Arkansas Supreme Court Rejects Federal Bonus Depreciation on Arkansas Returns

Posted: November 2, 2026

On October 29, 2026, the Arkansas Supreme Court (the "Court") held that an Arkansas resident may not claim federal bonus depreciation on an Arkansas individual income tax return, even where the deduction passes through from an out-of-state partnership's federal return. The decision, 2026 Ark. 160, reversed a Benton County Circuit Court judgment in the taxpayers' favor.

The opinion confirms two points of consequence for Arkansans who own interests in partnerships and limited liability companies organized or operating in other states. First, Arkansas allows only those federal deductions that the General Assembly has expressly adopted, and it has not adopted federal bonus depreciation. Second, Arkansas taxes its residents on income from every source, so the location of the entity does not remove a resident's share of its income from Arkansas tax.

Please contact any of McDaniel Wolff's tax attorneys if we can assist in evaluating how this decision affects a particular return, or submit an inquiry online.

Background of the Dispute

The taxpayers in the case (the "Taxpayers") are Arkansas residents. They own a Texas limited liability company (the "LLC") treated as a partnership for federal income tax purposes. For tax years 2016, 2017, and 2018, all of the LLC's income was derived from Texas, and the LLC filed no Arkansas returns.

On their Arkansas individual returns, the Taxpayers reported their share of the LLC's income or loss as shown on its federal partnership return (IRS Form 1065), which included bonus depreciation deductions. The Arkansas Department of Finance and Administration (the "Department") audited the returns and disallowed the bonus depreciation.

After the Taxpayers submitted amended calculations, the Department revised its assessments to $34,352 for 2016, $17,076 for 2017, and $39,721 for 2018. An administrative law judge and the Commissioner of Revenue sustained the revised assessments. The Benton County Circuit Court then granted summary judgment to the Taxpayers. It concluded that they had properly computed their Arkansas liability under Ark. Code Ann. § 26-51-405 by using the LLC's federal return, and that the Department lacked jurisdiction over a foreign partnership.

The Court's Holding

The Court held that the Department properly disallowed the deductions, because Arkansas law does not authorize bonus depreciation. Arkansas adopts particular federal provisions by statute, and Ark. Code Ann. § 26-51-428(a)(1) adopts 26 U.S.C. §§ 167 and 168(a)–(j) for depreciation. Bonus depreciation arises solely under 26 U.S.C. § 168(k), which the statute does not adopt. In the Court's words, "That omission is controlling."

The Court also held that a partnership's federal return does not determine its partners' Arkansas tax. The federal return reflects federal treatment, including deductions Arkansas has not adopted. On that point the Court relied on Farmers & Merchants Bank of Stuttgart v. Skelton, 266 Ark. 680, 587 S.W.2d 561 (1979), which held that Arkansas's use of federal tax forms does not adopt federal income tax law in its entirety. Any broader reading would improperly delegate legislative power.

Residence, Not Entity Location, Controls

The Court rejected the circuit court's conclusion that the Department lacked jurisdiction over a Texas partnership. Arkansas did not tax the LLC. It taxed the Taxpayers, under Ark. Code Ann. § 26-51-201(a), which imposes the tax on the entire income of every resident individual, trust, or estate.

The relevant inquiry, the Court explained, is where the taxpayer resides, not where the company operates. It was therefore immaterial that the LLC was a Texas entity that did no business in Arkansas.

The Court did not reach the Department's alternative argument that the circuit court's reading of § 26-51-405 would violate article 2, section 23 of the Arkansas Constitution.

Current State of Arkansas Depreciation Law

The decision addressed tax years 2016 through 2018, but its rule applies equally today. As of October 30, 2026, § 26-51-428(a)(1) adopts 26 U.S.C. §§ 167 and 168(a)–(j) as in effect on January 1, 2019, and it still does not adopt § 168(k).

Arkansas does follow federal expensing under 26 U.S.C. § 179, but only as that section stood on January 1, 2022, for property purchased in tax years beginning on or after that date. Ark. Code Ann. § 26-51-428(a)(2). Later federal changes to § 179 do not carry over to Arkansas unless the General Assembly adopts them.

Congress amended numerous Internal Revenue Code provisions in the One Big Beautiful Bill Act, Pub. L. No. 119-21, enacted July 4, 2025. Arkansas has not responded by adopting federal bonus depreciation, and as the Court observed, any change must come from the General Assembly.

The decision is recent. Under Arkansas Supreme Court Rule 2-3(a), a party may petition for rehearing within 18 calendar days of the decision, so readers should confirm the status of the case before relying on it.

Practical Considerations for Business Owners and Investors

The decision is of particular consequence to Arkansas residents who hold interests in real estate partnerships, operating companies, and investment funds organized or doing business in other states.

1. Confirm the Arkansas adjustment. An owner's Arkansas return should remove any federal bonus depreciation embedded in an entity's federal figures and substitute depreciation computed under Arkansas law. An out-of-state entity that files no Arkansas return will not make that computation, so it falls to the owner and the owner's return preparer.
2. Request asset-level information. Owners should ask each out-of-state entity for the cost, placed-in-service date, and recovery method of the assets it depreciates. Without that information, the Arkansas computation cannot be made accurately.
3. Maintain separate Arkansas depreciation records. Because Arkansas depreciation departs from federal depreciation, an asset's Arkansas adjusted basis will often differ from its federal basis. Gain or loss on a later sale must be computed using the Arkansas figure.
4. Review open years. An owner who has reported federal partnership figures without adjustment, on the theory the Court rejected, should review those returns with a tax adviser for any year still open to adjustment.

How McDaniel Wolff Can Help

The attorneys in McDaniel Wolff's Tax practice advise Arkansas individuals, business owners, and investors on state income tax compliance, audits, and controversies with the Department, including the treatment of income from out-of-state partnerships and limited liability companies. To discuss how this decision bears on a particular return, please contact our office or call (501) 954-8000.

This article is provided for general information only and does not constitute legal advice.