Kentucky Tax Reform Legislation – Sweeping Reform

Published on April 18, 2018 by Cheryl Ganim in Tax Services

The Kentucky Senate and House enacted tax reform legislation House Bill (HB) 366 into law on April 13, 2018, after overriding Governor Matt Bevin’s veto of the bill. The legislature reacted by passing House Bill 487 on the last day of the session, April 14, 2018, making changes to HB 366. HB 487 was sent to Governor Bevin who had ten days to sign or veto the bill.

On April 27, 2017 HB 487 was enacted into law, bringing sweeping reform to Kentucky’s tax code. The tax reform measure is expected to generate additional revenue for Kentucky by broadening the tax base while lowering rates. Kentucky HB 366 was drafted with emergency provisions, meaning that it becomes effective immediately upon approval by the governor rather than 90 days after adjournment.

Tax Credits Affected

• The Kentucky Jobs Retention Act credit which provides hundreds of millions of dollars in tax incentives to Kentucky companies to encourage economic growth and employment will not be repealed.
• The revised bill no longer suspends the Kentucky Industrial Revitalization Tax Credit (was suspended until July 1, 2022 under HB 366).
• Angel investor credit applications would be temporarily suspended on or after January 1, 2019, and approval of applications would resume on or after January 1, 2021 (rather than July 1, 2022 as provided in H366). No more than $40 million in angel investor credits could be awarded in total for all years prior to December 31, 2020 and only $3 million in credits could be awarded in each calendar year beginning on or after January 1, 2021.
• The Kentucky Investment Fund Act credit would be suspended for two years with no more than $40 million in credits awarded in total for all years prior to December 31, 2020 and a $3 million cap in each calendar year beginning on or after January 1, 2021.
• The inventory property tax credit would be amended to provide that the credit is only available if the property tax is timely paid.
• The Incentives for Energy Independence Act credit will not be repealed.

Sales and Use Tax

• Changes apply to sales tax transactions occurring on or after July 1, 2018.
• The base is expanded and will tax some services, such as landscaping, janitorial, veterinarian services for small animals, fitness and recreational sports centers, commercial laundries, golf courses and country clubs, dry cleaning, pet grooming, weight loss centers and campgrounds.
• Charges for labor or services to apply, install, repair, or maintain tangible personal property directly used in manufacturing or industrial processing are exempt.
• The definition of “prewritten computer software” (prewritten computer software is taxable), is amended to provide that modifications and enhancements are not included in the term (not taxable), if there is a reasonable, separately stated charge on an invoice or other statement of the price to the purchaser for the modification or enhancement.
• If the physical presence standard is overturned by the US Supreme Court in the current South Dakota v. Wayfair case, Kentucky legislation will require remote online sellers to collect and remit Kentucky sales tax if the remote retailer had 200 or more separate transactions or gross receipts that exceeds $100,000 in either the previous or current year.

Corporate Income Tax

• The corporate income tax rate adopts a rate reduction of a flat 5 percent from a tiered bracket tax which capped at 6 percent.
• Kentucky continues to decouple from bonus depreciation (IRC Section 168(k)) and the expanded IRC Section 179 expensing consistent with current Kentucky law.
• The bill removes the Kentucky Domestic Production Activities Deduction to conform to the elimination of the federal provision[1].
• Mandatory combined reporting was adopted by HB487. Corporations would be required to file a combined return if a member of a unitary business group, or make an election to file a consolidated return with all members of an affiliated group, or file a separate return if they do not qualify to file a combined or consolidated return for taxable years beginning on or after January 1, 2019. Affiliated groups could elect to file a consolidated Kentucky tax return, even if they are not filing a consolidated federal return. This is a dramatic departure from Kentucky’s current consolidated regime.
• Kentucky changes from a cost-of-performance sales factor sourcing to market-based sourcing for services and sales of intangibles.
• Providers of communication services, cable services, or Internet access services are allowed to continue to use the 3-factor apportionment formula, instead of the single sales factor apportionment provisions of H366.

Individual Income Tax

• Changes are effective for tax years beginning on or after January 1, 2018.
• Most working Kentuckians currently have at least 5.8 percent of their pay go toward income taxes. Starting in July, 2018, that rate will be reduced 5 percent for everyone from a tiered bracket tax which capped at 6 percent.
• The bill disallows the federal 20% deduction under IRC § 199A related to pass-through income to individuals.
• The bill disallows itemized deductions, including deductions for medical expenses, taxes paid, and casualty and theft losses.
• Charitable donations and the mortgage interest deductions are preserved for Kentucky individual income tax purposes.

Electronic filing

• H487 would require electronic filing for employers that issue more than 25 withholding statements and for corporations or pass-through entities with gross receipts of $1 million or more for taxable years beginning on or after January 1, 2019.

Revenue

• The tax reform legislation increase the state cigarette tax to $1.10 per pack.

 

The Barnes Dennig Tax Team will keep you informed of any updates and changes as they occur, please reach out if you have any questions about the  changes above, and a member of the tax team will contact you.

 

[1] (IRC Section 199 (repealed)) by the Tax Cut and Jobs Act (P.L. 115-97) (TCJA).

 

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