Manufacturing & Distribution: Key Provisions of House Bill 487

Assessing the Impact on the Manufacturing and Distribution Industry

In response to the Federal Government’s Tax Cuts and Jobs Act, the Kentucky General Assembly issued House Bill 487 (HB 487), passed in April of this year. For months, the measure of the bill’s impact on Kentucky’s manufacturing and distribution industry was uncertain. However, the State has since released a flurry of provisions expounding the bill’s reach. The provisions, listed below, summarize the income tax laws implemented by the State of Kentucky as a result of HB 487.

Kentucky House Bill 487 – Key provisions for manufacturers and distributors

• Tax Rates
  • The Graduated Tax Rate system was converted to a flat rate of 5%. Previously, rates fell between 4% and 6%.
    • The flat rate is effective for tax years beginning on or after January 1, 2018.

• Apportionment

• • The current Three Factor system is replaced with a Single Sales Factor.
    • Sales are assigned to KY if the ship to is KY or the US Government.
    • The throw-out rule applies only to intangible property, therefore, there is no impact to manufacturers and distributors.

• • The Three Factor system remains for the following services companies:
    • Communications service as defined in KRS 136.602;
    • Cable service as defined in KRS 136.602; or
    • Internet access as defined in 47 USC Sec 151

• Net Operating Losses
  • Adopts Federal 80% limitation for NOLs generated after January 1, 2018
  • Adopts Federal unlimited carryforward for NOLs generated after January 1, 2018
    • Kentucky does not allow NOL carrybacks for tax years beginning on or after January 1, 2005.

• Inventory Credit – for Property Taxes paid on Inventory
  • A non-refundable income tax credit for property taxes paid on inventory as follows:
    • 2018 – 25% of tax paid
    • 2019 – 50% of tax paid
    • 2020 – 75% of tax paid
    • 2021 and forward – 100% of tax paid

• Other items adopted by the State to conform to the Tax Cuts and Jobs Act
  • Net Interest Expense Limitation – The allowable interest expenses deduction is 30% of adjusted taxable income.
  • Repeal of Domestic Production Activity Deduction
  • Taxation of Foreign Derived Intangible Income

• Other items KY did not adopt to conform to the Federal Tax Cuts and Jobs Act
  • 100% Full “Bonus” depreciation expense
  • Deduction for Qualified Business Income of Pass-Through Entities – Sec 199A

As future provisions are released by the Department of Revenue, our team will be prompt in alerting you of these updates and what they mean for your business.

For additional information or guidance related to this article, contact Robin Teeters at rteeters@vlcpa.com or 800.887.0437.