Tax TipsRon Barnes, CPA, PFS Partner | Great News for Indiana Taxpayers!When the State of Kentucky passed the Kentucky Tax Modernization Act in March 2005, there was an unintended and in some instances a very significant negative tax impact on Indiana residents who conduct business in Kentucky.
One provision of the Kentucky Act was to discontinue recognition of the pass-through treatment associated with S-corporations and limited liability companies. Prior to the Act, both Indiana and Kentucky taxed income from these entity types at the individual or shareholder level rather than at the entity level (i.e. the income “passed through” to the individual owner). As a result of the Kentucky Act, these businesses are now required to compute and remit tax due at the entity level. An offsetting credit for tax paid on the shareholder’s allocable income is allowed on the Kentucky individual income tax return, preventing the income from being taxed twice.
Indiana residents that are owners of S-corporations or LLC’s doing business in Kentucky are required to report all income earned in Kentucky to the State of Indiana. Although Indiana allows a credit for tax paid by an individual to another state, the Kentucky tax is now assessed and paid at the entity level, which means that Indiana residents are no longer eligible to claim the credit on their personal returns. The effect is double taxation: the Kentucky income generated by these businesses is taxed by the State of Kentucky at the entity level, and again by Indiana at the individual level as pass-through income with no offsetting credit.
Recognizing the serious impact this would have on many Indiana taxpayers, the partners of McCauley Nicolas took action. Through collaboration with One Southern Indiana, the Indiana Chamber of Commerce, the Governor’s Office and Indiana legislators, McCauley Nicolas led the effort to bring attention to this important issue, and as a result was successful in obtaining an Advisory Opinion from the Indiana Department of Revenue which granted relief for tax year 2005 to affected Indiana taxpayers equal to the amount of the credit that would have been available prior to the enactment of the new law.
Affected taxpayers who have already filed a 2005 return should file an amended return to claim a refund.
Efforts are ongoing to obtain similar relief for tax year 2006.
Effective January 1, 2007, Kentucky has amended their statutes so that limited liability entities will no longer be taxed at the entity level, and Kentucky will treat those entities as pass through entities in accordance with the Internal Revenue Code.
If you need more information, or help claiming a refund, call us today at 288-6621.
Email Ron at Ron_Barnes@mnccpa.com.
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