Legal Insight and Litigation

Kentucky Tax Credits: What You Need to Know

Despite the lingering financial effects of the COVID-19 crisis and other economic setbacks, the Commonwealth of Kentucky is open for business. As part of ongoing statewide efforts for economic development, a variety of incentives are currently available to new and established businesses across the Commonwealth. We’ve highlighted some of these Kentucky tax incentive programs below – from farming operations to small entrepreneurial endeavors. A wide range of businesses are eligible to receive financial assistance such as tax credits and refunds, and yours may be one that qualifies.

• Kentucky Selling Farmer Tax Credit Guidelines

This tax credit program is targeted at farmers who agree to sell a portion of their land and assets to beginner farmers. Credit amounts can be up to 5% of the total purchasing price on the assets, with a cap of $25,000 per calendar year and a $100,000 lifetime cap. To qualify to sell assets, an individual must employ less than 50 people and legally own the land and assets being sold. To qualify as a beginning farmer, an individual cannot have owned any designated agricultural land for over 10 years. Farmers participating in the purchase must commit to operating a for-profit farming business for at least 5 years after the purchase. After completing the sale, both parties will need to submit applications with the Cabinet for Economic Development before credits can be granted.

• Small Business Tax Credit

The Kentucky Small Business Tax Credit Program offers a credit for amounts between $3,500 and $25,000 per year to qualifying small businesses. The business must have hired and sustained at least one new job in the previous year and purchased at least $5,000 in qualifying technology and equipment. Unlike some of the other tax credits outlined above, this program is open to almost all industries and types of small businesses. Applications can be filed through the Cabinet for Economic Development’s Office for this fiscal year.

• Kentucky Reinvestment Act (KRA) Credit

The KRA Credit is available for any Kentucky company working in manufacturing and related functions at a location within the state on a permanent basis. The goal of this credit is to provide financial resources to Kentucky companies that need new capital in order to remain competitive in the market. The credit can be used towards eligible equipment and employee skills upgrade training for the company, with the incentive being available for up to 10 years from final approval date. There is a minimum cost expenditure associated with this credit along with on-site employment requirements, so applicants need to ensure they meet all requirements for this tax credit to be of benefit. The Cabinet for Economic Development recommends drafting an application at least 45 days before submitting it.

• Incentives for Energy-Related Business Act (IEBA)

The IEBA is applicable to companies looking to operate a cryptocurrency facility in Kentucky. To qualify, a company must make a minimum capital investment of $1,000,000 into the facility, which can include labor and land acquisition costs, insurance, facility engineering services, and construction costs. Tax incentives are negotiable for this credit; they will be available for up to 25 years and can be for up to 50% of the capital investment amount in the project. Preliminary applications can be filed with the Kentucky Economic Development Finance Authority (KEDFA).

• Kentucky Angel Investment Program

The Angel Investment Act Tax Credit offers a tax credit amount of up to 40% of angel donations - startup capital for small businesses - to the lender. While there are guidelines available for what constitutes an investor, small businesses, and investment as “qualified” to meet the expectations for this credit, the State will not be performing due diligence on small businesses. This credit can be accessed after a minimum of $10,000 donation is made to the small business and can be carried forward for up to 15 years post-initial lending. Applications can be filed with the Cabinet for Economic Development.

• Kentucky Enterprise Initiative Act (KEIA)

The Kentucky Enterprise Initiative Act (KEIA) is directed at businesses working in manufacturing, service, or technology activities, or those operating a tourism attraction in the state. Qualifying companies will have made at least $500,000 in investment into the development project for eligible investment (most equipment, construction, and technology purchases are eligible, but labor costs are excluded). Companies meeting these guidelines will receive a refund on sales and use taxes paid for building and construction materials, research and development equipment, and electronic processing equipment bought after the KEDFA approval date. The maximum refund amount for all projects is $20,000,000 in construction materials and $5,000,000 in research/development/electronic processing equipment. Applications can be filed with the Kentucky Economic Development Finance Authority (KEDFA).

• Kentucky Entertainment Incentive (KEI) Guidelines

The KEI program is looking to incentivize development in the film and entertainment industry in Kentucky. This includes choosing Kentucky locations for film production, creating increased employment opportunities within film and entertainment industries, and developing facilities for production/postproduction for film companies and Broadway show productions. Projects can be eligible for up to $10 million in tax credits, but there is a maximum amount of $75 million available for the combined total of approved projects in a calendar year. Approved companies must incur the minimum total of Qualifying Expenditures and Qualifying Payroll Expenditures, with these numbers being decided by the type of Motion Picture or Entertainment Production in action. Depending on the location of the project, your company may be eligible for an increased tax credit based on the country where the Qualifying Funds are spent. For more information on what is considered a “Qualifying Expenditure,” refer to the Cabinet for Economic Development’s guidelines here. Interested parties are encouraged to reach out to the Cabinet staff to discuss the intended project before applying.

Tax policies can be difficult to navigate as a business owner. To make sure you’re maximizing your financial options, contact McBrayer today.

Kenton L. Ball is Of Counsel with McBrayer law in the Lexington office.  Mr. Ball focuses his practice areas to taxation, tax compliance, tax controversy, tax planning, transaction tax, and corporate & business tax law.  He can be reached at kball@mcbrayerfirm.com or (859) 231-8780, ext. 1222.  

Anne-Tyler Morgan is a Member of McBrayer law. Her law practice primarily focuses on economic development; healthcare and pharmacy law; regulatory and administrative law; government and nonprofit institutions and associations; and politics, elections, and campaign finance. Ms. Morgan can be reached at atmorgan@mcbrayerfirm.com or (859) 231-8780, ext. 1207. 

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This article does not constitute legal advice.