Income Taxes on Business Income in Kentucky

April 13, 2006

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In Kentucky, 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.

Corporations. Domestic corporations (corporations organized in Kentucky) and foreign corporations (corporations organized in a state other than Kentucky) are subject to a Kentucky income 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.

For taxable years beginning on or after January 1, 2005, corporations pay tax based on the greater of the taxable net income computation, the alternative minimum calculation, or the minimum tax ($175). Tax measured by taxable net income is as follows:

Taxable Income	Rate of Tax
Up to $50,000	4%
over $100,000	7%

For tax years beginning on or after January 1, 2007, the top rate will be 6 percent on all taxable net income over $100,000.

The alternative minimum tax calculation is equal to the lesser of: 9 1/2 cents per $100 of the taxpayer's gross receipts; or 75 cents per $100 of gross profits.

S corporations. Kentucky does not follow the federal income tax treatment of an S corporation and its shareholders. Instead, the definition of "corporations" subject to taxation for Kentucky purposes includes S corporations. As a result, every corporation doing business in Kentucky is subject to a tax based on the greater of the taxable net income computation, the alternative minimum calculation, or the minimum tax as described above.

In fact, all limited liability entities (corporations, LLPs, LLCs, including single member LLCs, limited partnerships, and S corporations) are subject to the expanded corporate income base. General partnerships and sole proprietorships, however, are not be subject to the expanded corporation income tax.