or infrastructure development.10 Costs related to the facility construction are incentivized through separate state programs, such as the Tax Back program, which offers sales and use tax refunds on eligible project expenditures.1

Due to the explicit exclusion of construction and renovation costs 2, a company must ensure its capital expenditure accounting for the new facility (land, building, machinery) is rigorously segregated from its operational R&D labor costs (QREs). Failure to properly segregate these costs and erroneously including capital expenses in QREs would lead to disallowed credits, impacting the substantial zero-base benefit in Years 1-3, and potentially triggering repayment provisions if benefits were received improperly.1

Although the Consolidated Incentives Act administrative rules do not contain a public definition of “New Research Facility” that clarifies whether expansion or renovation qualifies 1, the statute does authorize the Executive Director to negotiate proposals for “expanding an existing facility”.1 Because the law explicitly excludes “renovation of buildings” from qualifying QREs, any taxpayer pursuing a massive expansion or refurbishment project who wishes to claim the zero-base benefit must secure explicit, written pre-approval from the AEDC to administratively designate the site as a “New Research Facility” under the incentives program before executing the financial agreement. This ensures the foundational zero-base calculation is permitted, even if the physical construction costs themselves are not credited.

V. State Revenue Office Guidance and Administrative Compliance

Compliance for the R&D Tax Credit requires coordination between the Arkansas Economic Development Commission (AEDC) and the Department of Finance and Administration (DFA).

A. AEDC Application and Financial Incentive Agreement

The R&D tax credit program is discretionary, resting upon the approval of the Executive Director of the AEDC.2

1. Application: Taxpayers must apply to the AEDC (or its division, the Arkansas Science and Technology Authority, ASTA) to qualify.9 The application must generally describe the research to be undertaken and the estimated expenditures.2
2. Project Plan: The application must include a detailed project plan that clearly identifies the intent of the project, the expenditures planned, the start and end dates, and an estimate of total project costs.2
3. Financial Incentive Agreement (FIA): At the discretion of the Commission, the approved application and project plan may serve as the official Financial Incentive Agreement.1 The term of the FIA must be established for five years.2

The AEDC’s role is to validate the R&D activity and the “New Facility” status, resulting in the issuance of a Certificate of Tax Credit.

B. DFA Filing Requirements and Credit Utilization

The DFA administers the collection, utilization, and enforcement of the credit.

1. Certification and Filing: Once the credit is earned, the business must receive a Certificate of Tax Credit from the AEDC, which must be filed with the taxpayer’s annual state income tax return.1
2. DFA Forms: Businesses claim the credit using state income tax forms such as AR1000TC (Schedule of Tax Credits and Business Incentive Credits).14 The specific credit code for the In-House Research Income Tax Credit is 0023.14
3. Utilization and Carryforward: The credits are highly valuable because they may be used to offset up to 100% of the taxpayer’s annual Arkansas state income tax liabilities.9 Any unused credit amounts may be carried forward for a maximum of nine consecutive tax periods.9

The generous utilization rule, allowing a 100% income tax offset combined with a nine-year carryforward, creates an exceptional opportunity for long-term capital retention. Businesses leveraging the New Facility zero-base rule will generate substantial credits in the first three years. These credits can be strategically carried forward to effectively zero out state income tax for a significant period beyond the five-year incentive term, optimizing cash flow and lowering the effective state tax rate.11

Due to the bifurcation of administrative oversight—AEDC validating the activity and DFA validating the financial claim—compliance requires satisfying both agencies. The robust documentation that supports the QREs must be maintained to secure the Certificate of Tax Credit from the AEDC and to withstand potential audits by the DFA. If a business fails to meet the requirements of the financial incentive agreement, the DFA is authorized to pursue enforcement actions, including the collection of previously received benefits, for a period of two years.1

VI. Practical Example: Financial Impact Modeling of the Zero Base Year

To demonstrate the financial significance of the New Research Facility status, the following case models the front-loaded value generated by the zero-base calculation.

A. Case Study Setup: NovaTech R&D Center

NovaTech, a technology firm, establishes a New Research Facility in Arkansas, incurring Qualified Research Expenditures (QREs, consisting solely of R&D wages/fringe benefits) for five years under a Financial Incentive Agreement. The firm strategically ramps up staffing rapidly in the initial years.

• Credit Rate: 20%
• R&D Strategy: High initial staffing ramp-up (Years 1-3), followed by stabilization and incremental growth (Years 4-5).
• Status: New Research Facility (Base Year = $0 for Years 1-3).

B. Calculation of Annual Credit Value for the Five-Year Term (Zero-Base Advantage)

The table below illustrates the dramatic difference in credit generation between the zero-base years (Years 1-3) and the subsequent incremental base years (Years 4-5).

Five-Year R&D Tax Credit Scenario for a New Research Facility (NovaTech)

C. Comparative Statistics: Financial Significance of the Status

The modeling clearly illustrates the financial power of the New Research Facility status:

• Total Credit Earned in Years 1-3 (Zero Base): $740,000
• Total Credit Earned in Years 4-5 (Incremental Base): $50,000

The zero-base rule accounted for 93.7% of the total five-year credit value of $790,000. This highly concentrated financial support in the initial years provides substantial liquidity and working capital relief precisely when the company is undergoing maximum hiring and R&D ramp-up. The state’s design effectively lowers the operating cost of establishing the high-wage R&D workforce.

Conversely, the model underscores the mandate for continuous growth in the final two years. If NovaTech’s QREs had plateaued in Year 4 at the Year 3 level ($1,500,000), the eligible credit for Year 4 would have been zero (since the incremental QREs over the $1,500,000 base would be $0). The minimal credit earned in Years 4 and 5 is entirely dependent on the firm’s capacity for accelerating the R&D payroll base year-over-year.

VII. Conclusion: Maximizing the Initial R&D Investment in Arkansas

The “New Research Facility” designation represents the most significant incentive calculation advantage within the Arkansas R&D Tax Credit framework. By permitting eligible businesses to calculate the 20% credit against a zero baseline for the first three years of the financial incentive agreement, the state provides a substantial front-loaded subsidy designed to mitigate the high costs associated with launching major in-house R&D operations.

To realize the full strategic value of this status, corporate decision-makers must prioritize two key compliance principles:

1. Administrative Pre-Approval for Status: Businesses must secure explicit, written approval from the AEDC to establish the Financial Incentive Agreement and lock in the zero-base status for the first three years. This is especially crucial for projects involving the expansion or significant renovation of existing structures, where administrative designation is necessary to confirm the business is “new to the incentives” despite the presence of a prior physical footprint.
2. Rigorous Accounting Segregation: Due to the narrow definition of QREs—which focuses almost exclusively on R&D wages and explicitly excludes costs related to land, construction, renovation, equipment, and supplies—companies must maintain meticulous accounting separation. This segregation ensures that only eligible labor expenditures are reported as QREs, protecting the integrity of the maximized zero-base calculation from potential DFA audit adjustments and preventing forfeiture or clawback of the substantial credits generated in the first three years.

By successfully executing these steps, businesses can leverage the zero-base rule to generate immediate, high-volume credits, which can then offset 100% of state income tax liability and be carried forward for up to nine years, transforming the initial R&D investment into long-term financial stability and competitive advantage in Arkansas.

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/