Kentucky Small Business Tax Credit
Joe Guelda CPA, Tax Manager
Kentucky provides a unique credit for small businesses who have expanded during the prior 24 months. Below is a listing of the general requirements:
- Have 50 or fewer full-time employees
- Within the last 24 months, hired at least one new full-time employee and invested at least $5,000 in new equipment or technology
- Retain the employee for at least one year and pay an average hourly wage of at least $10.88
If you are an eligible applicant and satisfy the above requirements, you are eligible to receive a non-refundable tax credit in an amount not to exceed the lesser of $3,500 per eligible position or the rounded eligible dollar amount invested in qualifying equipment or technology up to a maximum credit of $25,000 per year.
The above paragraph requires clarification of many items. The first item we will expand upon is what businesses are eligible applicants. Below is a list of items which would disqualify a business:
- Businesses engaged in any type of illegal activity
- Businesses in default on any federal, state, or local taxes
- Businesses not in good standing with the Kentucky Secretary of State’s office
- Businesses that do not hold all current licenses, permits, and registrations necessary to legally operate a business in Kentucky
- Businesses presenting live performances of a prurient sexual nature or deriving more than five percent of annual gross revenue through the sale or rental of products or services, or the depiction of any displays, of a prurient sexual nature
- Businesses principally engaged in overt religious indoctrination
- Businesses deriving more than 50 percent of annual gross revenues from lobbying activities
The second item which requires clarification is non-refundable. Non-refundable means that the credit can only be used to offset taxes; therefore, it can result in a refund of taxes which were paid during the period but the credit itself cannot be refunded. If the full credit cannot be utilized in the year received, the credit may be carried forward up to 5 years.
The third item which requires additional explanation is eligible position. An eligible position must meet all of the following criteria:
- Be filled by an employee subject to the Kentucky income tax imposed by KRS 141.020
- Be filled by an employee working an average of 35 or more hours per week for a period of twelve consecutive months within the 24-month period immediately preceding submission of a KSBTC application
- Pay an average hourly wage of $10.88 or more per hour
- Increase the base employment
If an employee hired in an eligible position ceases for any reason to be employed by the small business during the 12-month employment period, the position may still be eligible for tax credit consideration if another eligible full-time employee is hired and begins working in the position within 45 days of the last work day of the first employee.
An employee’s average hourly wage includes wages, tips, overtime, bonuses, and commissions as reflected on the employee’s federal Form W-2.
Base employment for the initial application is the number of full time employees on payroll as of the day prior to the hire date of the employee filling the earliest eligible position included on the application. For subsequent applications, base employment is the combination of the base employment number on the initial application plus total number of tax credit eligible positions on all approved applications.
The final item which needs to be defined is qualifying equipment or technology. In order to qualify, the equipment or technology needs to meet all of the below criteria:
- For use in the business in Kentucky (not for resale or personal use)
- Expected useful life of one year or more
- Purchased within the 24-month period immediately preceding the submission of the application
Qualifying equipment includes computers, equipment, furniture, fixtures, furnishings (excluding artwork), and vehicles titled in the legal name of the small business.
The total combined allocation of tax credits available for both the Kentucky Small Business Tax Credit program and the Kentucky Selling Farmer Tax Credit program is $3,000,000 per fiscal year which is from July 1 through June 30. Once the funds have been used, no additional credits will be awarded until the next fiscal year begins.
Whether you have satisfied the requirements and would like assistance with the application, or plan to satisfy the requirements and would like to discuss any questions, please contact either me or your trusted Strothman and Company tax advisor. We look forward to helping you grow your business!