Arkansas Small Business Entity Tax Pass-Through Act: Repeal and Replacement with the Uniform Limited Liability Company Act

The Arkansas Small Business Entity Tax Pass-Through Act

The Arkansas Small Business Entity Tax Pass-Through Act‚ also known as the Former Act‚ was a law that governed the taxation of limited liability companies (LLCs) in Arkansas. It was repealed by the Uniform Limited Liability Company Act (ULLCA) in 2021. The Former Act allowed eligible entities to elect to pay tax at the entity level instead of passing through the income to shareholders. To make the election‚ the pass-through entity must file Form AR1100PET (e-file) or AR 362PT (by mail). The election must be made by the due date or extended due date for filing the entity’s income tax return.

The Former Act was designed to provide tax benefits to small businesses in Arkansas. However‚ it was criticized for being complex and difficult to understand. The ULLCA is intended to simplify the law and make it more user-friendly. The ULLCA was adopted by Arkansas in 2021‚ and it took effect on September 1‚ 2021. The ULLCA repeals the Former Act and replaces it with a new law that governs the formation and operation of LLCs in Arkansas.

Repeal and Replacement with the Uniform Limited Liability Company Act

The Arkansas Small Business Entity Tax Pass-Through Act (the Old Act) was repealed on September 1‚ 2021‚ when the Uniform Limited Liability Company Act (ULLCA) took effect. The ULLCA‚ enacted as Act 1041 of 2021‚ is a uniform law that has been adopted by many states to standardize the laws governing LLCs. The ULLCA replaces the Old Act‚ which was considered to be outdated and complex‚ with a more modern and streamlined approach to LLC governance. The ULLCA’s primary purpose is to simplify the process of forming and operating an LLC‚ making it easier for business owners to comply with state laws. The ULLCA is intended to clarify and update the legal framework for LLCs in Arkansas‚ making the state more attractive to businesses seeking to incorporate there.

The ULLCA’s adoption in Arkansas was a significant development for the state’s business community. It reflects a commitment to modernizing the state’s legal framework and making it more competitive with other states. While the ULLCA’s adoption was primarily focused on streamlining LLC governance‚ it also had an impact on the state’s tax laws. The ULLCA’s adoption coincided with the enactment of the Elective Pass-Through Entity Tax (PET) in Arkansas‚ which allows LLCs to elect to be taxed at the entity level rather than at the individual level. The PET is a significant development for Arkansas’s tax law and has the potential to attract more businesses to the state.

The Elective Pass-Through Entity Tax (PET)

The Elective Pass-Through Entity Tax (PET) is a new tax law in Arkansas that allows eligible pass-through entities to elect to be taxed at the entity level rather than at the individual level. This means that the entity will pay tax on its income‚ and the income will not be passed through to the owners or shareholders for taxation on their individual income tax returns. The PET is a significant development for Arkansas’s tax law and has the potential to attract more businesses to the state. The PET was enacted as part of Act 362 of 2021‚ which was sponsored by Representatives Joe Jett and Robin Lundstrum.

The PET is available to partnerships‚ Sub-S corporations‚ and LLCs that are classified as partnerships for federal tax purposes. To elect the PET‚ the entity must file Form AR1100PET (e-file) or AR 362PT (by mail) with the Arkansas Department of Finance and Administration. The election must be made by the due date or extended due date for filing the entity’s income tax return. The PET is effective for tax years beginning on or after January 1‚ 2022. The tax rate on capital gains will vary depending on the amount of income of an entity subject to the PET. For tax years beginning in 2022‚ the tax rate for capital gains will be 2.45% on income up to $250‚000 and 4.9% on income over $250‚000. The due date for the PET is April 15 for calendar year filers. The PET will be subject to all provisions of the Arkansas Tax Procedures Act and all penalty and interest provisions.

Impact on Business Owners

The repeal of the Arkansas Small Business Entity Tax Pass-Through Act and the enactment of the Uniform Limited Liability Company Act (ULLCA) and the Elective Pass-Through Entity Tax (PET) have had a significant impact on business owners in Arkansas. The ULLCA’s adoption has simplified the process of forming and operating an LLC‚ making it easier for business owners to comply with state laws and operate their businesses. The PET provides business owners with a new tax option that can potentially save them money. It allows eligible entities to elect to be taxed at the entity level rather than at the individual level‚ reducing the potential for double taxation.

However‚ the impact of these changes on business owners is not uniform. Some business owners may benefit from the ULLCA and the PET‚ while others may not. For example‚ business owners who are already familiar with the old law may not see a significant benefit from the ULLCA. Similarly‚ business owners who are not eligible for the PET or who do not find the tax savings to be significant may not benefit from its enactment. The impact of these changes will depend on the specific circumstances of each business owner. Despite the potential benefits‚ the changes may also create challenges for business owners. For example‚ business owners who are not familiar with the ULLCA may need to spend time learning about the new law and how it applies to their business. Additionally‚ business owners who are considering electing the PET may need to consult with a tax advisor to determine if it is the right option for them.