Selling Excess Arkansas Tax Credits Generated Apportionable Business Income

A taxpayer’s proceeds from selling its excess tax credits to other companies in 2015 were held to be taxable as apportionable business income for Arkansas corporate income tax purposes. The taxpayer could have carried forward the credits for a limited number of years for its own use but instead sold the credits and paid the proceeds to its parent company.

Under the functional test for classifying business/nonbusiness income, the credits were integral parts of the taxpayer’s business because the sales proceeds materially contributed to the taxpayer’s production of business income. Further, the credits were interwoven into and inseparable from the taxpayer’s trade or business since the taxpayer received the credits as part of operating its business as a distributor of certain products and parts. The taxpayer actively managed the credits since 2011 and sold credits in 2013, 2014, and 2015, demonstrating that it controlled and/or directed the use of such property.

Administrative Dockets No. 17-396, Arkansas Department of Finance and Administration, Office of Hearings & Appeals, August 7, 2017, ¶400-823

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