Background
Randall and Tia Risor, Arkansas residents, reported on their Arkansas individual income-tax returns their share of income or loss from a Texas LLC treated as a partnership for federal tax purposes. The LLC conducted business only in Texas and did not file Arkansas returns. Its federal partnership returns included federal bonus-depreciation deductions.
The Arkansas Department of Finance and Administration disallowed those deductions and issued revised assessments for tax years 2016 through 2018. The circuit court granted the Risors summary judgment, ruling that they could calculate their state liability from the federal partnership return and that ADFA lacked jurisdiction over the Texas LLC.
The Court’s Holding
The Arkansas Supreme Court reversed. Arkansas taxes residents on their entire income, including income derived from a foreign LLC. The relevant taxpayer was the Risors, not the Texas partnership, so the LLC’s location and lack of Arkansas operations did not limit Arkansas’s authority to tax the Risors’ distributive income.
Arkansas’s depreciation statute adopted specified portions of the federal depreciation provisions but did not adopt 26 U.S.C. § 168(k), the source of federal bonus depreciation. The federal partnership return therefore did not control the Risors’ Arkansas tax liability or permit a deduction Arkansas law had not authorized. The court did not reach ADFA’s alternative constitutional argument.
Key Takeaways
- Arkansas residents are taxed on income from all sources, including income received through an out-of-state LLC.
- Using a federal tax form does not incorporate all federal tax-law deductions into Arkansas law.
- Federal bonus depreciation is unavailable on an Arkansas return unless the General Assembly expressly adopts it.
Why It Matters
The decision confirms that federal pass-through reporting does not dictate Arkansas income-tax treatment. Taxpayers with out-of-state partnership or LLC income must separately determine whether Arkansas has adopted each federal deduction reflected on the entity’s federal return.
The court remanded for further proceedings consistent with its ruling that ADFA properly disallowed the Risors’ bonus-depreciation deductions.