The distilled spirits tax credit is a non transferable credit, with a binding refundable or nonrefundable election, that may be applied against income taxes imposed by KRS 141.020 (individual income tax) or KRS 141.040 (corporation income tax) and the limited liability entity tax (LLET) imposed by KRS 141.0401. Unused nonrefundable credit amounts cannot be carried forward to future tax years.
For taxable years before January 1, 2024
The amount of distilled spirits tax credit allowed is only for capital improvements at the premises of the licensed distiller. The distilled spirits tax credit may be accumulated for multiple taxable years for taxpayers who pay Kentucky property tax on distilled spirits assessed under KRS 132.160 and timely paid under KRS 132.180.
For taxable years beginning on or after January 1, 2024
A taxpayer may make an election, irrevocable and binding, for a refundable or nonrefundable credit, with the conditions listed below.
Nonrefundable election
- Waives any accumulated amount of distilled spirits credits.
- Allowed for timely paid distilled spirits ad valorem taxes paid on up to 25,000 barrels of distilled spirits in a bonded warehouse or premises for each taxable year.
- Equal to 100% of the tax assessed under KRS 132.160 and timely paid by the taxpayer under KRS 132.180 for those barrels.
- If there are over 25,000 barrels in a bonded warehouse, the credit is calculated beginning with the taxes timely paid on the most recent barrels (reverse chronological order) until the barrel limit is reached.
Refundable election
- Waives all future distilled spirits tax credits.
- Entitles the taxpayer to a refundable credit for tax years beginning on or after January 1, 2026.
- REQUIREMENT of both
- Making capital investment of at least $20,000,000 within a low and moderate income population (LMI); and
- Creating 10 or more jobs within an LMI.
- Equal to no more than 50% of the accumulated amount and based on both
- Sales and use tax paid on the purchase of tangible personal property used in the capital investment within the LMI; and
- Withholding of tax from wages paid by the taxpayer as an employer from employees hired to fill the jobs created within the LMI.
- Refund granted over a period of 15 years or until the amount has been utilized, whichever is earlier.
- The taxpayer's accumulated amount will be reduced by the amount refunded.
- Any remaining accumulated amount (the 50% figure) on or after March 1, 2039, shall lapse.
- To qualify for the portion of the refundable credit for sales and use tax paid, the taxpayer shall:
- Collect from the purchasers of tangible personal property used in the construction, replacement, or remodeling of warehouses or facilities all documentation relating to the payment of sales or use tax;
- Document sales and use tax paid directly by the taxpayer; and
- File an application for refund of the sales or use tax paid as reflected in the documentation collected.
- To qualify for the portion of the refundable credit for tax withheld from employees, the taxpayer shall document the amount withheld and file an application for a refund as prescribed by the department.
- Requests for a refund shall be filed annually and shall cover purchases made or the amount withheld from employees during the immediately preceding year.
- For taxable years beginning on or after January 1, 2026, the taxpayer's accumulated amount shall be reduced by the taxpayer's base reduction percentage, including a recapture of any credits which have previously been refunded.
- If a business-wide reduction or extraordinary event occurs, any taxpayer may apply to the Secretary of the Finance and Administration Cabinet for a waiver of the reduction in the accumulated amount.
Application Process
The Schedule DS must be filed with the income tax return to determine the credit against the income tax liability and LLET liability for which the credit is claimed. The Form 720-DS-ELECT must be filed the first year a Distilled Spirits credit is claimed for tax years beginning on or after January 1, 2024. Supporting documentation must be included with the return. For the nonrefundable election, include copies of the notices of assessment for the barrels and proof of timely payment for the taxes on those barrels. For the refundable election, include the proof of sales and use tax paid on the purchase of tangible personal property used in the capital investment within the LMI, and proof of withholding of tax from wages paid by the taxpayer as an employer under KRS 141.310 from employees hired to fill the jobs created within the LMI.
Who Can Claim the Credit?
| Pass-through EntitiesA pass-through entity (partnership, S-Corporation, LLC, general partnership, trust, etc.) may apply the distilled spirits tax credit against the LLET on its Kentucky Income and LLET Return and pass the credit through to its partners, members, or shareholders in the same proportion as the distributive share of income or loss is passed through with the ordering of the credits under KRS 141.0205. The credit is passed through to the partners, members, or shareholders of a pass-through entity that are the partners, members, or shareholders at the time of the application and subsequent approval of the credit. The income is reported on the Kentucky Schedule K-1 and any credit that is passed through to the partners, members, or shareholders may be used against individual income tax or corporate income tax and LLET.
IndividualsA sole proprietor reporting business income on Schedule C (federal Form 1040) may claim the credit for distilled spirits under the business name. An individual may claim the credit if it is passed through to them from a partnership, LLC, or S-Corporation on a Kentucky Schedule K-1. An individual may also claim the credit if they timely filed and paid tangible property tax returns and tax liabilities, completed capital improvements on the premises of their distillery, and claimed the credit on the Schedule DS filed with their individual income tax return. If a husband and wife have both names listed on the schedule DS, the credit may be wholly claimed if they file jointly but must be split if they file separately. If the application lists only one of the spouse's names, the listed spouse is entitled to claim the full credit.
CorporationsA corporation may apply the distilled spirits tax credit against income tax and LLET on its Kentucky Corporation Income Tax and LLET Return. A corporation may also claim the credit if it is passed through to them from a pass-through entity on a Kentucky Schedule K-1.
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Definitions
Capital Improvement means any costs associated with:
- (a) Construction, replacement, or remodeling of warehouses or facilities;
- (b) Purchases of barrels and pallets used for the storage and aging of distilled spirits in maturing warehouses;
- (c) Acquisition, construction, or installation of equipment for the use in the manufacture, bottling, or shipment of distilled spirits;
- (d) Addition or replacement of access roads or parking facilities; and
- (e) Construction, replacement, or remodeling of facilities to market or promote tourism, including but not limited to a visitor's center.
Base reduction percentage means the percentage by which the taxpayer's total number of barrels of distilled spirits stored or aging in this state as of January 1 of a taxable year does not equal or exceed the taxpayer's total number of barrels of distilled spirits stored or aging in this state as of January 1, 2025.
LMI means a low and moderate income population where the county median family income or county median household income is less than eighty percent (80%) of the state median family income or state median household income, respectively, as determined by using the most recent five (5) year American Community Survey published by the United States Census Bureau. For purposes of this section, once a county has been identified as an LMI population, the county shall remain an LMI population without regard to future determinations using the United States Census Bureau data.