Kentucky Department of Revenue issues new guidance on pass-through entity tax

The Kentucky Department of Revenue has announced a new procedure that could impact Ohio CPAs processing corporate tax returns and income tax withholdings for pass-through entities owned by nonresident individual partners.

The 2005 Kentucky General Assembly passed legislation (HB 272) which made pass-through entities, except general partnerships, subject to corporation income tax. This law change applied to taxable years beginning on or after Jan. 1, 2005.

The Kentucky Department of Revenue has informed the Kentucky Society of CPAs that several pass-through entities that are owned by non-resident individuals have not filed a Kentucky corporation income tax return, made estimated payments or applied for an extension to file a return. Instead, a PTE-WH form (form # 40A200) was filed incorrectly.

Under HB 272, withholding from nonresident individuals is only allowed for nonresident individual partners in a general partnership for the calendar years ending Dec. 31, 2005 or Dec. 31, 2006.

Kentucky Department of Revenue issues new guidance on pass-through entity tax

However, the Kentucky legislature recently passed small business income tax relief (HB 1) which eliminates entity level income taxation on pass-through entities and restores provisions that require nonresident withholding from individual partners, members and shareholders for taxable years beginning on or after Jan. 1, 2007.

In instances where pass-through entities have already filed a PTE WH form with payment, the Department will recognize that withholding on an individual income tax return. The pass-through entity will be billed for failure to file a corporation income tax return. Once the corporation files and pays the correct amount of corporation income tax due, the individual partner, shareholder or member may file an amended return to claim the nonrefundable and refundable corporation income tax credits.

Future PTE-WH forms filed for taxable years ending in 2005 or 2006 submitted by a pass-through entity subject to corporation income tax will result in the pass-through entity and individual partners, members and shareholders receiving a letter instructing them that pass-through entity withholding will not be recognized and any PTE-WH form and accompanying payment submitted will be returned.

Questions related to this matter should be directed to the Kentucky Department of Revenue Pass-through Entity Branch at 502.564.8139.

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