Whether you’re a business owner, tax professional, or someone exploring the tax landscape in Kentucky, this guide is designed to provide clear insights into various aspects of business taxation in the state. Kentucky’s tax policies impact a wide range of businesses, from corporations to limited liability entities, and understanding these regulations is crucial for effective tax planning and compliance. This guide will walk you through key elements, including the corporate income tax rate, limited liability entity tax, minimum tax requirements, filing deadlines, and the criteria for establishing state income tax nexus.

In this post we’ll delve into the nuances of Kentucky’s sales tax system, exploring the state sales tax rate, triggers for sales tax nexus, and recent changes affecting the taxation of services, Software-as-a-Service (SaaS), and other high-growth industries. Read on for valuable insights into available tax credits, such as the Kentucky Business Investment Program, Angel Investor Tax Credit, and other incentives that can benefit your business.

What is the Kentucky Corporate Income Tax Rate?

Kentucky has a flat 5% corporate tax rate. Understanding Kentucky business taxes involves navigating the apportionment process and calculating both Corporate Income Tax and Limited Liability Entity Tax (LLET). For tax years beginning on or after January 1, 2018, Kentucky implements a Single Sales Factor for apportionment, Market-Based Sourcing for intangible property sales, and retains Three-Factor Apportionment for certain providers. 

Calculating Corporate Income Tax requires adjustments to federal taxable income, considering Kentucky-specific laws. After adjusting, the net income is apportioned to Kentucky based on a factor reflecting receipts. The taxable net income is then multiplied by the 5% flat tax rate, with tax credits applied for the final net income tax liability. In parallel, LLET applies to businesses protected by state liability laws. Calculations involve determining Kentucky gross receipts or gross profits, adjusting for cost of goods sold, and applying a sliding scale formula for small businesses. For more information on how to file Kentucky taxes visit the Kentucky state tax website.

The final LLET liability, subject to a $175 minimum, can impact the overall Kentucky corporate income tax liability. Familiarity with these processes is essential for accurate tax planning and compliance for Kentucky businesses.

Is There a Corporate Minimum Tax?

Yes, a minimum tax of $175 applies to LLCs and Corporations who have to file taxes in Kentucky.

When is the Kentucky Corporate Income Tax Return Due?

Kentucky follows the Federal schedule and the tax return is due on April 15th for calendar year companies. 

How is State Income Tax Nexus Triggered in Kentucky?

The Kentucky Revenue Department’s administrative regulations outline the criteria and procedures for determining business nexus within the state. According to KRS 141.040(1), non-exempt corporations engaging in business activities in Kentucky must pay corporation income tax and fulfill necessary tax filing obligations. Additionally, KRS 141.206 mandates that pass-through entities conducting business in Kentucky must file tax forms to compute income distribution to partners, members, or shareholders. The Department of Revenue, authorized by KRS 131.130(1), can establish administrative regulations for tax law enforcement.

The regulations further define key terms, including “business situs,” “commercial domicile,” and “doing business in this state.” Notably, “doing business” encompasses profit-seeking activities within Kentucky, regardless of resulting profits or losses. The analysis considers various factors to determine if a corporation or pass-through entity is doing business in the state.

There is an exception related to solicitation activities, protected by Pub. L. 86-272. It specifies circumstances where a foreign corporation or pass-through entity engaging in protected solicitation activities is exempt from Kentucky income tax. Section 4 provides examples of activities constituting “doing business” under KRS 141.010(7), encompassing services, orders, real property transactions, and intangible personal property sales.

The regulations outline activities that are not considered solicitation, such as providing maintenance, accepting orders, or engaging in certain service-related actions. Importantly, the mere ownership of a corporation that does business in Kentucky does not subject the owner to additional requirements, unless other facts indicate sufficient contacts with Kentucky.

The regulations emphasize that exempted activities do not absolve a corporation from Kentucky corporation income tax if otherwise applicable. Examples of relevant facts and circumstances are provided, demonstrating instances where an entity may be considered doing business in Kentucky. Employee or independent agent activities are also addressed, detailing specific scenarios that may be deemed de minimis.

Does Having an Employee or Contractor Trigger Nexus in Kentucky?

Yes, a foreign corporation or pass-through entity that is not otherwise doing business in Kentucky may still be considered to have nexus if its employees or independent agents engage in certain activities within the state. The regulations provide examples of de minimis activities, such as sending employees for legal defense, purchasing raw materials, providing vacations, or sending business records for auditing.

Are There Kentucky Income Tax Credits Available?

Kentucky offers various corporate income tax credits to eligible businesses. Some common corporate income tax credits in Kentucky include:

Kentucky Business Investment (KBI) Program:

This program provides tax credits to manufacturers and certain non-retail service or technology-related companies that make qualified investments in Kentucky. The credit is based on a percentage of the company’s investment in eligible property.

Kentucky Industrial Revitalization Act (KIRA) Credit:

This credit is available to businesses that invest in the redevelopment of certain eligible industrial or commercial properties. The credit is based on a percentage of qualified rehabilitation expenditures.

Angel Investor Tax Credit:

Businesses may receive this credit for attracting investments from qualified investors. The credit is designed to encourage investments in Kentucky startup companies.

Environmental Stewardship Tax Credit:

Companies engaged in eligible environmental projects, such as pollution control equipment or environmental remediation, may qualify for tax credits.

Kentucky Small Business Tax Credit:

This credit is available to eligible small businesses that create and maintain full-time jobs for Kentucky residents. The credit is a percentage of the cost of employee health insurance premiums.

Historic Preservation Tax Credit:

Similar to the individual credit, businesses involved in the rehabilitation of historic buildings may qualify for tax credits.

Film Industry Incentive Credit:

Companies engaged in the film industry may be eligible for tax credits based on qualified expenses incurred during the production of films, television shows, or commercials in Kentucky.

Research and Development (R&D) Credit:

This credit encourages businesses to invest in research and development activities conducted in Kentucky.

Local Occupational License Tax in Kentucky:

Kentucky statutes grant cities, counties, and school districts the authority to impose occupational license taxes on the net profits of various business entities, such as corporations, proprietorships, partnerships, and self-employed individuals. These taxes can be implemented through a flat-rate schedule, considering factors like business type or employment size, or as a percentage of local net profits or gross receipts. In cases where businesses have both payroll and sales in multiple tax jurisdictions, net profits or gross receipts are apportioned using an equal weight of a payroll factor and a sales factor. For businesses with sales only in multiple jurisdictions, the apportionment is based on a sales factor alone. Certain jurisdictions may impose caps on annual tax payments for individual businesses or provide exemptions for lower profit amounts. Additionally, some communities may exempt income derived from sales made outside of the local area. For the latest occupational license tax rates and forms, refer to this link. 

What is the Kentucky Sales Tax Rate?

Kentucky maintains a state sales tax rate of 6 percent, and unlike some states, there are no additional local sales taxes applied within the state.

How is Sales Tax Nexus Triggered in Kentucky?

While a physical presence in the state is always a trigger for the sales tax collection obligation in Kentucky, out-of-state sellers can also trigger sales tax nexus with the state through various avenues. These include:

Affiliate Nexus:

This involves having connections to businesses or affiliates within Kentucky. Examples include participating in the design and development of tangible personal property (goods) sold by the remote retailer or engaging in the solicitation of sales on behalf of the retailer.

Economic Nexus:

As of October 2018, remote sellers are required to register with the state, collect, and remit Kentucky sales tax if they meet specific economic thresholds. These thresholds include:

• Gross receipts from sales into the state of $100,000 or more.
• Conducting 200 or more separate retail transactions into the state in the current or previous calendar year.

Inventory in the State:

Storing property for sale within Kentucky, including merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Kentucky warehouses owned or operated by Amazon.

Marketplace Sales:

Starting from July 2019, marketplace facilitators are tasked with the responsibility of collecting and remitting sales tax on behalf of marketplace sellers operating in Kentucky.

What Transactions are Included or Excluded from Sales Tax?

Significant exemptions from Kentucky’s state sales tax that hold significance for businesses and industries encompass various categories:

• Machinery intended for new or expanded industrial operations.
• Raw materials, industrial supplies, and industrial tools.
• Items acquired for the purpose of resale.
• Certified pollution control equipment.
• Containers, packaging, and materials for wrapping utilized in manufacturing.
• Energy and fuels used for energy production, provided they exceed 3 percent of the production cost in manufacturing.
• Industrial supplies and tools employed in the manufacturing process performed on another entity’s property.

Are Services Taxed for Sales Tax?

While services in Kentucky have traditionally been exempt from sales tax, the state is expanding its tax base to include what it identifies as high-growth services. As of this year, the following services are now taxable at a rate of 6% on the total sales price:

Business:

• Background check services
• Executive employee recruitment
• Labor and services for repairing or maintaining commercial refrigeration equipment and systems (when no tangible personal property is sold)
• Lobbying
• Marketing
• Public opinion and research polling
• Telemarketing

Cosmetic:

• Body modification services (tattooing, piercing, scarification, branding, etc.)
• Labor for repairing or altering apparel, footwear, watches, or jewelry (when no tangible personal property is sold)
• Lapidary services (cutting, polishing, and engraving precious stones)
• Specialized design (clothing, costumes, fashion, furs, jewelry, shoes, textiles, and lighting)

Home:

• Household moving
• Interior decorating and design

Personal:

• Bodyguard services
• Leisure, recreational, and athletic instruction
• Massage services (except when medically necessary)
• Fitness training
• Private investigation
• Private mailroom services (presorting mail, tracking, delivery, mailbox rental)
• Recreational camp tuition and fees
• Social event planning and coordination

Property/Real Estate:

• Condominium time-share exchange services
• Cosmetic surgery (excluding reconstruction due to medical reasons)
• Parking services (excluding educational institution parking)
• Rental of space for various events
• Residential and nonresidential security system monitoring
• Road and travel services by automobile clubs

Tech:

• Facsimile transmission services
• Photography and photofinishing (excluding medical and dental health)
• Prewritten computer software access services
• Website design and development
• Website hosting

Other:

• Process server services
• Repossession of tangible personal property services
• Testing services (excluding medical, educational, or veterinary reasons)

Businesses offering these services need to charge and remit a 6% sales tax, effective since January 1 of the current year. Those without a sales and use tax account must apply for one. Additionally, Kentucky has released a Sales Tax Facts sheet outlining the newly taxable services.

Is SaaS Taxable for Sales Tax?

Starting from January 1, 2023, Kentucky has implemented sales tax on “prewritten computer software access services,” a category likely encompassing Software-as-a-Service (SaaS). 

This change is a result of the amendment to KRS 139.010(33) through HB 8, defining “prewritten computer software access services” as the right to access prewritten computer software, with the objective of using it while the seller or a third party retains possession, irrespective of the charging method (per use, per user, per license, subscription, etc.). Prior to HB 8, Kentucky did not impose taxes on remotely accessed software. 

The Kentucky Department of Revenue clarified in December 2022 that the guidance provided in the 2020 Sales Tax Facts would no longer apply after January 1, 2023. This means that the sale of services providing access to prewritten computer software, whether hosted in the “cloud” or on the retailer’s servers, is now subject to sales tax under KRS 139.200 as amended by House Bill 8. It’s worth noting that Kentucky’s terminology, referring to Software-as-a-Service as “remotely accessed pre-written software,” differs from that of other states.

Frequently Asked Questions (FAQs) – Kentucky Business Tax Guide

What is the corporate income tax rate in Kentucky?

Kentucky imposes a flat 5% corporate income tax rate on businesses.

Is there a corporate minimum tax in Kentucky?

Yes, a minimum tax of $175 applies to LLCs and corporations required to file taxes in Kentucky.

When is the Kentucky Corporate Income Tax Return due?

The Kentucky Corporate Income Tax Return follows the Federal schedule, with a deadline of April 15th for calendar year companies.

What is the Kentucky sales tax rate?

The state maintains a flat 6% sales tax rate, and unlike some states, there are no additional local sales taxes applied within Kentucky.

How is sales tax nexus triggered in Kentucky?

Sales tax nexus can be established through physical presence or various avenues, including affiliate nexus, economic nexus, inventory in the state, and marketplace sales.

Are services taxed for sales tax in Kentucky?

While services were traditionally exempt, there are newly taxable services from 2023, including business, cosmetic, home, personal, property/real estate, tech, and other services.

Is Software-as-a-Service (SaaS) taxable for sales tax in Kentucky?

Starting January 1, 2023, Kentucky imposes sales tax on “prewritten computer software access services,” likely covering Software-as-a-Service (SaaS).