Corporations
Kentucky corporations and foreign corporations owning or leasing property or having one or more paid employee(s) in Kentucky pay an income tax annually on taxable net income.

• Limited liability companies that are treated as corporations for federal income tax purposes also are treated as corporations for Kentucky income tax purposes.

Corporations having business income taxable both in Kentucky and elsewhere pay Kentucky income tax on that portion of business income earned in Kentucky.

Gross income of corporations subject to Kentucky income tax is similar to income reported for federal income tax purposes. Included in Kentucky gross income is interest income from obligations of other states and their political subdivisions (bonds, notes, mortgages, etc.,) and income from intercorporate transactions adjusted to an arm's length basis, when required by the Kentucky Revenue Cabinet to prevent the avoidance of taxes.

Net income for corporations subject to Kentucky income taxes is gross income minus the same deductions allowed for federal income taxes, except for the following which are not deductible when computing Kentucky net income:

• income taxes paid to other states, U.S. territories or possessions, or any foreign country or its political subdivisions
• any deduction allocated to income which is exempt from taxation
• certain dividends received by the corporation
• amounts paid to any club, organization, or establishment that has been found by the courts or a government body to discriminate in its membership, privileges, or services on the basis of race, color, religion, national origin, or sex

Beginning January 1, 2005, a corporation in Kentucky shall not be allowed to carry its Kentucky net operating losses back. The carry forward of net operating losses (NOL) shall be reduced by the amount of distributive share, income, loss and deduction distributed to an individual or general partner. The NOL can be carried forward for up to twenty (20) years for tax years beginning after August 6, 1997. 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. Kentucky has not adopted the federal five-year net operating loss carryback rule enacted by the Job Creation and Worker Assistance Act of 2002.

S Corporations
Kentucky income tax laws recognize small business "S Corporations" for special income tax treatment. Qualifying S Corporations can have up to seventy-five (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 whenever their net capital gains exceed $25,000, and exceed fifty percent (50%) of its taxable income for the taxable year and its taxable income for such year exceeds $25,000. The tax is the lesser of (a) the tax determined by applying the corporation income tax rates to the capital gains in excess of $25,000; or (b) the tax determined by applying the corporation income tax rates to the taxable income in excess of $25,000. In no case shall the S Corporation pay corporation income tax if Section 1374 of the Internal Revenue Code would exempt such capital gains from federal income tax.

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.

Nonresident individuals that are shareholders of an S Corporation, which does business both in Kentucky and outside of the state, are taxed in Kentucky on the income of the corporation attributable to business conducted in the state. This is determined on the basis of the proportion of gross receipts from sales or services provided in Kentucky to sales or services provided everywhere.

Proprietorships & Partnerships
Sole proprietorships and partnerships are exempt from state corporate income taxes. Instead, the owners pay state individual income taxes on their shares of the earnings of the businesses, regardless of whether they take the income for their personal use or leave it in the business. Corporate partners who are partners in a partnership doing business in Kentucky are taxable on their distributive share of the partnership’s income. If the corporate partner’s only business activity in Kentucky is the partnership interest, then the corporate partner is subject to Kentucky’s corporation income tax on its distributive share income multiplied by the ratio of the partnership’s Kentucky gross receipts divided by the partnership’s total gross receipts. Limited liability companies that are treated as partnerships for federal income tax purposes also are treated as partnerships for Kentucky income tax purposes. Although partnerships have no state income tax liability, they must file an information return annually. Income distributed from a qualified investment partnership to a nonresident partner is not subject to Kentucky tax. “Qualified investment partnership” is defined to mean a partnership formed to hold only investments that produce income that would not be taxable to the nonresident individual if held or owned individually.

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 $500 must file estimates of income and make payments quarterly.

Nonresident individuals that are partners of a partnership, which does business both in Kentucky and outside of the state, are taxed in Kentucky on the income of the partnership attributable to business conducted in the state. This is determined on the basis of the proportion of gross receipts from sales or services provided in Kentucky to sales or services provided everywhere.

Local Income Tax
Employers are responsible for withholding an occupational license tax on the gross wages of their employees. If a business is located within Paducah the rate is 2.0% of gross wages. A business located in McCracken County withholds 1.0% of gross wages.

Income Tax Credits

• Credits for up to one hundred (100) percent of approved costs, for up to ten (10) years, on land, buildings, site development, and building fixtures and equipment used in new or expanded manufacturing operations are available under the Kentucky Industrial Development Act (KIDA). Companies must create at least fifteen (15) new full-time jobs and invest at least $100,000.
• Credits for up to fifty (50) percent of start-up costs and fifty (50) percent of annual rental costs or rental value, over a ten (10) year period, for new or expanding service and technology intensive projects that provide more than seventy-five (75) percent of their services to out-of-state customers and create at least fifteen (15) jobs for Kentucky residents are available under the Kentucky Jobs Development Act (KJDA).
• Credits for up to seventy-five (75) percent of the costs of upgrading manufacturing plants and equipment to prevent the closing of outdated facilities are available under the Kentucky Industrial Revitalization Act (KIRA). The credit can also be extended to corporation license taxes.
• Credits for up to fifty (50) percent of the costs of equipment used to recycle or compost business or consumer waste materials and machinery used to manufacture products from recycled waste materials.
• A credit of $100 for each unemployed person hired for at least 180 consecutive days.
• Any taxpayer that is an electric power company or an entity operating a coal-fired electric generating plant may receive a $2 per ton tax credit for each ton of Kentucky coal burned. Coal purchases in excess of the base year 1999 calendar year are eligible for the credit.
• A credit for up to 4.5 percent of the value of Kentucky coal (excluding transportation costs) used for industrial heating or processing, for ten (10) years following either the installation or conversion to coal burning units.
• A credit of up to $1,500 for ten (10) percent of the wages paid to certain unemployed or low-income individuals that are hired by qualifying enterprise zone businesses.
• A credit is allowed to investors in certified venture capital funds equal to forty (40) percent of their proportional ownership share of all qualified investments made by the fund, not to exceed fifty (50) percent of their credit in any one (1) year.
• A skills training investment tax credit may be awarded by Bluegrass State Skills Corporation as a nonrefundable credit for a company’s occupational or skills upgrade training program. The credit is equal to fifty (50) percent of the approved cost incurred and may not exceed $500 per employee and $100,000 per company.
• The Kentucky Economic Opportunity Zone Act (KEOZ) focuses on development of areas with high unemployment and poverty levels. Eligible companies include new or expanded manufacturing, services, or technology industries, which must invest at least $100,000 in the project and create at least ten (10) new full-time jobs for residents of the zone. An approved company may receive up to one hundred (100) percent credit against Kentucky income tax liability on taxable income generated by the project(s). The credit over the term of the agreement shall be limited to the total approved incentive amount. The approved company may carry forward credits during the agreement term, which shall be for ten (10) years.
• An employer is entitled to an income tax credit for a portion of released time given to assist an employee in obtaining a high school equivalency diploma. The credit is calculated by multiplying fifty (50) percent of the hours released by the student’s hourly salary. The credit shall not exceed $1,250.
• A state income tax credit equal to 5 percent of the qualified cost is available to new and existing businesses that construct, remodel, expand, or equip research facilities, but does not include replacement property. Any unused credit may be carried forward for ten (10) years.
• A state income tax credit for producers or blenders of a “biodiesel” or “blended biodiesel” with a blend of at least 2%. “Biodiesel” or “blended biodiesel” producers receive a $1 credit per gallon produced or blended. This credit is limited to a maximum annual state-wide credit of $1.5 million. Unused credits cannot be carried forward.
• An income tax credit not to exceed $150,000 over a 10-year period on taxpayer expenditures made at a “Qualifying Voluntary Environmental Remediation Property (QVERP).” QVERP is contaminated real property in which the Environmental and Public Protection Cabinet has determined that the responsible parties are financially unable to carry out the obligations to clean up the environmental or toxic damage and the property has been sold to a bona fide purchaser. (KRS 224-01-400 and KRS 224.01-405). The purchaser agrees to clean up the property and receive the credit and the Environmental and Public Protection Cabinet grants the taxpayer a covenant not to sue. The maximum allowable credit is $150,000 and for any one year is $37,500.
• The “Kentucky Environmental Stewardship Act” provides for an income tax credit for up to 10 years if approved by the Kentucky Economic Development Finance Authority (KEDFA) for 100% of the costs of providing the necessary skills training needed to produce the product and up to 25% of the investment in construction, equipment, and related expense. The costs must go towards the construction, rehabilitation or improvement of facilities necessary to produce an “Environmental Stewardship Product,” which is defined as any new or improved product that has a reduced adverse affect on human health or environment when compared to a current product. The maximum claimed for any one year is 25% of the total authorized inducement; and an approved company under this agreement is not entitled to take a recycling tax credit.
• The “Kentucky Clean Coal Incentive Act” provides for an income, license or public service corporation property tax credit for new clean coal facilities constructed after January 1, 2005, at a cost exceeding $150 Million and used for purposes of generating electricity. Before the credit is given, the Environmental and Public Protection Cabinet must certify that a facility as reducing emissions of pollutants released during electric generation through the use of clean coal equipment and technologies. The amount of credit will be $2.00 per ton of coal mined in Kentucky and used in the facility and not already receiving tax credit. Any unused portions of this credit shall not be carried forward.
• A “Certified Historic Structures” tax credit on income, license or franchise tax for financial institutions for the rehabilitation of a certified historic structure. The credit is 30% of the qualifying expenses for an owner-occupied property and 20% for all other properties. There is a seven-year carry forward for any unused credit. The maximum credit an owner that is also occupying the home may take is $60,000. The credit is capped for all taxpayers at $3 million per calendar year.