Kentucky Tax Modernization Legislation

Kentucky has made sweeping changes to state tax law that are generally effective for years ending on or after December 31, 2005, unless otherwise noted. The following are some highlights of the legislation.

Individuals & Businesses

• Kentucky’s tax code will conform to the Internal Revenue Code (IRC) as of December 31, 2004, with a few exceptions. Notably, depreciation will be based upon the December 31, 2001 IRC which limits Section 179 expense to $25,000 per year and does not include bonus depreciation allowed through December 31, 2004.
• Net operating losses may no longer be carried back for Kentucky purposes.

Individuals

• The tax rate for taxable income between $8,000 and $75,000 has been decreased from 6% to 5.8%.
• The intangible tax is repealed effective January 1, 2006.
• Kentucky will not allow the deduction for state and local sales taxes.
• A Family Size Tax Credit will replace the low-income tax credit. This will provide expanded relief for low-income taxpayers.
• The pension exclusion will be capped at $41,110 for 2004 and future.
• A credit equal to 25% of the federal Hope or Lifetime Learning credit is available for undergraduate studies at most Kentucky higher education institutions.
• Kentucky will allow the same tax advantages available at the federal level for the Health Savings Accounts.

Businesses

• The corporate license tax is repealed. Limited liability entities (S corporations, LLC’s, LLP’s, Limited Partnerships, etc.) will be taxed as regular corporations. Individual owners will still report pass-through income, but will receive a credit for the amount of tax paid by the entity. This credit may be limited.
• The top corporate rate is reduced and the lower brackets are expanded. New rates are 4% of the first $50,000 of taxable income, 5% from $50,000 - $100,000, and 7% of income over $100,000. The 7% rate is reduced to 6% after 2006.
• Kentucky now has an Alternative Minimum Tax that must be paid if higher than the regular tax. This tax is the lesser of: 9.5 cents per $100 of Kentucky Gross Receipts or 75 cents per $100 of Kentucky Gross Profits (after cost of goods sold). In no event will Kentucky tax be less than $175.
• Multi-state business must apportion income to Kentucky under a 3-factor apportionment formula.
• Other business changes include revised definitions for “doing business in Kentucky,” consolidation of affiliated entities, limited deductions for affiliated entities, etc.

This article only briefly highlights some of the major provisions of the law changes. There are many details and a host of other changes which may affect you or your business. We urge you to contact us to discuss your specific situation.

Ken_Coyle@mnccpa.com