Kentucky’s Limited Liability Entity Tax, a tax that many commonly refer to as the LLET, is intertwined with Kentucky’s income tax scheme in KRS Chapter 141. The LLET replaced the Alternative Minimum Calculation (“AMC”) which was in effect during 2005 and 2006 tax years. So, Kentucky has had a gross receipts tax variant for nearly a decade.

LLET Basics

The LLET is a tax on the Kentucky gross receipts or gross profits (i.e., gross receipts less cost of goods sold, as that term is statutorily defined) from the sale of tangible property of each non-exempt corporation and limited liability tax pass-through entity (“LLPTE”), such as a limited liability company (“LLC”), limited partnership, or an S corporation, doing business in Kentucky.

The LLET rate is the lower of $950 per $1,000,000 of Kentucky gross receipts or $7,500 per $1,000,000 of Kentucky gross profits, with an absolute “minimum” tax of $175.

Entities Not Subject to LLET

The LLET does not apply to a general partnership because it is neither a corporation nor a LLPTE, nor does the LLET apply to an individual, estate or trust for the same reason.

A disregarded single member limited liability company (“DESMLLC”) is neither a corporation nor a pass-through entity – it is disregarded. A lower-tier DESMLLC owned by another DESMLLC, a LLPTE or a corporation is disregarded and is not subject to LLET independent of its corporation or LLPTE single-owner; such a DESMLLC is subject to LLET only as a part of its single owner. However, the Kentucky Department of Revenue has taken the position that any DESMLLC whose single member is an individual, estate, trust, or general partnership is subject to the LLET.

Managing the LLET liability of a number of affiliated DESMLLCs is not necessarily difficult. If, for example, an individual had 100 rental properties owning each property in a separate DESMLLC, a minimum of $17,500 (100 x $175) in LLET would be owed annually. However, if that individual held 100 LLCs in a single LLC holding company, each of the DESMLLC would be disregarded from the holding company LLC and a minimum of only $175 (1 x $175) in LLET would be owed annually.

LLET Exemptions: Exempt Entities, QIPs and Small Businesses

Entities exempt from LLET include financial institutions (and like entities), insurance companies, tax-exempt organizations (including religious, educational, and charitable organizations), public service corporations, personal service corporations, and others. Generally, companies subject to industry specific taxes (e.g., banking or insurance) and most non-profits do not pay LLET. Viewing these exemptions from a legislative historical perspective, one need only recall that the LLET’s predecessor, the AMC, essentially replaced the corporate license tax and the intangibles tax, and many of these types of companies were exempt from the license tax, generally because they were tax-exempt entities or were subject to other taxes like the insurance premium tax or the public service corporation tax, etc.

There is also an exclusion from the LLET tax base of a LLPTE’s proportionate share of gross receipts or gross profits attributable to the ownership share of a qualified exempt organization, i.e., an entity exempt from the LLET. This exclusion prevents the application of LLET to, for example, a LLC wholly owned by a charity or by a utility (a public service corporation).

A qualified investment partnership (“QIP”), a pass-through entity which, during the taxable year, holds only investments that produce income that would not be taxable to a non-resident individual if held or owned individually, for example, stocks and bonds, is exempt from LLET. It is not uncommon to see a family limited partnership formed for estate planning structured to qualify as a QIP.

The Department takes the position that a LLPTE is not a QIP when it owns an investment that produces income other than from securities, such as rental income or business income, even if that income has a source outside of Kentucky, e.g., rental income from rental property located outside of Kentucky. So, family limited partnerships which hold not only stocks and bonds but also other investments producing rental or business income do not qualify as QIPs under the Department’s position. Although an argument could be developed that certain such entities qualify as QIPs, consideration should be given to restructuring such holdings into a QIP entity and a non-QIP entity.

There is also a “small business” exemption for each business with total gross receipts or gross profits from all sources of less than $3 million (measured on a combined group basis). This exemption is phased out between $3 and $6 million, so that taxable entities with gross receipts and gross profits greater than $6 million pay the full LLET. While seemingly low, this threshold is often exceeded. Interestingly, there have been proposals to lower the small business exemption phase-out threshold to $1 million. Is this not going the wrong way?

“Doing Business” in Kentucky

A non-exempt corporation or LLPTE that is “doing business” in Kentucky is subject to the LLET. An activity that causes a corporation or LLPTE to have nexus for income tax purposes will also cause that entity to have nexus for the LLET.

The Department has taken the position that Public Law 86-272, a federal law which protects taxpayers from the imposition of income-type taxes when the taxpayer solely engages in protected activities related to the solicitation of orders in a state to be filled from out-of-state, does not apply to protect a taxpayer from the imposition of LLET. The Department has taken this position even though the KRS Chapter 141 imposes both the LLET and the income tax and even though the two taxes are intertwined therein. Query whether this may be challenged? Under the Department’s position, a taxpayer could be exempt from income tax under P.L. 86-272 but still subject to LLET.

LLET Gross Receipts

The LLET’s tax base, Kentucky gross receipts and gross profits, derive from the apportionment provisions of Kentucky’s corporation income tax. The Administrative Regulation concerning the Sales Factor provides some insight as to the Department’s position as to what constitutes gross receipts and examples of what the Department considers to be Kentucky gross receipts. Although what constitutes gross receipts from tangible property and the assignment of same to the destination state appear to be relatively straightforward concepts as presented in the Regulation, treatment of gross receipts from intangibles and services, particularly as compared to the sales factor statutory provisions, is less than straightforward, and some have argued, inconsistent with the sales factor statutory provisions.

As a practical matter, the Department often compares Kentucky and total gross receipts on Schedule LLET with Kentucky and total sales on Schedule A, Apportionment and Allocation. So, in preparing the Kentucky LLET portion of a Kentucky income tax return, maybe it makes sense to reconcile these amounts? A lack of matching can result in the Department issuing a Notice of Tax due to an LLET taxpayer, without prior contact with the taxpayer. In a somewhat Alice in Wonderland way, does this practice seem somewhat like, verdict first, trial later? Why not first send a letter requesting information or inquiring about the discrepancy?

LLET Gross Profits and Cost of Goods Sold

Kentucky gross profits are computed by subtracting Kentucky cost of goods sold from Kentucky gross receipts. The Department has taken the position that only a taxpayer engaged in manufacturing, producing, reselling, retailing or wholesaling may deduct, as cost of goods sold, amounts directly incurred in acquiring or producing a tangible product (including, both real and tangible personal property, but not intangible personal property) generating the Kentucky gross receipts. Note that the LLET Return requests a taxpayer’s NAICS Code Number and principal business activity in Kentucky. The Department pays attention to these and has issued Notices of Tax Due for LLET to taxpayers with an NAICS Code that would not appear to the Department to encompass an activity that comes within such activities (i.e., manufacturing, etc.). When preparing their LLET Return, taxpayers should pay close attention to the NAICS Code reported on its Kentucky income tax return.

Another trap that taxpayers inadvertently fall into is not realizing that the Department does not consider cost of goods sold for LLET purposes to be the same as cost of goods sold under the Internal Revenue Code of 1986, as amended, and as reported to the Internal Revenue Service on the taxpayer’s federal income tax return. Rather, the Department takes the position that cost of goods sold for LLET purposes includes only direct labor costs and direct material costs.

Direct labor, according to the Department, is labor that is incorporated into the tangible product sold or is an integral part of the manufacturing process, and under the Department’s construction, consists of basic compensation, overtime, vacation and holiday pay, sick leave pay, shift differential, payroll taxes, and payments to supplemental unemployment benefit plans relating to direct labor. According to the Department, this does not include pensions, profit sharing, workers’ compensation, life insurance, health insurance, membership dues, or union dues, even if relating to direct labor.

Direct material, according to the Department, is material incorporated into the tangible product sold or manufactured. The Department routinely disallows what it considers to be indirect costs including: utilities; repairs and maintenance; depreciation; insurance; quality control; and rent. Notably, bulk delivery costs for consumers’ gasoline and special fuels are included in cost of goods sold.

The Department is collecting information on each taxpayer’s computation of cost of goods sold for purposes of computing their LLET reported on Schedule COGS. The Department also reviews the computation by reference to each taxpayer’s federal income tax return and has been known to issue Notices of Tax Due to taxpayers with the initial contact being the Notice.

For multistate taxpayers, the Department prefers taxpayers to compute Kentucky cost of goods sold using separate accounting. When it is not possible for a taxpayer to use separate accounting, the Department has taken the position that a taxpayer must compute cost of goods sold using the sales factor. Does this approach make sense to you?

LLET Flow Up of Gross Receipts, Profits and Credits

For apportionment purposes, gross receipts, and, likewise, gross profits, flow up from a LLPTE and certain general partnerships (those organized or formed after January 1, 2006) to their owner. This would result in multiple levels of tax on essentially the same gross receipts; however, the owner of an LLPTE receives a current year nonrefundable credit for the proportionate share of LLET paid by the lower-level LLPTE (less the $175 minimum) on gross receipts/profits passed through to its owner. The credit applies across multiple layers of multi-layered organizational structures.

An LLPTE owner is also allowed a nonrefundable credit against the owner’s current year Kentucky income tax on income from the LLPTE for their proportionate share of the LLPTE’s LLET for the current year, after subtraction of any credits and reduced by the $175 minimum. Also, a corporation receives a nonrefundable credit for LLET (less the $175 minimum) against its current year Kentucky corporation income tax due from its activities in Kentucky.

Any remaining unused LLET credit cannot be carried forward; it must be used or lost. There are opportunities to manage the utilization of LLET credits.


Over the past decade, there has been much that taxpayers attempting to comply with the LLET or resolving an LLET assessment have learned, i.e., to avoid traps created by and take advantage of opportunities to manage their LLET obligations.