The Strategic Value of the Qualified Educational Institution in Arkansas R&D Tax Credits

I. Executive Summary: The Strategic Role of Qualified Educational Institutions in Arkansas R&D

The Qualified Educational Institution (QEI) definition in Arkansas encompasses any public college, university, junior college, or vocational school supported by the state, alongside qualifying private educational institutions located within Arkansas, including public K-12 schools.1 This classification is pivotal, as it allows Arkansas businesses to claim a 33% income tax credit for expenses related to research contracts or for donating new machinery and equipment to these educational bodies for use in approved research programs.1

Arkansas employs its Research and Development (R&D) incentive framework to stimulate innovation, specifically intending to provide incentives for university-based research, in-house corporate research, and technology-based start-up enterprises.2 The University-Based Research and Development incentive, tied to QEI partnerships, is strategically the most financially compelling mechanism, offering a 33% income tax credit rate for qualified expenditures, significantly higher than the 20% rate offered for general in-house R&D (which is also incremental based on a baseline expenditure).2

This tax credit is highly effective, as it may offset up to 100% of a business’ state income tax liability in a given year.2 The financial disparity between the QEI-related credit (33% non-incremental) and the standard in-house credit (20% incremental) acts as a structural mechanism steering corporate R&D funds away from entirely proprietary internal efforts toward collaborative projects with academic partners. The state’s explicit policy objective is achieved through this mechanism: “enhancing opportunities for research support from industry to colleges and universities,” thereby stimulating technology transfer and reinforcing the academic research ecosystem as a strategic economic development tool.1

II. Statutory and Regulatory Foundation: Defining the QEI and the Qualified Research Program

The legal basis for the QEI definition and the associated tax credits originates from Act 759 of 1985. The implementation rules governing the program are jointly overseen by the Arkansas Department of Higher Education (ADHE) and the Arkansas Science and Technology Authority (ASTA).1

A. The Precise Definition of Qualified Educational Institution (QEI)

The definition of a QEI is broadly encompassing, ensuring that a wide array of educational partners can participate in tax-credit eligible research programs.

1. Public Institutions

The definition includes “any public university, college, junior college, or vocational technical training school supported by the State of Arkansas”.1 This covers the entire publicly funded higher education system and state-supported technical training centers, ensuring that taxpayers can partner with major research universities or specialized vocational schools alike.

2. Private Institutions

QEI status is also available to private entities, provided they meet specific jurisdictional and tax criteria. The rules include “any private university, college, junior college, or vocational technical training school located in the State of Arkansas and qualified for tax-exempt status under Arkansas Income Tax Law”.1 Qualification necessitates that the institution is situated within Arkansas and maintains its tax-exempt classification under state statute.

3. K-12 Inclusion

The rules further expand the scope to include “Any public elementary or secondary school located in the State of Arkansas”.1 The inclusion of public vocational schools and K-12 entities is significant because it extends the tax incentive beyond traditional, high-level basic research centers. This structural provision allows the incentive to support technical training and applied skill development across the entire educational spectrum. Manufacturers, for example, can leverage this credit by donating advanced, state-of-the-art equipment to high school vocational programs for use in approved, applied research projects, effectively aligning current R&D objectives with long-term future workforce recruitment strategies.

B. The Mandate for a Qualified Research Program (QRP)

To claim the 33% credit, the expenditure or donation must be made specifically to support a Qualified Research Program (QRP). This requirement ensures that the funds are directed toward activities that meet the state’s standard for scientific and technological advancement.

A QRP is defined as a research program undertaken by a QEI that satisfies the eligibility criteria established by ASTA’s existing Applied Research Grant Program or Basic Research Grant Program.1

• Applied Research is defined as any activity seeking to utilize or apply existing knowledge, information, or resources to resolve a specific problem, question, or issue.1
• Basic Research is defined as any original investigation for the advancement of scientific or technological knowledge.1

To ensure alignment with strategic state priorities, the underlying research expenditure must be jointly approved by both the Arkansas Science & Technology Authority (ASTA) and the Arkansas Department of Higher Education (ADHE).1 This regulatory link to ASTA’s grant criteria requires that supported projects adhere to a specific benchmark for original investigation or technological relevance, thereby preventing the credit from being utilized for routine product development. Taxpayers must present a robust project plan detailing intent, expenditures, and scope for agency review prior to the research being undertaken.1

III. Credit Mechanisms: Generating the 33% Tax Incentive

The University-Based R&D program provides a 33% credit rate, applicable to two distinct categories of expenditures, as outlined in the program rules.1

A. Mechanism 1: Qualified Research Expenditures (QREs)

The first mechanism applies to eligible businesses that contract with QEIs to conduct research.2 The credit is calculated as 33 percent of the amount expended by the taxpayer to the QEI during the taxable year in funding the approved QRP.1

A key advantage of this mechanism lies in the scope of eligible costs compared to internal R&D credits. For internal, in-house R&D (the 20% credit), QREs are typically limited to R&D salaries, explicitly excluding costs for supplies, equipment, and buildings.3 By contrast, the QEI research credit focuses on the total “amount expended” to the university or college under the contract.1 This simplification minimizes the compliance burden for the industry partner, who is not required to delineate the QEI’s internal spending (i.e., auditing whether the QEI spent the contracted funds on wages versus supplies). The credit base is simply the contract cost paid by the business to the QEI.

B. Mechanism 2: Donations or Sales Below Cost of New Machinery and Equipment

Taxpayers may also earn the 33% credit by transferring new machinery or equipment to a QEI for use in a QRP.1 The credit is calculated as 33% of the cost of the donated property, or 33% of the cost reduction if the property is sold below cost.1

1. Definition and Requirements

The machinery and equipment must be tangible personal property and must be “state-of-the-art,” meaning it is of the same type, design, and capability as equipment currently sold or manufactured.1 Furthermore, the property must be “new,” meaning it has either never been used (except for normal manufacturer testing) or has been used solely for demonstration purposes by a retailer or wholesaler.1

2. Valuation Methods for Cost Basis

The calculation of the cost basis for the 33% credit is strictly defined based on the taxpayer’s economic role:

• Wholesaler or Retailer: For these taxpayers, the cost basis is the amount actually paid by the business to its supplier for the property.1
• Manufacturer: For a manufacturer, the cost basis is defined as the “enhanced value of the materials used to produce the machinery or equipment,” which is explicitly determined by the lowest price at which the manufacturer sells the property.1

This rule offers a distinct financial advantage to manufacturers. By allowing the credit basis to be tied to the lowest sale price, the manufacturer is effectively permitted to include internal costs such as labor, overhead, and profit margin in the value used to calculate the 33% credit. This results in a credit base significantly higher than the manufacturer’s simple material or book cost, maximizing the tax benefit. This regulatory approach specifically targets and generously rewards high-tech manufacturers for transferring high-value capital assets into the state’s educational research sector.

IV. Administrative Guidance and Compliance Mandates from Arkansas Revenue Offices

Compliance for the QEI credit necessitates coordinated approval from the Arkansas Economic Development Commission (AEDC)/ASTA, ADHE, and the Department of Finance and Administration (DFA).6 The DFA, as the tax authority, relies on these agencies for certification.

A. Agency Roles and Documentation

Applications for the credit must be submitted to the ASTA, detailing the research program proposal, the QEI partner, and the planned expenditures.1 To ensure timely review and credit issuance before the close of the tax year, applicants are typically advised to submit their required documentation approximately 45 days prior to the company’s tax year-end.3

B. Essential Documentation: The QEI Affidavit Requirement

For machinery and equipment donations, the DFA’s compliance framework requires rigorous third-party verification to substantiate the claim. The most crucial document is the affidavit provided by the receiving Qualified Educational Institution, which acts as the state’s technical verifier.1

The QEI affidavit must explicitly confirm the following four points:

1. Confirmation of receipt of the machinery and equipment.6
2. A statement that the property is “new machinery and equipment” within the meaning of the relevant state subchapter.1
3. Confirmation of the transaction type (donation or sale below cost), including the amount paid if applicable.6
4. A statement that the machinery and equipment has been dedicated for use in an approved Qualified Research Program.1

This compliance structure delegates the verification of specialized facts—such as whether the equipment is truly “state-of-the-art” and dedicated to the QRP—from state tax auditors to the qualified educational institution’s technical personnel.1 This means the QEI affidavit is the linchpin of compliance for equipment donations. If this affidavit is incomplete, missing, or fails to address the “new” status or “QRP use” requirements, the Department of Finance and Administration will likely deny the credit claim, regardless of the intrinsic value of the contribution.

In addition to the affidavit, the original cost basis must be proven via external documentation, such as the supplier invoice (for wholesalers/retailers) or the manufacturer’s wholesale price list (for manufacturers).1

V. Financial Utilization, Limitations, and the Carryforward Trap

Effective financial planning requires a precise understanding of how the QEI credit can be used and, critically, the period during which unused credit balances remain valid.

A. Credit Application and Anti-Abuse Rules

The 33% credit is a powerful incentive, allowing the taxpayer to offset up to 100% of their net income tax liability in a given year.2 However, Arkansas law contains an anti-abuse provision: taxpayers claiming any credit under Act 759 of 1985 (the QEI program) shall not concurrently claim any deduction under the Arkansas Income Tax Law for the same expense or contribution.1 This ensures that the taxpayer receives a single, non-duplicative tax benefit.

B. The Critical Discrepancy: Carryforward Periods

A significant nuance that poses a compliance risk for taxpayers leveraging large QEI expenditures relates to the credit carryforward period. There exists a discrepancy between general program descriptions and the specific rules governing the QEI program.

• General R&D Guidance (9 Years): General administrative guidance for various R&D credits, such as the standard In-House R&D credit, often cites a generous carryforward period of nine (9) years.2
• Specific QEI Program Rules (3 Years): Conversely, the official Research and Development Tax Credit Program Rules (governing Act 759, specific to QEI contributions and QREs) explicitly limit the carryover for both Qualified Research Expenditures and Donations/Sales Below Cost to the three (3) tax years next succeeding the tax year of the payment or donation.1

In legal and regulatory practice, the detailed rules promulgated by the governing agencies (ADHE/ASTA) for the specific Act establishing the QEI credit take precedence over general descriptions. Therefore, financial modeling for this specific incentive must strictly adhere to the shorter, statutory 3-year carryforward limitation.1 Reliance on the general 9-year carryforward period, which applies to other state R&D programs, will inevitably lead to the expiration and forfeiture of unused QEI tax credits. Strategic tax planning must isolate and accelerate the utilization of QEI credits due to this significantly truncated expiration timeline.

VI. Practical Application and Financial Modeling Example

The following example illustrates the calculation of the QEI tax credit and demonstrates the impact of the limited carryforward period.

A. Scenario: Defense Contractor QRE and Donation

Entity: AR Defense Innovations (ADI), a large, eligible defense contractor.

QEI Partner: Arkansas Tech University (ATU), a public state-supported university.

Program: An ASTA/ADHE-approved QRP focused on applied materials science research (QREs and Donation).

Financial Summary (Tax Year X1):

B. Utilization and Carryforward Analysis

AR Defense Innovations earns a total credit of $\$462,000$ in Tax Year X1.

• Credit Utilization (X1):

• Liability Offset: $\$200,000$ (100% of liability offset).5
• Remaining Tax Liability: $\$0$.
• Unused Credit: $\$462,000 – \$200,000 = \$262,000$.

• Strategic Carryforward:

• The unused balance of $\$262,000$ is subject to the 3-year carryforward rule specific to QEI credits.1 The balance must be utilized against Arkansas income tax liability across Tax Years X2, X3, and X4.

If ADI’s expected tax liability averages $\$75,000$ per year in the succeeding period, the utilization would be modeled as follows:

In this modeled scenario, AR Defense Innovations fails to utilize the full credit within the strict three-year period, resulting in a forfeiture of $\$37,000$. This outcome underscores the critical nature of the 3-year limitation and the necessity of immediate, strategic tax planning to monetize the full benefit of the credit.

VII. Conclusion and Strategic Recommendations

The Arkansas University-Based R&D tax credit is a highly beneficial incentive, offering a generous 33% return on investment designed to foster strategic collaboration between Arkansas industry and its educational institutions.2 The expansive definition of the Qualified Educational Institution, including vocational and K-12 institutions, confirms the state’s intent to support broad technical skill development alongside advanced research.1

For corporate tax departments and chief financial officers, leveraging this credit successfully requires an elevated level of administrative discipline and specialized planning. This involves obtaining the mandatory joint pre-approval from ASTA and ADHE for the Qualified Research Program, and, in the case of equipment donations, securing the crucial QEI affidavit that technically validates the property and its usage.1

The most significant compliance imperative is the management of the credit’s lifespan. Due to the statutory limitation restricting the carryforward of QEI credits to only three (3) tax years subsequent to the year the credit was earned 1, corporations must isolate these credits from other, longer-duration R&D incentives in their tax strategy. Failure to generate or anticipate sufficient Arkansas income tax liability within this short period will result in the expiration and forfeiture of the unused tax benefit. Optimal utilization of this incentive therefore demands rigorous compliance management and an accelerated monetization strategy to ensure full realization of the state’s generous 33% tax credit.

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/