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Kentucky Enacts Pass-Through Entity Tax Election

Kentucky HB 360 would allow a PTE to elect to pay its tax liability at the entity level on behalf of its individual owners. Read on for details.
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On March 24, 2023, Gov. Andy Beshear signed Kentucky House Bill (HB) 360 into law. The bill allows a pass-through entity (PTE) to elect to pay its tax liability at the entity level on behalf of its individual partners, members, or shareholders for taxable years beginning on or after January 1, 2022. This is a retroactive measure to January 1, 2022 and is a key component of HB 360. 

Key takeaways from Kentucky’s PTE election include:

  • Owners with an interest in an electing PTE will be allowed to claim a nonrefundable tax credit equal to 100% of the amount of tax paid by the electing entity. The credit is based on the owner’s pro rata share of Kentucky income. 
  • The election will be made on a form prescribed by the Kentucky Department of Revenue and must be made by April 15 or the extended due date of October 15. 
  • It’s unclear if the election is to be made annually or one time, but it’s binding once made.
  • The election must be made only upon the consent of all partners, members, or shareholders holding more than 50% ownership in the PTE.
  • The PTE tax rate for tax year 2022 is equal to the individual tax rate of 5% and will continue to follow the individual income tax rate in subsequent years.
  • It’s important to note that HB 360 also includes a measure that aims to gradually reduce the individual income tax rate to zero. This would require the Office of State Budget Director to evaluate whether certain budget conditions have been met on an annual basis. If reduction conditions are met, the tax rate would be reduced 0.5% per year until the rate is zero.

Forvis Mazars will continue to monitor for further guidance from the Kentucky Department of Revenue as it becomes available. If you have any questions or need assistance, please reach out to a professional at Forvis Mazars or submit the Contact Us form below.

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