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State & Local Taxes

Kentucky continues to be one of the states with the lowest overall cost of doing business in the eastern United States according to Economy.com. Kentucky has been determined to have the 3rd lowest overall Energy Cost Index. The index utilized to measure the overall cost of doing business within a state ranks Kentucky with a state index of 92. The national average index is 100.

State Sales & Use Tax

A state sales tax is levied at the rate of 6% on the purchase or lease price of taxable goods and on utility services. Local sales taxes are not levied in Kentucky.

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.

Major exemptions for businesses (state taxes only):

  • Items purchased for resale. (KRS 139.260)
  • Machinery for new and expanded industry (manufacturing, extraction of minerals, ores, coal, clay, stone, and natural gas). Replacement machinery for manufacturing is exempt when it increases consumption of recycled materials not less than 10 percent, performs a different function, manufactures a different product, or has a greater productive capacity.  Repair parts, replacement parts, and spare parts are taxable. (KRS 139.480; 139.170; and 103 KAR 30:120)
  • Raw materials which enter into and become a part of the manufactured product. (KRS 139.470)
  • Supplies used directly in manufacturing which have a useful life of less than one year (lubricating and compounding oils, grease, machine waste, abrasives, chemicals, solvents, fluxes, anodes, filtering materials, fire brick, catalysts, dyes, refrigerants, explosives, etc.), excluding repair, replacement, or spare parts of any kind. (KRS 139.470)
  • Industrial tools that have a useful life of less than one year, limited to hand tools (such as jigs, dies, drills, cutters, rolls, reamers, chucks, saws, spray guns, etc.) and tools attached to a machine (such as molds, grinding balls, grinding wheels, dies, bits, cutting blades, etc.), excluding repair, replacement, or spare parts of any kind. (KRS 139.470)
  • Materials and supplies that are not reusable after one manufacturing cycle, excluding repair, replacement, or spare parts of any kind. (KRS 139.470)
  • Pollution control equipment and facilities approved by the Kentucky Revenue Cabinet. Included is equipment for air pollution control, water pollution control, disposal or reclaiming of solid or hazardous wastes, sound emission control, and pretreatment of raw materials for environmental protection. (KRS 139.480 and 224.01-300)

Income 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 corporations 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.

Property Taxes

The basis of assessments for property taxes in Kentucky is 100% of fair cash value. Kentucky Revenue Cabinet, Department of Property Valuation, performs the assessment valuation for a limited number of classes of property including property owned by utility companies, railroads, airlines, and most financial institutions, distilled spirits, non resident commercial watercraft and unmined minerals. The county Property Valuations Administrator (PVA), an elected state official, assesses all other classes of taxable property for the state, county, school districts and for most special taxing districts.

Assessments are based upon property held on January 1st of each year. Taxpayers are required to report the value of all of their taxable property to the local PVA annually.

Exemption & Key Points For Businesses

  • Exemption of manufacturing machinery from all local property taxes. The state rate is only 15 cents per $100 of assessed value. (KRS 132.020 and 132.200)
  • Exemption of certified pollution control facilities and equipment from all local property taxes. The state rate is only 15 cents per $100 of assessed value. (KRS 132.020; 132.200 and 224.01-300)
  • Exemption of raw materials and products in the course of manufacture from all local property taxes. The state rate on these inventories is only 5 cents per $100 of assessed value. (KRS 132.020 and 132.200)
  • Exemption of tangible personal property located in a federally designated and activated foreign trade zone (or sub-zone) from all local property taxes. The state rate is only 1/10 of 1 cent per $100 of assessed value. (KRS 132.020 and 132.200)
  • Exemption of intangible property (money in hand, notes, bonds, accounts receivable, mortgage receivables, intercompany intangible personal property due from affiliates, patents, copyrights, trademarks and other credits) from state and local taxation, except for financial institutions and life insurance companies. (KRS 132.208)
  • Favorable tax treatment for finished goods inventories. The state rate on these inventories is only 5 cents per $100 of assessed value. Cities, counties, and urban-county governments may levy rates on these business inventories that are less than the prevailing rate of taxation on other tangible personal property in their respective jurisdictions. (KRS 132.020; 68.246; and 132.028)
  • Favorable tax treatment for finished goods in a transit status may occur if the goods are located in a warehouse or distribution center pending subsequent shipment out-of-state. These goods shall be exempt from state, city, county (general levy), urban county, and school district property taxation. Fire and special taxing districts may exempt these goods at their discretion. (KRS 132.020; 132.095)
  • State laws limit the increase in local property tax revenues from real estate, exclusive of new property, to 4 percent annually for each local taxing jurisdiction (county, city, and school district). Increases larger than 4 percent must be approved by voters. (KRS 132.023 and 132.027)
  • State laws limit the increase in state property tax revenues from real estate, exclusive of new property, property approved for tax increment financing and KRS Chapter 103 industrial revenue bond property receiving the reduced state rate of $0.15 per $100 of leasehold value, to 4 percent annually. (KRS 132.020)
  • Assessment of property for taxation is made only once annually on January 1, allowing businesses to plan purchases or assets and levels of inventories to their best tax advantages. (KRS 132.220)