KRS 141.206 — Filing of returns by pass-through entities -- Withholding requirements on owners of pass-through entities -- Apportionment issues for pass-through entities

(1) Every pass -through entity doing business in this state shall, on or before the
fifteenth day of the fourth month following the close of its annual accounting
period, file a copy of its federal tax return with the form prescribed and furnished
by the department.
(2) (a) Pass-through entities shall calculate net income in the same manner as in the
case of an individual under KRS 141.019 and the adjustment required under
Sections 703(a) and 1363(b) of the Internal Revenue Code.
(b) Computation of net income under this section and the computation of the
partner's, member's, or shareholder's dis tributive share shall be computed as
nearly as practicable identical with those required for federal income tax
purposes except to the extent required by differences between this chapter and
the federal income tax law and regulations.
(3) Individuals, estates, trusts, or corporations doing business in this state as a partner,
member, or shareholder in a pass -through entity shall be liable for income tax only
in their individual, fiduciary, or corporate capacities, and no income tax shall be
assessed against the net income of any pass-through entity, except as required:
(a) For S corporations under KRS 141.040;
(b) For a partnership level audit under KRS 141.211; and
(c) For a pass-through entity making an election under KRS 141.209.
(4) (a) Every pass-through entity required to file a return under subsection (1) of this
section, except publicly traded partnerships as described in KRS
141.0401(6)(a)18. and (b)14., shall withhold Kentucky income tax on the
distributive share, whether distributed or undistribute d, of each nonresident
individual partner, member, or shareholder.
(b) Withholding shall be at the maximum rate provided in KRS 141.020.
(5) (a) Every pass -through entity required to withhold Kentucky income tax as
provided by subsection (4) of this section shall pay estimated tax for the
taxable year, if for a nonresident individual partner, member, or shareholder,
the estimated tax liability can reasonably be expected to exceed five hundred
dollars ($500).
(b) The payment of estimated tax shall contain the information and shall be filed
as provided in KRS 141.207.
(6) (a) If a pass -through entity demonstrates to the department that a partner,
member, or shareholder has filed an appropriate tax return for the prior year
with the department, then the pass -through entity shall not be required to
withhold on that partner, member, or shareholder for the current year unless
the exemption from withholding has been revoked pursuant to paragraph (b)
of this subsection.
(b) 1. An exemption from withholding shall be considered revoked if the
partner, member, or shareholder does not file and pay all taxes due in a
timely manner.
2. An exemption so revoked shall be reinstated only with permission of the
department.
3. If a partner, member, or shareholder who has been exempted from
withholding does not file a return or pay the tax due, the department
may require the pass-through entity to pay to the department the amount
that should have been withheld, up to the amount of the partner's,
member's, or shareholder's ownership interest in the entity.
4. The pass -through entity shall be entitled to recover a payment made
pursuant to this paragraph from the partner, memb er, or shareholder on
whose behalf the payment was made.
(7) In determining the tax under this chapter, a resident individual, estate, or trust that
is a partner, member, or shareholder in a pass -through entity shall take into account
the partner's, member's, or shareholder's total distributive share of the pass -through
entity's items of income, loss, deduction, and credit.
(8) In determining the tax under this chapter, a nonresident individual, estate, or trust
that is a partner, member, or shareholder in a pass-through entity required to file a
return under subsection (1) of this section shall take into account:
(a) 1. If the pass -through entity is doing business only in this state, the
partner's, member's, or shareholder's total distributive share of the pass-
through entity's items of income, loss, and deduction; or
2. If the pass-through entity is doing business both within and without this
state, the partner's, member's, or shareholder's distributive share of the
pass-through entity's items of income, lo ss, and deduction multiplied by
the apportionment fraction of the pass -through entity as prescribed in
subsection (11) of this section; and
(b) The partner's, member's, or shareholder's total distributive share of credits of
the pass-through entity.
(9) A corporation that is subject to tax under KRS 141.040 and is a partner or member
in a pass -through entity shall take into account the corporation's distributive share
of the pass-through entity's items of income, loss, and deduction and:
(a) 1. For taxable years beginning on or after January 1, 2007, but prior to
January 1, 2018, shall include the proportionate share of the sales,
property, and payroll of the limited liability pass -through entity or
general partnership in computing its own apportionment factor; and
2. For taxable years beginning on or after January 1, 2018, shall include
the proportionate share of the sales of the limited liability pass -through
entity or general partnership in computing its own apportionment factor;
and
(b) Credits from the partnership.
(10) (a) If a pass -through entity is doing business both within and without this state,
the pass-through entity shall compute and furnish to each partner, member, or
shareholder the numerator and denominator of each factor of the
apportionment fraction determined in accordance with subsection (11) of this
section.
(b) For purposes of determining an apportionment fraction under paragraph (a) of
this subsection, if the pass-through entity is:
1. Doing business both within and without this state; and
2. A partner or member in another pass-through entity;
then the pass -through entity shall be deemed to own the pro rata share of the
property owned or leased by the other pass -through entity, and shall also
include its pro rata share of the other pass-through entity's payroll and sales.
(c) The phrases "a partner or member in another pass -through entity" and "doing
business both within and without this state" shall extend to each level of
multiple-tiered pass-through entities.
(d) The attribution to the pass-through entity of the pro rata share of property,
payroll and sales from its role as a partner or member in another pass -through
entity will also apply when determining the pass -through entity's ultimate
apportionment factor for property, payroll and sales as required under
subsection (11) of this section.
(11) (a) For taxable years beginning prior to January 1, 2018, a pass -through entity
doing business within and without the state shall compute an apportionment
fraction, the numerator of which is the property factor, representing twenty -
five percent (25%) of the fr action, plus the payroll factor, representing
twenty-five percent (25%) of the fraction, plus the sales factor, representing
fifty percent (50%) of the fraction, with each factor determined in the same
manner as provided in KRS 141.901, and the denominator of which is four
(4), reduced by the number of factors, if any, having no denominator,
provided that if the sales factor has no denominator, then the denominator
shall be reduced by two (2).
(b) For taxable years beginning on or after January 1, 2018, a p ass-through entity
doing business within and without the state shall compute an apportionment
fraction as provided in KRS 141.120.
(12) Resident individuals, estates, or trusts that are partners in a partnership, members of
a limited liability company electing partnership tax treatment for federal income tax
purposes, owners of single member limited liability companies, or shareholders in
an S corporation which does not do business in this state are subject to tax under
KRS 141.020 on federal net income, ga in, deduction, or loss passed through the
partnership, limited liability company, or S corporation.
(13) An S corporation election made in accordance with Section 1362 of the Internal
Revenue Code for federal tax purposes is a binding election for Kentucky tax
purposes.
(14) (a) Nonresident individuals shall not be taxable on investment income distributed
by a qualified investment partnership. For purposes of this subsection, a
"qualified investment partnership" means a pass -through entity that, during
the taxable year, holds only investments that produce income that would not
be taxable to a nonresident individual if held or owned individually.
(b) A qualified investment partnership shall be subject to all other provisions
relating to a pass -through entity under this section and shall not be subject to
the tax imposed under KRS 141.040 or 141.0401.
(15) (a) A pass -through entity shall deliver to the department a return upon a form
prescribed by the department showing the total amounts paid or credited to its
nonresident individual partners, members, or shareholders, the amount paid in
accordance with this subsection, and any other information the department
may require.
(b) A pass -through entity shall furnish to its nonresident partner, member, or
shareholder annually, but not later than the fifteenth day of the fourth month
after the end of its taxable year, a record of the amount of tax paid on behalf
of the partner, member, or shareholder on a form prescribed by the
department.