On April 1, 2026, the Kentucky General Assembly approved House Bill 757 (HB 757), which includes several business and individual tax changes. These proposed changes would update Kentucky's Internal Revenue Code (IRC) conformity date, address some provisions in the "One Big Beautiful Bill Act" (OBBBA),¹ and delay implementation of the corporate income tax deferred tax deduction. The income tax changes discussed in this Tax Alert would apply to tax years beginning on or after January 1, 2026, unless otherwise noted.

The General Assembly sent the bill to the governor on April 2, who has 10 days to act on the measure. If the governor vetoes the bill, lawmakers will have the ability to override his veto when they return for the last two days of the 2026 legislative session, on April 14 and 15.

IRC conformity

HB 757 would update Kentucky's IRC conformity date to the IRC in effect on December 31, 2025 (from December 31, 2024). This change would apply to tax years beginning on or after January 1, 2026. The update would exclude any IRC amendments made subsequent to that date, unless the amendments extend provisions in effect on December 31, 2024, that would otherwise terminate.

Corporate income tax changes

For corporate income taxes, HB 757 adds a new subsection (j) to KRS 141.039(1) to include in Kentucky corporate gross income the amount deducted for domestic research and experimental (R&E) expenditures under IRC Section 174A. That new subsection would allow a deduction for the amount of domestic R&E expenditures that would have been deducted for federal purposes under IRC Section 174 as that section existed on December 31, 2024.

HB 757 also decouples from deductions related to qualified film, television, live theatrical, and sound recording production under IRC Section 181 and interest deducted under IRC Section 139L (amounts paid to a qualified lender for any qualified real estate loans).

For purposes of determining the IRC Section 163(j) limitation on business interest, HB 757 would require taxpayers to use IRC Section 163(j) in effect on December 31, 2024, excluding any amendments made after that date.

Individual income tax changes

In addition to the previously discussed changes related to IRC Section 174 and 174A, HB 757 would decouple from OBBBA deductions for qualified tips, qualified overtime wages, qualified passenger vehicle loan interest, amounts related to qualified film, television, live theatrical, and sound recording production under IRC Section 181, and interest deducted under IRC Section 139L.

Deferred tax deduction postponed

When Kentucky adopted mandatory combined reporting in 2019, the legislature enacted a deferred tax deduction to reduce the effect on certain tax attributes from the transition from the prior nexus consolidated filing regime to combined reporting (see Tax Alert 2019-0688). This deduction, originally scheduled to start with the combined group's first tax year beginning on or after January 1, 2024, had been delayed until January 1, 2026 (see Tax Alert 2024-0813). HB 757, once again, would delay implementation of this provision to the combined group's tax year beginning on or after January 1, 2028.

Implications

Taxpayers will want to take note of Kentucky's IRC conformity update and the state's decoupling from various OBBBA provisions, including the limitation on the deduction of business interest under IRC Section 163(j), which is as it existed on December 31, 2024. With regard to domestic R&E expenses, the original draft of HB 757 would have effectively disallowed a Kentucky deduction for these expenses for corporate and non-corporate taxpayers. As amended, HB 757 appears to allow some deduction for these expenses by referencing IRC Section 174 as of December 31, 2024.