Greetings, and I hope all is well. I am reaching out to you today to ensure you are aware of certain tax laws that affect pass-through entities in the Commonwealth of Kentucky. You may elect on an annual basis to pay Kentucky income tax and expense those taxes at the entity or business level, which could provide tax savings to you on your personal tax return. Under existing law, a “pass-through entity” (PTE) includes any partnership, S corporation, limited liability company, limited liability partnership, limited partnership, or similar entity recognized by the laws of Kentucky that is not taxed for federal purposes at the entity-level, but instead passes to its owners their proportionate share of income, deductions, gains, losses, credits, and similar attributes.
Electing to pay Kentucky income tax at the business level is optional and must be done each tax year on KY Form 740-PTET, along with making the requisite estimated tax payments using KY Form 740-PTET-ES. The electing entity may be subject to penalties if the estimated tax payments are not made timely and correctly. An election to pay estimated payments through the business entity for a particular tax year is binding for all entity owners for the entire tax year. An election for a year is only for a single year and subsequent elections must be made each year you wish to pay Kentucky income tax at the entity level.
Owners of electing entities are entitled to a refundable credit against Kentucky’s individual income tax equal to 100% of their proportionate share of the tax paid by the electing entity. The entity must report to each owner the owner’s proportionate share of tax paid for the taxable year. This provision prevents double taxation at both the entity and owner levels, allowing the business to pay and expense the taxes, thereby no longer recognizing them as an Owner’s Draw.
We encourage you to contact us to discuss how this applies to you and to address any questions you may have about your specific tax situation, or if you require assistance with calculating your estimated tax payments. We are here to help you navigate these requirements and ensure your business remains compliant.
