Kentucky enacts pass-through entity tax election

On March 24, Kentucky Gov. Andy Beshear signed House Bill 360, which allows a PTE to make a PTE tax election for the tax years beginning on or after Jan. 1, 2022. Then, on March 31, Gov. Beshear signed House Bill 5, which includes technical corrections to House Bill 360.

Crowe observation

The legislation is intended to allow owners of electing entities to receive the benefit of deducting state taxes in excess of the current $10,000 limitation for federal income tax purposes.

Eligible entities include a partnership, S corporation, limited liability company, limited liability partnership, limited partnership, or similar entity that is recognized by the laws of Kentucky and that is not taxed for federal purposes at the entity level. The PTE tax is paid on behalf of the entity owners, who are direct or indirect owners of an electing entity who receive a proportionate share of the entity’s income. An “owner” is defined as a direct or indirect partner, member, or shareholder of an electing entity, which includes a beneficiary of an estate or trust. An “authorized person” is an individual with the authority to bind the electing entity or sign returns on the entity’s behalf. Once the election is made it is binding for all entity owners.

An authorized person may make the irrevocable annual election on behalf of the electing entity to have the tax pursuant to Kentucky’s individual tax code imposed on the electing entity. The tax base includes ordinary income and separately stated items of income calculated under Kentucky pass-through reporting statutes. The tax rate applied is the individual income tax rate in effect on the last day of the PTE’s tax year. The entity owners will receive a PTE tax credit equal to their proportionate share of tax paid. The PTE tax credit is refundable and used after all other credits have been applied against income tax liability.

For tax years beginning on or after Jan. 1, 2022, but before Jan. 1, 2023, the election is made after March 31, 2023, but before Aug. 31, 2024. For tax years ending on or after Jan. 1, 2023, the election may be made anytime during the taxable year, but not later than the 15th day of the fourth month or the 15th day of the 10th month in the case of an extension.

For tax years beginning on or after Jan. 1, 2022, but before Jan. 1, 2024, an electing entity is not required to make estimated payments, and no penalties or interest will be assessed. For tax years beginning on or after Jan. 1, 2024, an electing entity is required to make estimated payments and will be subject to penalties and interest if these payments are not properly made.

The bill also provides a credit for Kentucky resident individuals who are partners, members, or shareholders of a PTE paying similar PTE taxes assessed at the entity level in other states. The amount of the credit is limited to the lesser of tax actually paid to other states or the amount of tax that would be paid if the income were taxed by Kentucky.

The Kentucky Department of Revenue is expected to issue guidance soon, including but not limited to the way the election and payments are made.