by Teresa Callahan
Kentucky legislation repeals the pass-through entity tax provisions enacted in L. 2023, H360 (c. 92) and instead provides that pass-through entities may elect to pay the personal income tax. In addition, the bill phases out the property tax on distilled spirits and exempts distilled spirits from tax after year 2043. A local replacement property tax is also imposed to benefit school districts, fire districts and emergency services boards. The legislation also allows a taxpayer to elect to receive a modified distilled spirits (bourbon barrel) personal income tax credit or a combined sales and use tax and withholding tax refund based on a portion of the accumulated distilled spirits credit for certain capital investments and job creation. The definition of “telemarketing services” is also revised. (L. 2023, H5, effective 03/31/2023.)
Revised pass-through entity tax election and credit.
For taxable years beginning on or after January 1, 2022, an authorized person may elect annually, on behalf of a pass-through entity, to have the personal income tax imposed upon the electing entity and based on the ordinary income and the separately stated items of income calculated under Ky. Rev. Stat. Ann. §141.206. For taxable years beginning on or after January 1, 2022, but before January 1, 2023, the election may be made after March 31, 2023, but before August 31, 2024. For taxable years beginning on or after January 1, 2023, the election may be made at any time during the taxable year or after the end of the taxable year, but not later than the 15th day of the fourth month upon the close of the taxable year or the 15th day of the 10th month upon the close of the taxable year for filing extensions. The election, once made for a taxable year, is irrevocable and binding upon all entity owners.
Credit: For taxable years beginning on or after January 1, 2022, a refundable pass-through entity tax credit will be allowed, which is equal to 100% of the entity owner’s proportionate share of the tax paid by the pass-through entity for the taxable year. The credit will be based on the pro rata share of the entity owner’s income from the pass-through entity.
Estimated tax payments: For taxable years beginning on or after January 1, 2022, but before January 1, 2024, an electing entity is not required to make estimated income tax payments and no estimated tax penalty will be assessed. For taxable years beginning on or after January 1, 2024, an electing entity will be required to make estimated income tax payments and the estimated tax penalty will be imposed if the estimated income tax payments are not properly made.
Taxes paid to other states: Any resident entity owner of an electing entity doing business in another state in which the tax is assessed and paid at the entity level is allowed a credit. The credit will be based on the entity owner’s distributive share of the electing entity’s items of income, loss, deduction, and credit.
Distilled spirits (bourbon barrel) income tax credit.
For taxable years beginning on or after January 1, 2019, but prior to January 1, 2024, the distilled spirits credit is equal to 100% of the tax assessed under Ky. Rev. Stat. Ann. §132.160 and paid under Ky. Rev. Stat. Ann. §132.180 on a timely basis.
Election: A taxpayer may make an election regarding the distilled spirits tax credit related to taxable years beginning on or after January 1, 2024, but prior to January 1, 2040. Any election made is binding on both the Department of Revenue (DOR) and the taxpayer and will be irrevocable. The election allows the taxpayer to waive any accumulated amount of tax credits and allows a nonrefundable and nontransferable tax credit up to 25,000 barrels of distilled spirits in a bonded warehouse or premises for each taxable year. The tax credit is equal to 100% of the tax assessed under Ky. Rev. Stat. Ann. §132.160 and paid by the taxpayer on a timely basis on those barrels.
Alternative multiple tax credit: Alternatively, the taxpayer may waive all future tax credits allowed under this section and for taxable years beginning on or after January 1, 2026 will be allowed a refundable tax credit on multiple taxes. To qualify for the multiple tax credit, the taxpayer must make a capital investment of at least $20 million within an LMI (i.e., a low and moderate income population where the county median family income or county median household income is less than 80% of the state median family income or state median household income) and creates 10 or more new jobs within the LMI. Upon certification to the DOR that the capital investment has been made and the jobs have been created within an LMI, a refundable credit equal to no more than 50% of the accumulated amount of credits; based on the sales and use tax paid on the purchase of tangible personal property used in the capital investment within the LMI and the withholding taxes paid by the taxpayer from employees hired to fill the jobs created within the LMI; and refunded over a period, the earlier of which is 15 years; or until the amount determined has been utilized through the sales and use tax and withholding tax remitted; and reduce the taxpayer’s accumulated amount by the amount refunded. Any portion of the 50% of the accumulated amount remaining on or after March 1, 2039 will lapse. Requests for a refund must be filed annually and will cover purchases made or the amount withheld from employees during the immediately preceding year.
Sales and use tax portion of credit: To qualify for the portion of the refundable credit for sales and use tax paid, the taxpayer must: collect from the purchasers of tangible personal property used in the construction, replacement, or remodeling of warehouses or facilities all documentation relating to the payment of sales or use tax; document sales and use tax paid directly by the taxpayer; and file an application for refund of the sales or use tax paid as reflected in the documentation collected. To fulfill the requirements for a sales and use tax refund, the taxpayer must execute information-sharing agreements with contractors, vendors, and other related parties to verify construction material costs.
Withholding tax portion: To qualify for the portion of the refundable credit for withholding taxes, the taxpayer must document the amount withheld and file an application for a refund.
Reduction and recapture of credit: For taxable years beginning on or after January 1, 2026, the taxpayer’s accumulated amount of credits must be reduced by the taxpayer’s base reduction percentage, including a recapture of any credits, which have previously been refunded. “Base reduction percentage” means the percentage by which the taxpayer’s total number of barrels of distilled spirits stored or aging in Kentucky as of January 1 of a taxable year does not equal or exceed the taxpayer’s total number of barrels of distilled spirits stored or aging in Kentucky as of January 1, 2025.
Telemarketing services definition.
The bill revises the sales and use tax definition of telemarketing services to delete the phrase “including but not limited to various forms of social media” that was added by L. 2023, H360 (c. 92).
Phase-out of distilled spirits property tax.
Distilled spirits stored or aging in barrels located in a bonded warehouse or premises will be exempt from state and local property taxes for tax assessments made on or after January 1, 2043. The state and local tax rate that may be levied on distilled spirits for a taxpayer of a premises will be the state and local tax rate for tax assessments made on January 1, 2023. Prior to complete phase-out in January 1, 2043, the tax will be gradually reduced beginning with a reduction of tax to 96% beginning with tax assessments made on January 1, 2026 to 8% for tax assessments made on January 1, 2042.
Replacement tax for schools and fire districts.
Beginning with the 2026 calendar year and for each subsequent calendar year thereafter, in addition to any property taxes collected under Ky. Rev. Stat. Ann. §132.150, a replacement tax is imposed on every taxpayer with a premises located in a local jurisdiction that collected property tax during calendar year 2025. The total replacement tax for each school district is an amount that is not less than zero; and results from the following calculation: the property tax on distilled spirits stored or aging in a premises collected by or on behalf of the school district during calendar year 2023; minus the amount of the property tax collected by or on behalf of the school district for the applicable calendar year; and minus the amount by which the Support Education Excellence in Kentucky (SEEK) program final calculation for the school year ending during the applicable calendar year exceeds the SEEK program final calculation for the 2022-2023 school year. The total replacement tax for each fire district or emergency services board will be: an amount that is not less than zero; and results from the following calculation: the property tax on distilled spirits stored or aging in a premises collected by or on behalf of the fire district or emergency services board during calendar year 2025; minus the amount of the property tax collected by or on behalf of the district or board for the applicable calendar year. Each year, DOR must assess taxpayers the replacement tax for the preceding calendar year in proportion to the number of barrels of distilled spirits stored and aging at their premises in the local jurisdiction on January 1 of that preceding calendar year.
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