Corporate income tax imposition and scope
Kentucky imposes a corporate income tax on non-exempt corporations doing business in the state. The tax applies to corporations, limited liability companies, S-corporations, limited partnerships, and other business entities that have limited liability protection under state law. Sole proprietorships and general partnerships are not subject to the corporate income tax because they lack limited liability. The term "doing business" is interpreted broadly to include any profit-seeking enterprise or activity in Kentucky, regardless of whether the activities result in a profit or loss.
Source: Ky. Rev. Stat. § 141.040 | 103 KAR 16:240 (Nexus standard regulation) | Kentucky DOR - Corporation Income and LLET Tax
Corporate income tax rate
Kentucky imposes a flat 5% corporate income tax rate on taxable net income. This rate applies to tax years beginning on or after January 1, 2018, replacing the previous graduated rate brackets.
Source: Ky. Rev. Stat. § 141.040 | Kentucky DOR - Corporation Income Tax Rate
Corporate income tax base
Kentucky determines taxable net income by reference to the Internal Revenue Code as amended as of December 31, 2024, for tax years beginning on or after January 1, 2024. The tax base starts with federal taxable income and applies Kentucky-specific additions (including state income taxes deducted federally) and subtractions (including dividend income and certain interest), then allocates and apportions the result to Kentucky. Kentucky decouples from the 100% bonus depreciation deduction, Section 179 expensing above pre-TCJA limits, and the 20% qualified business income deduction.
Source: Ky. Rev. Stat. § 141.010(21)
Apportionment formula
Kentucky apportions multi-state corporate income using a single-sales-factor formula for tax years beginning on or after January 1, 2018. Apportionable income is multiplied by a fraction, the numerator of which is the taxpayer's Kentucky receipts, and the denominator of which is the taxpayer's total receipts everywhere. This formula applies to most corporations. Providers of communication and cable services (as defined in KRS 136.602), financial organizations, and public service companies use different apportionment formulas specified in KRS 141.121.
Source: Ky. Rev. Stat. § 141.120(2)
Nexus standard — "doing business" test without economic threshold
Kentucky imposes corporate income tax on non-exempt corporations "doing business" in the state. There is no minimum revenue or transaction threshold for nexus. The regulation defines "doing business" comprehensively as "any profit-seeking enterprise or activity in Kentucky," regardless of whether the activities result in a profit or loss. Examples of nexus-creating activities include performing services in Kentucky, owning or leasing property in the state, owning mineral rights, being a member of a pass-through entity doing business in Kentucky, and receiving income from intangible property with Kentucky business situs. Physical presence is not required.
Source: 103 KAR 16:240 | Kentucky DOR FAQ
Receipts sourcing rules for apportionment
Kentucky uses market-based sourcing to determine which receipts are included in the numerator of the single-sales-factor apportionment formula. The general rule is that receipts are sourced to Kentucky if the taxpayer's market for the sale is in Kentucky. The detailed sourcing rules are set forth in KRS 141.120 and administrative regulation 103 KAR 16:270, which applies to tax years beginning on or after January 1, 2018.
Tangible personal property
Receipts from sales of tangible personal property are sourced to Kentucky if the property is delivered or shipped to a purchaser within Kentucky, regardless of the f.o.b. point or other conditions of sale. If the property is shipped from an office, store, warehouse, factory, or other place of storage in Kentucky and the taxpayer is not taxable in the state of the purchaser, the receipts are sourced to Kentucky.
Real property
Receipts from the sale, rental, lease, or license of real property are sourced to Kentucky if the real property is located in Kentucky.
Rental, lease, or license of tangible personal property
Receipts from rental, lease, or license of tangible personal property are sourced to Kentucky to the extent the property is located in Kentucky. For mobile property (such as equipment or vehicles) that moves both within and without Kentucky during the lease period, the receipts are apportioned using a mileage fraction under 103 KAR 16:290, adjusted as necessary to reflect differences between contract-period usage and taxable-year usage.
Services — general rule
Receipts from the sale of a service are sourced to Kentucky if and to the extent the service is delivered to a location in Kentucky. "Delivered to a location" means the location of the taxpayer's market for the service, which may not be the location of the taxpayer's employees or property performing the service.
In-person services
In-person services are those physically provided in person by the taxpayer (or by a third-party contractor on the taxpayer's behalf) when the customer or the customer's real or tangible property upon which the services are performed is in the same location as the service provider. These receipts are sourced to Kentucky if and to the extent the customer receives the in-person service in Kentucky. Examples include carpentry, certain medical and dental services, and child care services.
Professional services
Professional services of an intellectual or intangible nature—such as legal, accounting, financial, and consulting services—are sourced based on where the service is delivered to the customer, not where the service provider performs the work. The regulation requires the taxpayer to determine the location where the benefit of the service is received. If the customer is an individual, receipts are generally sourced to the individual's billing address. If the customer is a business, receipts are sourced to the location where the service is received, which ordinarily is the customer's commercial domicile unless the service relates to specific business operations at another location.
Receipts from intangible property
Certain receipts from the sale of intangible property are excluded from both the numerator and denominator of the receipts factor under KRS 141.120(11)(a)4.b.iii. For intangible property transactions that are included in the receipts factor, the regulation provides specific sourcing rules depending on the type of intangible (e.g., patents, copyrights, trademarks).
Throwout rule
If the taxpayer is not taxable in the state to which receipts would otherwise be assigned, or if the state of assignment cannot be determined or reasonably approximated, those receipts are excluded from the denominator of the receipts factor under KRS 141.120(11)(c).
Effective date
The market-based sourcing framework in KRS 141.120 and 103 KAR 16:270 applies to tax years beginning on or after January 1, 2018, the same effective date as Kentucky's adoption of the single-sales-factor apportionment formula.
Source: KRS 141.120 | 103 KAR 16:270
Limited Liability Entity Tax (LLET)
Kentucky imposes a Limited Liability Entity Tax (LLET) under KRS 141.0401 on corporations and limited liability pass-through entities doing business in the state. A "limited liability entity" is defined in KRS 141.0401(1)(e) to mean a corporation or a limited liability pass-through entity. A "limited liability pass-through entity" under KRS 141.010(16) means a pass-through entity in which the partners, members, or shareholders have limited liability with respect to the entity's obligations—specifically including limited liability companies, limited partnerships, limited liability partnerships, and S corporations, but excluding general partnerships and sole proprietorships. The same "doing business" standard that triggers nexus for corporate income tax under 103 KAR 16:240 also creates LLET liability; no separate threshold applies.
Tax base and calculation
The LLET is calculated under two alternative methods, and the taxpayer pays the lesser of the two:
- Gross receipts basis: 0.095% of Kentucky gross receipts (expressed in KRS 141.0401(2)(a)1. as $950 per $1 million), or
- Gross profits basis: 0.75% of Kentucky gross profits (expressed in KRS 141.0401(2)(a)2. as $7,500 per $1 million).
Kentucky gross receipts are defined in KRS 141.0401(1)(a) as the numerator of the apportionment fraction under KRS 141.120 (the market-based receipts sourcing formula), and include the taxpayer's proportionate share of Kentucky gross receipts from all wholly or partially owned limited liability pass-through entities, including all layers of a multi-tiered pass-through structure. Gross receipts from all sources (the denominator) is defined in KRS 141.0401(1)(b) as the denominator of the apportionment fraction.
Kentucky gross profits are Kentucky gross receipts less Kentucky cost of goods sold. KRS 141.0401(1)(d) strictly limits what may be deducted as cost of goods sold: only costs directly incurred in acquiring or producing a tangible product for purposes of manufacturing, producing, reselling, retailing, or wholesaling may be included. The statute provides that "for an entity other than manufacturing, producing, reselling, retailing or wholesaling, no costs shall be included in cost of goods sold." As a result, service businesses, technology companies, and other non-manufacturing entities typically have no allowable cost of goods sold, meaning their Kentucky gross profits equal their Kentucky gross receipts for LLET purposes.
Small-business exemption and phase-in
If either total gross receipts from all sources or total gross profits from all sources is $3 million or less, the LLET is $175. This is the minimum tax amount under KRS 141.0401(2)(b).
For entities with total gross receipts or total gross profits between $3 million and $6 million, the tax phases in under a formula set forth in the statute. For gross receipts, the phase-in formula under KRS 141.0401(2)(a)1.a. is:
(Kentucky gross receipts × 0.00095) − [$2,850 × ($6,000,000 − total gross receipts from all sources) ÷ $3,000,000]
For gross profits, the phase-in formula under KRS 141.0401(2)(a)2.a. is:
(Kentucky gross profits × 0.0075) − [$22,500 × ($6,000,000 − total gross profits from all sources) ÷ $3,000,000]
In both cases, the result cannot be less than zero. Entities with both total gross receipts and total gross profits exceeding $6 million pay the full LLET at the rates above.
The $175 minimum applies to every taxable entity, regardless of size. Under KRS 141.0401(3), nonrefundable credits permitted by KRS 141.0205 may reduce the LLET, but the final LLET liability may not be reduced below $175 by any credit.
Interaction with corporate income tax
For a corporation subject to tax under KRS 141.040, the LLET paid generates a nonrefundable credit against corporate income tax. Under KRS 141.0401(3)(a), the credit equals the LLET calculated for the current year, minus any credits identified in KRS 141.0205 that were applied against the LLET, minus the $175 minimum, plus any credit attributable to LLET paid by wholly or partially owned limited liability pass-through entities (allocated proportionately to the corporate member). The credit may be applied only to the income tax due from the corporation's activities in Kentucky; any remaining credit is disallowed and does not carry forward.
For members, shareholders, or partners of a limited liability pass-through entity, KRS 141.0401(3)(b) provides a similar credit: the member's proportionate share of the entity's LLET (calculated after subtraction of any credits under KRS 141.0205 and reduced by the $175 minimum). Under KRS 141.0401(3)(b), the LLET credit allowed to a member "shall be applied to the income tax imposed by KRS 141.020 or 141.040 on income from the limited liability pass-through entity," and any remaining credit from the pass-through entity is disallowed.
This credit structure prevents double taxation: entities pay LLET at the entity level (calculated on gross receipts or gross profits, an economic base distinct from net income), then receive a credit against net income tax to the extent that credit does not exceed the income tax attributable to the same activity.
Exemptions
KRS 141.0401(6) provides specific exemptions from LLET. For tax years beginning on or after January 1, 2021, exempt entities include:
- Financial institutions as defined in KRS 136.500 (subject to the bank franchise tax), except banker's banks organized under KRS 287.135 or 286.3-135;
- Insurance companies (subject to insurance premium tax);
- Organizations exempt under IRC Section 501(c);
- Religious, educational, charitable, and like corporations not conducted for profit;
- Publicly traded partnerships treated as partnerships under IRC Section 7704(a), and any partnership or limited liability company in which a publicly traded partnership or its affiliates directly or indirectly own any interest;
- Qualified investment partnerships as defined in KRS 141.0401(7);
- Public service corporations subject to tax under KRS 136.120; and
- Personal service corporations as defined in IRC Section 269A(b)(1), provided substantially all activities consist of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and substantially all stock is held by employees performing such services.
Exemptions for financial institutions and insurance companies apply only for tax years beginning prior to January 1, 2021, under prior versions of the statute; those entities became subject to LLET beginning January 1, 2021, under 2020 Ky. Acts ch. 91, § 8.
Pass-through entities may also exclude the proportionate share of gross receipts or gross profits allocable to a "qualified exempt organization" under KRS 141.0401(7).
Effective date and history
The LLET was enacted by 2006 (1st Extra. Sess.) Ky. Acts ch. 2, § 4, effective June 28, 2006, replacing Kentucky's Alternative Minimum Calculation. Amendments in 2018 and 2020 established the current rate structure and tied the definitions of Kentucky gross receipts and gross profits to the single-sales-factor apportionment formula and market-based sourcing rules under KRS 141.120, which took effect for tax years beginning on or after January 1, 2018.
Source: KRS 141.0401 | Kentucky DOR – Corporation Income and Limited Liability Entity Tax
Combined unitary reporting requirement and consolidated return election
Kentucky requires mandatory combined unitary reporting for corporations engaged in a unitary business with one or more other corporations for tax years beginning on or after January 1, 2019. Under KRS 141.202(3)(a), a taxpayer engaged in a unitary business must file a combined report that includes the income and apportionment fraction of all corporations that are members of the unitary business. This combined reporting requirement applies unless the corporation makes an election to file a consolidated return under KRS 141.201.
Unitary business definition and 50% ownership test
A "combined group" subject to mandatory combined unitary reporting includes only corporations for which the voting stock is more than 50% owned, directly or indirectly, by common owners. KRS 141.202(2)(a) establishes this 50% ownership threshold. The term "unitary business" is broadly construed to the extent permitted by the U.S. Constitution.
Under administrative regulation 103 KAR 16:400, a unitary business is characterized by significant flows of value evidenced by factors such as functional integration, centralization of management, and economies of scale. These factors provide evidence of whether business activities operate as an integrated whole or exhibit substantial mutual interdependence. The regulation requires analyzing these factors in combination for their cumulative effect, not in isolation.
Waters-edge basis
The combined report must be filed on a waters-edge basis under KRS 141.202(3)(a) and (8). This means the combined group generally includes only U.S. corporations and certain specified foreign corporations, excluding most foreign subsidiaries from the combined return.
Alternative consolidated return election under KRS 141.201
As an alternative to mandatory combined unitary reporting, an affiliated group may elect to file a consolidated return that includes all members of the affiliated group. Under KRS 141.201(4)(a), an affiliated group—whether or not filing a federal consolidated return—may elect to file a Kentucky consolidated return which includes all members of the affiliated group.
The "affiliated group" for this purpose is defined by reference to the federal definition: corporations connected through stock ownership with a common parent corporation where the common parent directly owns at least 80% of voting power and value of at least one includible corporation, and stock meeting the 80% test of each includible corporation (other than the common parent) is directly owned by one or more other includible corporations.
Binding election period
Once made, the consolidated return election is binding on both the Department of Revenue and the affiliated group for a period beginning with the first month of the first taxable year for which the election is made and ending with the conclusion of the taxable year in which the 48th consecutive calendar month expires. This 48-month binding period is specified in KRS 141.201(2)(e). The election must be made on a form prescribed by the Department and submitted on or before the due date of the return, including extensions, for the first taxable year for which the election is made.
Treatment of consolidated group
Under KRS 141.201(4)(b), an affiliated group electing to file a consolidated return is treated for all purposes as a single corporation. The determinations and computations required are made in accordance with Internal Revenue Code Section 1502 and related regulations, except as required by differences between Kentucky law and the Internal Revenue Code. All intercompany transactions between corporations included in the consolidated return are eliminated in computing net income and determining the apportionment fraction.
Effective date
Both KRS 141.201 and KRS 141.202 apply to taxable years beginning on or after January 1, 2019. Prior to January 1, 2019, Kentucky required consolidated returns for affiliated groups under former KRS 141.200, but did not provide for combined unitary reporting. The 2018 legislation (House Bill 486) enacted mandatory combined unitary reporting and the consolidated return alternative for the first time, effective January 1, 2019.
Source: KRS 141.202 (Combined unitary reporting) | KRS 141.201 (Consolidated return election) | 103 KAR 16:400 (Combined unitary regulation)