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Taxes on Business Income in Kentucky

Filed under State Taxes. Fact checked on February 12, 2013.

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Corporations in Kentucky are required to pay income tax on their business income that is attributable to Kentucky. This tax is based upon corporate taxable net income. If you operate your business as a sole proprietorship or via a pass-through entity, then you must report your business income on your personal income tax return. However, Kentucky is one of the few states that imposes an entity-level tax on pass-through entities. So, not only will you pay income tax on your personal tax return, you must also pay the entity-level tax.

In Kentucky, you're generally free to choose to operate your business as a you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

C Corporations Are Subject to Corporate Income Tax

Domestic corporations (corporations organized in Kentucky) and foreign corporations (corporations organized in a state other than Kentucky) are subject to two types of income tax in Kentucky: a corporate income tax and a "limited liability pass-through entity tax. In addition, qualified local governments in Kentucky are authorized to levy a local income tax, so be sure to check with your local government.

Corporations pay tax based on the greater of the taxable net income computation, the limited liability entity tax calculation, or the minimum tax ($175). Tax measured by taxable net income attributable to Kentucky.

Corporate Income Tax Rates for Tax Year 2012
Taxable Income Rate of Tax
Up to $50,000 4%
$50,001 to $100,000 5%
Over $100,000 6%

Limited Liability Entity Tax Applies to All Pass-through Entities

Kentucky characterizes all pass-through entities the same way for state income tax purposes as they are treated for federal income tax purposes. Thus, S-corporations, LLCs, LLPs, etc. are not subject to state corporate income tax (unless the LLC has elected to be taxed as a corporation.)

However, Kentucky has a "limited liability entity tax"(LLE tax). S corporations, limited liability companies and partnerships are all liable for this tax. The LLE tax calculation is equal to the lesser of 9.5¢ per $100 of the taxpayer's gross receipts or 75¢ per $100 of the taxpayer's Kentucky gross profits. The minimum LLE tax is $175. There is a credit available for shareholders and partners of pass-through entities that they can claim on their personal tax returns.

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