Kentucky has a well-defined tax system for corporations and pass-through entities, ensuring that all businesses operating in the state comply with filing, payment, and reporting rules. C corporations are subject to a flat 5% corporate income tax, and they must also pay the Limited Liability Entity Tax (LLET). Pass-through entities such as S corporations and partnerships are generally not taxed at the entity level, but they are required to file information returns and pay LLET.
This blog explains taxation in Kentucky with a focus on Corporation Income Tax and LLET Return, Pass through Entity Tax, and the rules for Penalty and Interest. It details who must file, which forms are required, filing deadlines, extensions, estimated tax payment rules, and the penalties for late filing or payment.
Corporation Income Tax and LLET Return
C corporations doing business in Kentucky or deriving income from Kentucky sources are required to file Form 720, the Kentucky Corporation Income Tax and LLET Return. Corporations must file if they meet any of the following conditions:
- Organized under Kentucky law
- Commercial domicile in Kentucky
- Owning or leasing property in Kentucky
- Having employees or performing services in Kentucky
- Holding an interest in a pass-through entity doing business in Kentucky
- Deriving income attributable to Kentucky sources (including from a trust or a single-member LLC treated as disregarded for federal tax purposes)
- Directing activities at Kentucky customers for the purpose of selling goods or services
The corporate income tax rate is a flat 5%.
The LLET is a tax imposed on limited liability entities. Unlike income tax, it is assessed on the entity itself but is deductible for both Kentucky and federal purposes. Importantly, it is not added back to determine Kentucky taxable income.
The due date for filing is the 15th day of the fourth month following the end of the taxable year.
Corporations needing more time must file Form 720 EXT to request an extension. The extension grants up to seven months to file, but it applies only to filing, not to payment. Taxes owed must still be paid by the original due date to avoid penalties and interest.
Estimated Tax Payments:
- If the expected tax liability exceeds USD 5,000, corporations must make quarterly estimated payments.
- Payments are made in four equal installments of 25% each, due by the 15th day of the 4th, 6th, 9th, and 12th month of the tax year, using Form 720ES.
These provisions ensure that corporations spread their payments throughout the year and remain compliant.
Pass through Entity Tax
S corporations and partnerships in Kentucky are considered pass-through entities (PTEs). This means income flows through to shareholders or partners, who then report it on their individual returns.
Kentucky generally follows the federal tax treatment of pass-through entities. Income, deductions, and credits are passed directly to owners without taxation at the entity level.
Pass-through entities must file the Kentucky PTE Income and LLET Return (Form PTE) to report their income and deductions. Additionally, each shareholder or partner receives a Schedule K-1 (Form PTE) that shows their share of income, which must be included in their individual returns.
The due date for filing Kentucky PTE returns is the 15th day of the fourth month following the close of the taxable year.
Extension of Time to File: Pass-through entities can request an extension by filing Form 720 EXT. The extension provides up to six months to file, but like corporate rules, it only extends the filing deadline, not the payment due date.
Estimated Tax Payments:
- PTEs expecting tax liability above USD 5,000 must make estimated tax payments.
- 25% of the estimated liability is due on the 15th day of the 4th, 6th, 9th, and 12th month of the tax year.
- These payments are made using Form 720ES.
This ensures that pass-through entities comply with tax obligations even though income is not taxed at the entity level.
Penalty and Interest
Kentucky imposes penalties and interest for late filings and late payments to encourage timely compliance.
- Late Filing Penalty: A 2% penalty of tax due per 30 days (or part thereof) is applied, capped at 20%. The minimum penalty is USD 10 per tax.
- Late Payment Penalty: If less than 75% of income tax or LLET is paid by the due date, a 2% penalty per 30 days is applied, capped at 20%. The minimum penalty is USD 10 per tax.
- Interest: Unpaid corporation income tax and LLET are subject to interest at 11%, while the standard assessment rate is 9%.
These provisions underline the importance of timely payment, as penalties and interest can quickly add up for non-compliance.
Conclusion
Kentucky’s taxation framework ensures that both corporations and pass-through entities meet compliance standards.
- C corporations are taxed at a flat 5%, must file Form 720, and pay LLET. Estimated payments are mandatory if liability exceeds USD 5,000, with extensions available through Form 720 EXT.
- Pass-through entities like S corporations and partnerships must file Form PTE and provide Schedule K-1s to owners. While they are not taxed at the entity level, they remain subject to LLET and estimated payment requirements.
- Penalties and interest reinforce the importance of filing and paying on time. Late filings or payments can result in penalties of up to 20% plus interest of up to 11%.
For businesses, compliance in Kentucky means timely filing, accurate reporting, and careful attention to estimated payments. With proper planning, corporations and PTEs can navigate their obligations effectively while avoiding unnecessary penalties.
