Kentucky Small Business Tax Credit

The state of Kentucky offers small businesses pretty substantial income tax credits. Actually, up to $25,000, if they qualify through growing their business by equipment purchases and hiring new, full-time employees. 

Tax credits are generally well-loved because they permit an off-the-top reduction in the taxes owed to the government. A tax deduction or tax exemption reduces the amount of income in which individuals or businesses are taxed. A tax credit is a dollar-for-dollar reduction in taxes. The government doesn't bestow tax credits because they want to give money away; rather, the government is expecting a return on tax credit (ROTC) to result in more people working and paying taxes and stronger businesses that will also pay more in taxes.

The two requirements are, as stated above, buying and hiring. The credits run between $3,500 and $25,000 per year, depending on the number of people hired and the amount of equipment or technology purchased. The credit is capped at the end of each calendar year.

On the "equipment" side of the tax credit ledger, a Kentucky-located small business, with 50 or fewer employees, may be eligible for tax credits if they buy $5,000 or more of equipment or technology classified as tangible property that will be used for at least one year. Another attractive feature is that the equipment or technology for business - not personal use or for resale - can be purchased up to 24 months prior to an application being submitted for the tax credits. There are a few other conditions the must be met to qualify:

  • Each individual item purchased must cost at least $300

  • It must have a useful life greater than one year

Items that are specifically allowable under the credit include computers, equipment, and business vehicles. It is important to retain verification of all purchases as the small business must submit proof of payment information with the tax credit application.

On the "hiring of employees" side, even the hiring of a single employee could potentially work in your favor towards the tax credit, though the more employees hired the potentially larger the credit. There are several guidelines that determine whether a new employee qualifies for purposes of the credit. A new hire qualifies as an “eligible position” for the credit if all of the following conditions are met:

1. New employee must be subject to Kentucky income taxes

2. New hire must be a full-time employee (defined as 35+ hours per week)

3. Average hourly wage must be at least $10.88 (150% of federal minimum wage)

4. New position must be filled for at least twelve months

5. New hire must increase the base employment of the business

That last condition merely requires that the new employee must not be a replacement of a previous employee, but rather an addition to the current workforce. A company can determine their “base employment” by looking at the total number of employees as of the day before the hire date of the new employee (the one who will be used to meet the criteria for the tax credit). That total number of employees must be reduced by any part-time employees and by any employees not subject to Kentucky income tax. That net number of employees is considered the “base employment”. When a small business applies for the tax credit, they must re-calculate their net employment and compare it to the base employment number. The number of new hires that are eligible to be included for purposes of the tax credit is limited to the increase in net employment over the base employment number. A company cannot hire two new employees, fire two old employees, and claim the credit.

In short, real purchases and real jobs equal real tax credits. If you are a small business in Kentucky and feel that you qualify, it could be highly beneficial to speak with a trusted advisor. 

I would like to talk to a CPA about this tax credit.


Tagged Kentucky Tax, Small Business, Tax