Kentucky Small Business Tax Credit

Are you a small business in Kentucky looking to create new jobs? You're in luck because there is a great opportunity for financial incentive in the form of extra tax relief for you.

Under the Kentucky Small Business Tax Credit (KSBTC) program, a Kentucky small business can receive up to $25,000 in tax credits. There are two basic criteria that must be met to be eligible for this credit:

1. The business must hire a new employee for an eligible position, and
2. The business must spend at least $5,000 in qualifying equipment or technology within six months of the new hire

The amount of the tax credit is the lesser of $3,500 per new employee or the total amount spent on equipment and technology. The credit is capped at $25,000 each calendar year.

A small business can include any for-profit business that has fewer than 50 employees.

The fine print – what is an eligible position?

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. The new employee must be subject to Kentucky income taxes
2. The new hire must be a full time employee (defined as 35+ hours per week)
3. The average hourly wage must be at least $10.88 (150% of federal minimum wage)\
4. The new position must be filled for at least twelve months
5. The 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.

The fine print – what is qualifying equipment and technology?

The second criterion for the tax credit is an investment of $5,000 or more into qualifying equipment or technology. For an investment to qualify, it must meet all of the following conditions:

1. It must be purchased for business use
2. Each individual item purchased must cost at least $300
3. It must have a useful life greater than one year
4. It must be purchased within six months before or after a new eligible position was filled
5. It must be purchased within two years before the business applies for the tax credit

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.

How to apply:
A small business is eligible to apply for the tax credit one year after the eligible position was filled, or one year after the qualifying equipment was purchased. The “eligibility date” is deemed to be whichever of those dates occurs last. The small business then has 90 days after that eligibility date to apply for the credit.

The application for the credit can be found here. The small business must pay an administrative fee of 1% of the potential credit amount when submitting the application.

For more information, visit the Kentucky Cabinet for Economic Development, or contact us at Rodefer Moss.