The Kentucky Legislature recently concluded its 2019 session. During the session, the Kentucky Legislature passed two significant tax bills, House Bill (HB) 354 and HB 458. HB 458 was passed on the final day of the 2019 session and makes several technical changes to HB 354, which was passed earlier in the session. While the bills contain provisions related to tax reform measures passed during the 2018 legislative session, they also address several new items not addressed last year.
Following is a summary of some relevant measures adopted in HB 354 and HB 458.
Repeal of Bank Franchise & Savings & Loans Taxes
Under Kentucky’s current law, every financial institution regularly engaged in business at any time during a tax year is subject to the bank franchise tax. HB 354 originally provided that (1) beginning January 1, 2022, the bank franchise tax shall no longer apply to financial institutions; and (2) for tax years beginning January 1, 2021, all financial institutions shall be subject to the state’s corporation income tax and limited liability entity tax (LLET). Thus, for the 2021 tax year, financial institutions would’ve been required to file both a bank franchise tax return and corporation income tax and LLET return, although such taxpayers would’ve been allowed to claim a refundable credit for the amount of bank franchise tax that was paid for that year.
However, HB 458 modified the provisions of HB 354 to provide that beginning January 1, 2021, the bank franchise tax shall no longer apply to financial institutions. It further provides that beginning January 1, 2021, all financial institutions shall be subject to the corporation income tax and LLET. Thus, the technical correction provided for in HB 458 eliminated what would’ve been an onerous requirement for financial institutions to file both a bank franchise tax return and corporation income and LLET return for the 2021 tax year. HB 458 further provides that beginning January 1, 2021, savings and loan associations shall no longer be subject to the current savings and loans tax but instead be required to file a corporation income tax and LLET return.
HB 458 requires financial institutions as well as savings and loan associations operating on a fiscal-year basis to file a short-year corporation income tax and LLET return for the period beginning January 1, 2021, through the end of the financial institution’s normal fiscal year. It also provides that financial institutions shall remain subject to all applicable local government franchise taxes measured by deposits that are imposed on financial institutions by any Kentucky counties, cities and urban-county governments.
Finally, HB 354 provides that the Kentucky Department of Revenue (Department) shall issue regulations to detail the sourcing of various types of revenues related to financial institutions.
New Deferred Tax Deduction (DTD) for Public Companies
HB 458 provides that for purposes of computing Kentucky net income, a corporation may reduce its gross income by a DTD. The deduction is only eligible to publicly traded companies that, as a result of the requirement to file a combined return, have (1) an aggregate increase to the member’s net deferred tax liability (DTL); (2) an aggregate decrease to the member’s net deferred tax asset (DTA); or (3) an aggregate change from a net DTA to a net DTL. This deduction doesn’t apply to taxpayers who make the election to file a consolidated Kentucky corporate income tax return.
The deduction can be claimed for 10 years beginning with the combined group’s first taxable year beginning on or after January 1, 2024, and shall equal one-tenth of the amount necessary to offset the increase in the net DTL, decrease in the net DTA or change from a net DTA to a net DTL.
The DTD amount is computed by dividing the deferred tax impact of the requirement to file a combined report by the corporation income tax rate of 5 percent divided by the Kentucky apportionment factor of the combined group used in the calculation of the DTAs and DTLs. It should be noted that the deduction shall not be adjusted as a result of any events occurring subsequent to the calculation including, but not limited to, any disposition or abandonment of assets. In addition, to the extent the deduction in a given year is greater than the combined group’s entire Kentucky net income, the excess deduction shall be carried forward and applied as a deduction to the combined group’s entire net income in future taxable years until fully realized.
It’s important to note that while the deduction may not be claimed for any tax year beginning prior to January 1, 2024, any combined group intending to claim this deduction must file a statement with the Department on or before July 1, 2019 (no extension is available with respect to the filing of the statement). The statement, KY Schedule DTD, shall specify the total deduction amount the combined group claims on the form, including the calculations and other information supporting the total deduction amount as required by the Department. In addition, no deduction is allowed for any taxable year except to the extent it’s claimed on a timely filed statement.
Combined Reporting Changes
Effective for tax years beginning on or after January 1, 2019, a unitary business group must file a unitary combined report or make an election to file a consolidated return that includes all affiliated group members regardless of whether those group members have income tax nexus in Kentucky. HB 354 and HB 458 provide for several enhancements and clarifications to the unitary combined and consolidated return filing requirements enacted in HB 487 during the 2018 legislative session. Specifically, effective January 1, 2019, HB 354 and HB 458 provide the following:
- Reduce the period for which a consolidated group election is binding from eight to four years
- Clarify that a combined group shall include only corporations, the voting stock of which is more than 50 percent owned, directly or indirectly, by a common owner or owners
- Update the definition of a “tax haven” to exclude countries with a tax treaty with the United States
- Clarify that the combined filing should be filed on a water’s-edge basis
- Provide that in computing the combined gross receipts or combined income of a combined group, all intercompany transactions among group members shall be eliminated
- Establish rules for the sharing of net operating losses of one group member with other group members
- Clarify that a unitary U.S. member that earns 80 percent or more of its receipts from outside the U.S. is excluded from the combined filing
- Clarify that a non-U.S. corporation with 20 percent or more of income from other group members is excluded from inclusion in a combined group if a tax treaty exists
Estimated Tax Payment Due Dates
While Kentucky previously provided its own due dates for estimated tax payments related to corporate and individual income tax and LLET, HB 354 provides that effective January 1, 2019, the Kentucky due dates shall be aligned with the due dates for federal tax purposes. Therefore, for corporations and limited liability pass-through entities, four equal payments of the estimated tax due are now due April 15, June 15, September 15 and December 15 for calendar-year taxpayers, or the 15th day of the fourth, sixth, ninth and 12th months of the tax year for fiscal-year taxpayers. For individuals, the estimated tax due dates are April 15, June 15, September 15 and January 15 of the following year.
Miscellaneous Income Tax Provisions
HB 354 and HB 458 contain a number of miscellaneous provisions including the following:
- Updates Kentucky’s conformity to the Internal Revenue Code (IRC) as of December 31, 2018, for tax years beginning on or after January 1, 2019
- For property placed in service on or after January 1, 2020, IRC Section 179 expense for Kentucky purposes conforms to IRC as of December 31, 2003
- Provides that C corporations are now allowed a seven-month extension to file corporation income and LLET returns
- Extends the statute of limitations period for shareholders, members or partners of a pass-through entity when an assessment of LLET is made against such pass-through entity to the greater of the normal four-year statute of limitations or 180 days from the date the assessment becomes final to ensure that such shareholders, members and partners have sufficient time to claim a tax credit from the pass-through entity
Heavy Equipment Rental Inventory
HB 354 provides that effective January 1, 2020, qualified heavy rental equipment is to be treated as inventory for personal property tax purposes, as companies in the industry generally sell the equipment similarly to a new or used equipment dealer. “Qualified heavy equipment” is defined as machinery and equipment, including ancillary equipment and attachments, which are primarily used and designed for construction, mining, forestry or industrial purposes. “Qualified heavy equipment” includes items such as cranes, earth-moving equipment, well-drilling machinery and equipment, lifts, material-handling equipment, pumps, generators and pollution-reducing equipment, and it must be held in a heavy equipment rental company’s inventory for rental under a heavy equipment rental agreement or for sale in the regular course of business. The bill also defines a “heavy equipment rental company” as being an entity that’s primarily engaged in a line of business described in NAICS code 532412 or 532310. As a result, qualified heavy rental equipment will now be subject to property tax at the lower rate that applies to inventory located in the state.
For more information or to further evaluate the effects and implications of these decisions for your company, reach out to your BKD trusted advisor or use the Contact Us form below.