Client Alert


Kentucky Apportionment Update


Effective January 1, 2021 Kentucky eliminated its Bank Franchise Tax ("BFT")and instead subjected financial institutions and financial organizations to the state's existing Corporate Income Tax ("CIT") and Limited Liability Entity Tax ("LLET").


Implementing this change, the Kentucky Department of Revenue has proposed new regulations for financial institutions and financial organizations which bear a striking resemblance to the former BFT rules. However, unlike the old BFT rules, the Department's proposed regulation condenses definitions and apportionment rules from multiple statutes into a single regulation, providing greater ease of access. The proposed regulations also provide several additional definitions, provide more detailed definitions, and expand the definition of "financial organization" to include any entity which is majority-owned by registered bank or savings and loan holding companies. Finally, the proposed regulations offer greater specificity for sourcing receipts from investment and trading assets and activities.


This is the latest step in a rapid re-shaping of the manner in which banks and other financial institutions report income in Kentucky. As of January 1, 2018, Kentucky shifted from a more traditional three-factor income apportionment formula to a single sales factor for CIT purposes. That same legislation also implemented combined reporting for most CIT taxpayers, effective as of January 1, 2019. The BFT repeal and these new regulations bring banks and other financial institutions into this new landscape, but retain some familiar elements for these entities. Plus ça change? Although the Department's proposed regulations could have substantially impacted the apportionment methodology for financial institutions, the regulations primarily make cosmetic changes to the BFT rules. Taken in combination with Kentucky's move to a single receipts factor for CIT apportionment purposes, this may provide some relief for financial entities with physical operations in the state. However, all financial entities should confirm that receipts which previously may have fallen through the gaps in the old BFT rules are not now specifically designated as apportionable and update their filing positions appropriately. Similarly, financial entities whose unitary group has Kentucky activities should also carefully consider the impact of combined reporting as they begin to plan for their initial CIT filings, due in 2022.

If you have questions regarding your specific situation, please contact a member of our SALT Team.

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