In Kentucky Revenue Procedure KY-RP-19-02 (issued April 11, 2019), the Kentucky Department of Revenue (Department) provides instructions on complying with notice requirements to claim the deferred tax deduction (DTD). The Department also issued Schedule DTD, which must be filed by taxpayers intending to claim the DTD.

Background

Governor Matt Bevin signed Kentucky House Bill 458 (HB 458) into law on April 9, 2019. Among various tax-related changes, HB 458 enacted the DTD, which is intended to mitigate the effects of Kentucky's move from nexus consolidated reporting to unitary combined reporting for tax years beginning on or after January 1, 2019.

HB 458 added a new paragraph (d) under Kentucky Revised Statute (KRS) Section 141.039(2) to provide for the DTD. Only publicly-traded corporations that will file a combined return, including affiliates listed in the publicly-traded corporation's financial statements as of January 1, 2019, are eligible for the DTD. Affiliated groups of corporations electing to file a consolidated return are not eligible for the DTD.

Department guidance

The DTD is computed by first determining the deferred tax impact of the change to combined reporting on the publicly-traded corporation. This is computed in Part I of the Schedule DTD. If the change results in a negative deferred tax impact,¹ that amount is then divided by the 5% Kentucky corporate rate, with that resulting amount divided by the apportionment factor used to compute the deferred tax assets and liabilities. This is computed on Part II of the Schedule DTD.

After a DTD is computed, it is taken in 1/10th increments, beginning with the combined group's first tax year beginning on or after January 1, 2024. To the extent the DTD in a tax year exceeds taxable income, any excess DTD is carried forward to future tax years until fully realized.²

No adjustment to the DTD will be permitted for events occurring after the computation for Schedule DTD purposes. The DTD is computed without regard to its federal income tax effect nor does it alter the tax basis of any assets. The Schedule DTD must be filed by July 1, 2019. No DTD will be allowed if the Schedule DTD is not timely filed.

Implications

Taxpayers should take notice of the short-fuse deadline for filing the form for purposes of claiming the DTD deduction. EY will continue to monitor developments in this area.

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ENDNOTES

¹ If a positive net deferred tax impact results, no deduction is allowed.

² There appears to be some conflict between KRS Section 141.039(2)(d)(5), which provides for the deduction "[f]or ten (10) years," and KRS Section 141.039(2)(d)(7), which provides for the carryover of an unused deduction to "future [tax] years until fully utilized" without an express limitation or clarification on the 1/10th incremental annual limitation. This may need to be addressed in future legislative sessions, the Department's rulemaking process or other administrative guidance.