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business_climateIncome Tax

Kentucky’s combined state and local own source revenue per capita for 2002 was below the national average and ranked as the 7th lowest among the 50 states. The 2005 Kentucky General Assembly passed major Tax Modernization legislation, which lowers corporation income tax rates, eliminates state license taxes, eliminates most intangible property taxes, introduces several new tax credit incentives, and improves Kentucky’s overall business tax climate.

Kentucky corporations and foreign corporations owning or leasing property or having one or more paid employees in Kentucky pay an income tax annually on taxable new income. Exempted are banks and trust companies other than bankers banks, savings and loan associations, production credit associations, insurance companies, corporations exempted form federal income tax under section 501 of the U.S. Internal Revenue Code, small business S corporations, and other nonprofit religious, educational and charitable corporations.

Limited liability companies that are treated as corporations for federal income tax purposes are also treated as corporations for Kentucky income tax purposes.

Key Points

  • Net operating losses can be carried forward for up to 20 years. (KRS 141.010 and 141.011)
  • A multi-state corporation sustaining a tax loss only at its Kentucky facility during its first year of operation can carry the loss forward as a deduction from its second year Kentucky taxable income, provided separate accounting can be used for the Kentucky activity. (KRS 141.012)
  • The top corporation income tax rate is 6% beginning January 1, 2007
  • The corporation license tax is eliminated beginning January 1, 2006.

Tax Rate Schedule

First $50,000 of taxable income: 4.0%
Next $50,000 or portion: 5.0%
All over $100,000: 6% (After 1/1/2007)

Net operating losses can be carried forward for up to 20 years and back for 2 years.
A multi-state corporation sustaining a tax loss only at its Kentucky facility during its first year of operation can carry the loss forward as a deduction from second year Kentucky taxable income, provided separate accounting can be used for the Kentucky activity.

The taxation of the income of multinational corporations is limited to their U.S. domiciled corporations (water's edge). Affiliated corporations as defined in Section 1504(a) of the Internal Revenue Code may file separate returns or may elect to file a consolidated return. An election to file a consolidated return is binding for 8 years. Combined reporting under the unitary business concept is not allowed.

State Income Taxes: S Corporations

Kentucky income tax laws recognize small business “S Corporations” for special income tax treatment. Qualifying S corporations can have up to 75 shareholders (individuals, estates, or trusts) and must have a single class of stock.

The income of S corporations is exempt from state income taxes, except when the S corporation realizes certain levels of capital gains. S corporations must pay Kentucky income taxes on the lesser of net capital gains exceeding $25,000, by applying the corporation income tax rates to the lower of the two amounts.

Stockholders of an S corporation in Kentucky pay state individual income taxes on their pro rata shares of the corporation's net income accruing to them individually, whether or not the income is withdrawn from the corporation. Tax rates for the shares of an individual are:

First $3,000 or portion: 2.0%
Next $1,000 or portion: 3.0%
Next $1,000 or portion: 4.0%
Next $3,000 or portion: 5.0%
All over $8,000: 6.0%

State Income Taxes: Proprietorships & Partnerships

Sole proprietorships and partnerships are exempt from state income taxes. Instead, the owners pay individual income taxes on their shares of the earnings of the businesses, regardless of whether they will take the income for their personal use or leave it in the business. Limited liability companies that are treated as partnerships for federal income tax purposes are also treated as partnerships for Kentucky income tax purposes. Although partnerships have no state income tax liability, they must file an information return annually.

Kentucky tax rates on net taxable income:

$0-$3000: 2.0%
$3001 - $4000: 3.0%
$4001 - $5000: 4.0%
$5001 - $8000: 5.0%
$8001 - $75000: 5.8%
$75001+: 6.0%

Owners of unincorporated businesses who earn over $5,000 each year without withholding for state income taxes and who have a state tax liability of more than $200, must file estimates of income and make payments quarterly.