Kentucky Releases Guidance on Inventory Tax Credit

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On November 26, 2018, the Kentucky Department of Revenue (Department) issued Technical Advice Memorandum 18-07 (KY-TAM-18-07), which provides guidance on the inventory tax credit.

Pursuant to Kentucky Revised Statute (KRS) 141.408, Kentucky now allows a nonrefundable and nontransferable credit against individual income tax, corporate income tax and limited liability entity tax for personal property taxes timely paid on inventory of eligible property that is held for sale in the regular course of business. Inventory for purposes of the inventory tax credit is defined as goods held for sale in the regular course of business and includes the following examples:

  • Machinery and equipment held in a retailer's inventory for sale or lease originating under a floor plan financing arrangement
  • Motor vehicles:
    • Held for sale in the inventory of a licensed motor vehicle dealer—including licensed motor vehicle auction dealers—that are not currently titled and registered in Kentucky and are held on an assignment pursuant to the provisions of KRS 186A.230
    • That are in the possession of a licensed motor vehicle dealer for sale—including licensed motor vehicle auction dealers—although ownership has not been transferred to the dealer
  • Raw materials, which include distilled spirits and distilled spirits inventory
  • In-process materials, which include distilled spirits and distilled spirits inventory, held for incorporation in finished goods held for sale in the regular course of business

The tax credit allowed is phased in starting in 2018 as follows:

Tax Credit Table

To qualify as being timely paid, the property tax must be paid to the taxing jurisdiction on or before December 31 of the tax year.

The Department notes in KY-TAM-18-07 that it can be difficult for taxpayers to know what portion of property tax paid is eligible for the credit given the volume of jurisdictions and the number of different configurations used to assess tax. As a result, an inventory tax calculator will be made available here that will use the most complete information available regarding local property tax rates and allow taxpayers to compute the amount of the credit. However, the Department will accept the credit amount based on the results from the inventory tax calculator, but the taxpayer bears the responsibility for accurate data entry into the calculator and timely payment of the property taxes. For Kentucky tax return purposes, the credit will be reported using Schedule INV.

Taxpayers that operate on a fiscal year will use the credit based on when the tax is timely paid. For example, a corporate taxpayer with a June 30, 2019, fiscal year-end that timely pays property tax on inventory on December 20, 2018, will use 25 percent of its inventory tax credit on its 2018 tax return because the tax was paid during its taxable year beginning after January 1, 2018, and before January 1, 2019.

The tax credit is allowed against individual and corporate income taxes and also can be passed through to owners of pass-through entities subject to the limited liability entity tax, such as S corporations, limited liability companies and limited partnerships. The credit is nonrefundable, nontransferable and may not be carried forward to future taxable years if it’s not fully used.

For more information, contact Jim or your trusted BKD advisor.

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