Individual Income Tax
- In large part, changes made in Dec. 2017 to the federal tax code are incorporated into the state tax code. The General Assembly made two significant departures. First, Kentucky is not adopting the increased expensing and depreciation provision for capital improvements. Second, Kentucky is not adopting the “qualified business income deduction” for owners of pass-through entities.
- Individual income tax rates are converted from a bracket system to a flat tax and the rates are reduced to 5% for tax years beginning on or after Jan. 1, 2018.
- For taxpayers that itemize deductions, the only itemized deductions that will be allowed are deductions for mortgage interest and charitable contributions. All other itemized deductions, such as medical expenses, local occupational taxes and property taxes paid, interest expense on investments, casualty and theft losses and other misc. deductions are eliminated.
- Long-term care and health insurance premiums are no longer allowed as deductions.
- There is no change in how social security is treated under the tax code.
- The person credit of $10 per person is repealed.
- The corporate tax code conforms to the federal tax code as amended in December 2017. As stated above, Kentucky decouples from the added expensing and depreciation deductions, and from the qualified income business deduction for owners of pass-through entities.
- The corporate tax calculation is changed from a bracket system to a flat tax and the rate is 5%.
- Companies that do business in Kentucky, and other states will apportion income to Kentucky using a single sales-factor apportionment formula as opposed to the current three-factor apportionment formula (property, payroll, sales). The sales factor for service entities will be computed based on market-sourcing as opposed to the current cost performance methodology. A carve out has been made for a provider of communication services, cable services, or internet access from the single factor and market-based sourcing.
- Disallows deduction for domestic production activities to conform with IRS code update.
- Provides that every corporation shall file a (1) combined return or make an election to file a consolidated return, or (2) 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.
- Kentucky is one of a handful of states that imposes a property tax on business inventory. The bill provides a phase-out of the business inventory tax by allowing a non-refundable income tax credit of 25% for taxes paid in 2018 and increasing the credit by 25% each year until there is a 100% credit for taxes paid on business inventory for years beginning on or after Jan. 1, 2021.
- Businesses will continue to pay the local property tax to help local governments that rely on that revenue. However, businesses will receive a non-refundable credit against their income tax for the inventory tax they pay.
- For tax years on or after January 1, 2019, custom software will be exempt from all state and local property taxes.
- Effective for transactions occurring on or after July 1, 2018, the bill imposes the existing 6% sales and use tax for the first time on the following:
- Labor and services associated with the repair, installation and maintenance related to the sale of taxable tangible personal property. Labor and services associated with the repair, installation and maintenance of machinery and equipment directly used in manufacturing or industrial processes will be exempt.
- Pollution control facilities
- Landscaping and lawn care services
- Janitorial services
- Dry cleaning and laundry services
- Linen supply services
- Pet care veterinarian services (small animals)
- Pet grooming and boarding
- Admissions to fitness and recreational sports centers, golf courses and country clubs, campsites, campgrounds, RV parks, bowling centers, skating rinks, health spas
- Linen supply, diet and weight reducing centers, overnight trailer campgrounds. • Limousine services
- Extended warranties
The tax reform package also positions Kentucky to impose use of tax collection responsibilities on remote sellers (i.e. sellers without a physical location in the state). The changes are intended to immediately reach sellers that use third-party marketplaces, such as amazon.com or e-bay and to reach all remote sellers in the event that the U.S. Supreme Court rules in favor of the State of South Dakota in a case involving Wayfair.
Finally, HB 487 restores several of the tax credit programs that were suspended under HB 366, including the Kentucky Industrial Revitalization Tax Act, Kentucky Investment Fund Tax Act, Kentucky Jobs Retention Act and Incentives for Energy Independence Act. HB 487 further changes the suspension for the Angel Investor Tax Credit programs to two years. The program will begin accepting applications again on Jan. 1, 2021.
Since the tax reform package moved quickly through the process, Commerce Lexington Inc. continues to seek feedback from our membership, including small businesses, to better understand the impact of tax reform. Although we recognize that a number of businesses will benefit from the reforms, while others may not, Commerce Lexington Inc. believes this to be a first step in the process to modernize Kentucky’s tax code.
If you have questions about the 2018 Regular Session and any legislation, please contact Andi Johnson, Chief Policy Officer at 859-226-1614 or by emai at [email protected]