Kentucky: Department of Revenue - Pass-Through Entities Tax

NONRESIDENT WITHHOLDING

Distributive Share Income of Individual and Corporate Partners, Members or Shareholders

Pursuant to KRS 141.206, Kentucky income tax on distributive share income, whether distributed or undistributed, is to be withheld from each non-resident individual or C-corporate partner, member or shareholder that is doing business in Kentucky only through its ownership interest in a pass-through entity. “Individual” includes an individual, estate or trust. (The tax imposed by KRS 141.020 upon individuals shall apply to estates and trusts and to all fiduciaries.) KRS 141.030.

If the partner receiving the distributive share income is an S-corporation or an LLC Partnership, no withholding is required. S-corporations and LLC Partnerships are considered pass—through entities and are required to file their own Kentucky return.

Withholding shall be reported on Form 740NP-WH with the PTE-WH Forms attached for each non-resident individual or C-corporate partner, member or shareholder that is doing business in Kentucky only through its ownership interest in a pass-through entity. A copy of the PTE-WH shall also be given to each non-resident partner, member or shareholder.
Withholding on the distributive share income is due on the 15th day of the 4th month following the close of the entities taxable year. For calendar year filers the due date is April 15.

NOTE: Additional information on nonresident withholding may be found in the instructions for Pass-through Entities tax forms.

EXTENSIONS

If an extension to file is needed, Form 740 NP-WH should be submitted with an extension payment by the original due date along with a copy of the entity’s approved Federal or Kentucky extension. Submit complete information with an updated Form 740 NP-WH by the extended due date and attach all necessary PTE-WH Forms.

COMPOSITE RETURNS

A nonresident individual partner, member or shareholder exempt from withholding pursuant to KRS 141.206(4)(b)2 and whose only source of income within this state is distributive share income from one (1) or more pass-through entities may elect to be included in a composite income tax return filed pursuant to KRS 141.206(13).

The pass-through entity will calculate the income tax for each eligible electing individual partner, member or shareholder on a composite return filed on Form 740-NP. The tax must be calculated at the highest marginal rate provided for under KRS 141.020 on the partners’, members’ or shareholders’ distributive share income.

Partners, members or shareholders included in a composite return may file an individual tax return to take advantage of the graduated tax rates and any credits allowed by KRS 141.0205 and shall receive credit for any tax paid on the partner’s, member’s or shareholder’s behalf by the pass-through entity.

NOTE: Additional information on composite returns may be found in the instructions for Pass-through Entities tax forms.

Background

The 2006 Extraordinary Special Session of the General Assembly passed House Bill 1 which defined a “Corporation” to mean a “corporation” as provided by Section 7701(a)(3) of the Internal Revenue Code effective for taxable years beginning before January 1, 2005 and after December 31, 2006. Corporations are now subject to the corporation income tax imposed by KRS 141.040 and the limited liability entity tax (LLET) imposed by KRS 141.0401(2). Limited liability pass-through entities will be subject to the LLET imposed by KRS 141.0401(2). The limitations imposed and protections provided by the United States Constitution or Pub. L. No. 86-272 do not apply to LLET. The LLET does not apply to entities listed in KRS 141.0401(6).