Corporate income and franchise taxes
How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?
Kentucky taxable income is determined by reference to the Internal Revenue Code 1986, as amended as of December 31 2017 (including Tax Cuts and Jobs Act 2017 provisions, with certain exceptions—e.g., 100% depreciation deduction, Section 179 expensing, and the 20% Qualified Business Income deduction)—modifying federal taxable income by certain additions and subtractions, and allocating and apportioning such income to Kentucky (Kentucky Revised Statutes (KRS) 141.010).
How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?
Apportionment is governed primarily by KRS 141.120.
A single sales factor apportionment formula, except for providers of communication and cable services, is used to apportion a taxpayer’s apportionable income. The sales factor is computed based on the ratio of receipts in Kentucky versus everywhere. The location of sales of tangible personal property are assigned based on the destination of the goods, and there is no throwback rule for non-governmental sales; other receipts are assigned based on market-based sourcing rules.
The following types of income, provided that the income is non-apportionable, is allocated to Kentucky:
- net rents and royalties from real property located in the state;
- capital gains and losses from sales or other dispositions of real property located in the state;
- interest if the corporation’s commercial domicile (i.e., the principal place from which the trade or business of the corporation is managed) is in the state; and
- patents and copyrights if and to the extent the property is utilized by the payer either in the state or in a state in which the corporation is not taxable and the corporation’s commercial domicile is in the state. Non-apportionable income that is not allocated to Kentucky is allocated outside of Kentucky.
A taxpayer may petition or the Kentucky Department of Revenue may require other allocation and apportionment methods if the standard provisions do not reflect the extent of the taxpayer’s business activity in Kentucky and the alternative provision is reasonable.
Kentucky regulates transfer pricing by disallowing certain deductions resulting from expenses paid to affiliated entities or related parties for intangible expenses, management fees, or related party costs, with certain exceptions as provided for by KRS 141.205.
How is nexus determined for corporate income tax purposes?
Nexus is determined using a ‘doing business’ standard. ‘Doing business’ in Kentucky includes, but is not limited to:
- being organized under the state’s laws;
- having a commercial domicile in the state;
- owning or leasing property in the state;
- having one or more individuals performing services in the state;
- maintaining an interest in a pass-through entity doing business in the state;
- deriving income from or attributable to sources within the state, including deriving income directly or indirectly from a trust or a single-member limited liability company (disregarded as an entity separate from its single member for federal income tax purposes) doing business in the state; or
- directing activities at Kentucky customers for the purpose of selling them goods or services.
103 KAR 16:240 provides guidance as to what constitutes doing business in Kentucky for income tax purposes and recognizes the limitations imposed by P.L. 86-272, codified as 15 U.S.C. 381 to 384, on the imposition of income taxes.
Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?
Other than ownership in a pass-through or disregarded entity doing business in Kentucky, the statutory definition of ‘doing business’ in KRS 141.010 and the nexus standard regulation, 103 KAR 16:240, do not directly address the concept of affiliate nexus. Kentucky has, however, adopted unitary combined reporting and elective consolidated reporting using the federal income tax consolidated group, effective for tax years beginning on or after January 1 2019. There have been no recent notable cases concerning affiliate nexus.
What are the applicable corporate income tax rates?
Kentucky’s corporate income tax rate for tax years beginning on or after January 1 2018 is 5% (KRS 141.040).
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
Deductions from gross income allowed by Chapter 1 of the Internal Revenue Code 1986, as amended as of December 31 2017 (including Tax Cuts and Jobs Act 2017 provisions, with some exceptions—e.g., the 100% depreciation deduction, Section 179 expensing, and the 20% Qualified Business Income deduction).
Any income that is exempt from taxation under the US Constitution (e.g., the Commerce Clause or Due Process Clause), federal statute (e.g., P.L. 86-272), or the Kentucky Constitution are exempt from taxation in Kentucky. Dividend income is also exempt.
There are many tax credits against the corporation income tax, including the limited liability entity tax credit, the Kentucky Business Investment Act credit, and the recycling/composting equipment credit. A list may be found on Kentucky Department of Revenue Form Schedule TCS, Tax Credit Summary Schedule.
What filing requirements and procedures apply? Are there special filing requirements for groups of company?
Kentucky corporate income taxes are generally imposed based on each taxpayer’s tax year, which is generally a calendar year, with the annual tax return being due on the 15th day of the fourth month following the close of the fiscal year (i.e., April 15 for calendar year taxpayers), unless extended for up to six months (KRS 141.160 and 141.170).
Corporate entities doing business in Kentucky are required to file a return unless they are exempt from Kentucky corporate income tax under KRS 141.040. For tax years beginning on or before January 1 2019, corporate taxpayers must file, as part of a mandatory nexus, consolidated return filing group, which generally includes each includible corporation with nexus with Kentucky 80% or more owned by a common parent corporation that is itself an includible corporation (KRS 141.200).
For tax years beginning on or after January 1 2019, Kentucky will require unitary combined reporting for multistate companies unless the company is a part of a group that elects to file a consolidated return based on the federal income tax consolidated return group.
Corporate franchise tax
Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?
Kentucky does not impose a corporate franchise tax, but it does impose a limited liability entity tax pursuant to KRS 141.0401 on every non-exempt corporation and limited liability pass-through entity doing business in Kentucky on all Kentucky gross receipts or Kentucky gross profits.
If your state imposes a corporate franchise tax, please stipulate:
(a) The applicable tax base
The tax base for the limited liability entity tax is the taxpayer’s Kentucky gross receipts or gross profits (KRS 141.0401).
(b) The tax rates
The tax rate is $0.095 per $100 of the entity’s Kentucky gross receipts and $0.75 per $100 of the entity’s Kentucky gross profits. The annual limited liability entity tax imposed is the lesser of these two amounts or $175 (KRS 141.0401).
(c) Any exemptions or deductions
There is a small-business exemption for businesses with total gross receipts or profits of less than $3 million, which is phased out between $3 million and $6 million. Certain organizations are exempt, including, but not limited to, financial institutions, insurance companies, alcohol production facilities, REITs, and charitable or otherwise tax-exempt corporations (KRS 141.0401).
(d) Filing formalities
A taxpayer generally complies with their limited liability entity tax filing obligation on the same return as they do their income tax return filing obligation, such as Kentucky Department of Revenue Forms 720, 720S, or 765. Individually owned single member limited liability companies may file Kentucky Department of Revenue Form 725. A disregarded single member limited liability company owned by a regarded entity is included in the return of its single member owner.