Overview
Kentucky enacted a pass-through entity tax joining about 30 other states. The legislation, H.B. 360, enacts a tax at the entity level or “PTET” tax. Kentucky allows the restaurant revitalization grant income exclusion and related expenses to be deducted retroactively. Kentucky lowered the income tax rates for 2023 and 2024 forward.
The PTET Election
The legislation creates a new pass-through entity tax (“PTET”) under new KRS Chapter 141 retroactive back to tax years beginning on or after January 1, 2022. The tax is elective and subject to Kentucky’s income tax rates enacted under HB 360 Section 21 covered later under “Reduction in Tax Rates” section of this Multistate Tax Alert.[1] The election must be made by the fifteenth day of the fourth month after the close of the tax year or the fifteenth day of the tenth month if the return is extended. The election can be made if the partners, members, or shareholders holding 50% or more ownership in the pass-through entity (“PTE”) consent to the election. The election is binding on all the owners of the PTE.[2]
The owners of the PTE will be allowed to take a credit on their Kentucky income tax return for years beginning on or after January 1, 2022. The credit is nonrefundable and is based on the owner’s pro rata share of their PTE income.[3] The PTE tax credit is permitted to be taken against the tax imposed by KRS 141.020.
A Kentucky resident owner of a PTE, subject to tax in another state at the entity level is allowed a resident credit for Kentucky income tax purposes for the income tax paid to the other state. The Kentucky credit is based on the individual’s distributive share of the PTE’s items of income, loss, deduction and credit.[4]
Kentucky Internal Revenue Code Conformity Updated
For tax years beginning on or after January 1, 2023, Kentucky updated its Internal Revenue Code Conformity in effect as of December 31, 2022.[5]
Restaurant Revitalization Grants
Kentucky retroactively enacted the restaurant revitalization grant tax exclusion and related expenses are permitted to be deducted for years beginning on or after January 1, 2020, but before March 11, 2023. Kentucky is allowing the restaurant revitalization grants to be excluded from taxable income to match the federal tax treatment as well as allowing related expenses to be deductible for these grants. Under federal tax law, the restaurant revitalization grants are excluded from taxable income for the years noted above. Kentucky previously required an addback of the restaurant revitalization grants excluded from federal taxable income.[6]
Reduction In Tax Rates
Kentucky enacted a tax rate reduction continuing the trend for lowering the KY income tax rates. For tax years beginning on or after January 1, 2023, but prior to January 1, 2024,the tax rate is 4.5%. For tax years beginning on or after January 1, 2024, the tax rate will be 4%. The Kentucky legislature will evaluate future tax rate reductions following the annual process for review and consideration of lowering the tax rate.[7] The Kentucky tax rate for years beginning on or after January 1, 2018, but before January 1, 2023, was five percent (5%).
Implications for Kentucky Sales and Use Tax
The passage of Kentucky H.B. 360 clarifies the definitions for certain sales and use tax services along with amending the taxability and exemption provisions for certain services, most notable is the change in how text messaging will be taxed under “telemarketing services”. In addition, the new legislation strikes former KRS 139.200 (2)(r) and 139.010(22) which imposed tax on defined “marketing services”, making such services nontaxable.
Taxpayer Considerations
PTE’s should consult with their tax representatives to determine if electing into Kentucky’s PTE level tax would be beneficial retroactive to tax years beginning on or after January 1, 2022.
If your business received a restaurant revitalization grant, please consult with your tax representative to determine whether it would be advantageous to take advantage of Kentucky’s retroactive law change allowing it to be excluded from taxable income.
Kentucky lowered the tax rate applicable to 4.5% for 2023 and 4% for 2022. This will mean lower withholding on Kentucky payroll and Kentucky estimated income tax payments. Please consult with your tax representative if you plan to make estimated tax payments in 2023 to lower your Kentucky estimated tax due for year 2023 forward.
If you have any questions or would like to contact a member of the CSH SALT team please feel free to reach out to:
Phil Hurak Diane Merk Keri Boergert Cody Cain Steve Estelle Brian Murphy
[1] H.B. 360, Sec. 16(1)
[2] H.B. 360, Sec. 16(2)
[3] H.B. 360, Sec. 16(3)
[4] H.B. 360, Sec. 23(4) amends KRS 141.070(4)
[5] H.B. 360, Sec. 17 amends KRS 141.010(21)
[6] H.B. 360 Sec. 19 Amended KRS Sec. 141.019 by adding (1)(q) for passthrough entities and H.B. 360 Sec. 20 amended KRS Sec. 141.039(1)(i) for corporations.
[7] H.B. 360, Sec. 21 amends KRS 141.020(2)(b); (c); and (d).
