On April 9, 2019, Kentucky Gov. Matthew Bevin signed House Bill 458, providing technical changes and clarifications of the recently enacted House Bill 354, signed on March 26, 2019. House Bill 354 provides technical changes to last year’s tax bills, revisions to IRC conformity, and the adoption of new economic sales tax nexus provisions. For a summary of 2018’s comprehensive tax legislation, please read our article titled "Kentucky enacts significant income tax and sales tax reform".
Highlighted below are some of the key changes from this year’s tax bills:
IRC conformity
House Bill 354 revises the following conformity dates for both corporate and personal income tax:
- For tax years that begin on or after Jan. 1, 2019, Kentucky conforms to the IRC as of Dec. 31, 2018
- For tax years that begin on or after Jan. 1, 2018, but before Jan. 1, 2019, Kentucky conforms to the IRC as of Dec. 31, 2017, including the provisions of the Tax Cuts and Jobs Act that were in effect as of that date
Income tax provisions
Estimated tax payments (both corporate and individual income tax) have been updated to conform to federal estimated payment provisions. Most notably, Kentucky estimated payments for calendar year companies are now due April 15 (25 percent), June 15 (25 percent), September 15 (25 percent), and December 15 (25 percent). Previously, Kentucky estimated payments did not have a first-quarter payment, the first and second quarters were combined and due on June 15. These new provisions are effective for taxable years beginning on or after Jan. 1, 2019.
Kentucky tax statutes have been revised to specifically conform to the IRC as of Dec. 31, 2003, for the election to expense deduction allowed under section 179, effective for tax years beginning on or after Jan. 1, 2020. Under this conformity, Kentucky now allows $100,000 to be immediately expensed when the property has been placed in service during the taxable year.
One of the most significant revisions from last year’s legislation was the introduction of combined unitary reporting for corporate income taxes. Combined unitary reporting requires that all corporations in a 'combined group' must file one combined income tax return for any tax year. However, taxpayers and tax professionals requested guidance on what constituted a 'combined group.' The new tax bill provides some guidance by amending the definition of a 'combined group' to include corporations that are owned more than 50 percent, directly or indirectly, by the same common owner(s). The combined report would be filed on a 'waters-edge' basis.
Last year’s legislation allowed taxpayers to elect to file a consolidated return in lieu of a unitary combined return. A consolidated return only requires that companies that are 80 percent or more owned by the same common owner file one return. The election was binding for 96 months as originally passed, and is reduced to 48 months by House Bill 354.
House Bill 458 provides an election for a deferred corporate income tax deduction over a 10-year period, starting with the combined group’s first taxable year beginning on or after Jan. 1, 2024. This deduction was passed with the intention of negating the effects of the state moving to a combined reporting state. The deduction would only be available for publicly traded corporations and their affiliates that also participate in the publicly traded corporation’s financial statements. The deadline for the election is July 1, 2019.
Another new provision is the sharing of certain tax attributes among members of a combined group. Last year’s legislation provided that certain tax attributes generated by a company, when filed on a separate company basis, could only be used by that particular company and could not be shared with other combined members. Under House Bill 458, companies may share those tax attributes with other members of the group, subject to certain conditions. For example, Kentucky net operating losses generated on a pre-combined return can be shared with other members of the group but is limited to 50 percent of the shared member’s taxable income.
Other minor changes by House Bill 458 include:
- The extension for filing corporate tax returns is now seven months, previously six
- Small businesses (companies with less than $6 million in gross receipts) are now subject to the $175 minimum LLET fee
- Beginning Jan. 1, 2021, the bank franchise tax no longer applies. All corporations previously subject to the bank franchise tax are required to file a regular corporate income and LLET tax return
Sales and use tax provisions
Marketplace provider nexus
House Bill 354 adopts 'marketplace provider' provisions for sales and use tax for transactions occurring on or after July 1, 2019. A marketplace provider is defined as any company that makes or facilitates retail sales of products and services, both tangible and digital, that are delivered or digitally transferred to a Kentucky customer for one or more marketplace retailers that in total exceed $100,000 of sales or conducts 200 or more transactions in the preceding or current calendar year. If a company is determined to be a marketplace provider, they must register and start collecting sales tax on all applicable purchases that they facilitated through their marketplace. The marketplace retailer whose products/services are sold is relieved of all liability for sales made through a marketplace provider.
Miscellaneous additional sales and use tax provisions
- Sales of admissions and fundraising event sales by non-profit are exempt effective March 26, 2019
- Resale certificates and direct pay certificates are permitted to be utilized for various services such as landscaping, janitorial, dry cleaning, and extended warranties, among others
- Clarification for tolling operations for purposes of the exemption for energy used in manufacturing
Takeaways
The income tax amendments provide much-needed clarity to the significant tax reform enacted last year. It is recommended that companies review those provisions and speak to their tax advisers with questions.
