In our December and February Kentucky Tax Talk articles, we discussed what to consider regarding Commonwealth taxes for the Kentucky 2021 legislature. Some hot topics, such as the required legislative approval from the reorganized Kentucky Board of Tax Appeals and the treatment of the recent Kentucky Supreme Court ruling to dismiss historic horse racing as a form of legal parti-mutuel betting, should be scrutinized. However, given a shorter than normal session and a priority in passing a rare, one-year COVID-focused 2021 budget, no major changes to Kentucky’s tax law or structure were expected.
Instead, the General Assembly used several tax initiatives to provide immediate aid to troubled companies and to develop new industries in a post-pandemic world.
Business expansion in bluegrass – cryptocurrency, tax credit for historical rehabilitation, expansion of the incentive program
Several laws were passed to expand new and existing industries in Kentucky. One of these industries is cryptocurrency mining. While Kentucky is in an optimal location for this industry because of its easy access to and relatively low energy costs, Kentucky tax laws were not designed to benefit this industry. HB 230 and SB 255 were signed by Governor Andy Beshear to address this issue and allow this industry to expand in the Commonwealth. HB 130 offers sales and excise tax exemption for energy bought and consumed in commercial mining of cryptocurrency at both state and local levels. SB 255 enhances a government tax incentive program that enables sales tax refunds for equipment used to build, retrofit, or upgrade a cryptocurrency mining facility, in addition to potential income tax and wage tax incentives. These bills are designed to provide Kentucky with the opportunity to expand and diversify its manufacturing industry to incorporate new and developing technology and to capitalize on its ability to provide energy to such operations.
SB 162 also expands and changes a variety of other tax incentives regulated by the Kentucky Cabinet for Economic Development and encourages businesses to set up and expand in Kentucky. Significant changes to SB 162 include modifying the most widely used incentive program, the Kentucky Business Investment (KBI) program, by expanding qualifying activities and removing income tax credits related to the Kentucky Industrial Revitalization Act (KIRA) and the Changes to various parts of the Kentucky Reinvestment Act (KRA).
Two other pieces of legislation could have a significant impact on expanding industries in the Commonwealth. First, the Historic Rehabilitation Tax Credit (HTC) has been expanded by increasing its cap from $ 5 million for certified historic buildings to $ 100 million. To benefit from this increase, applications must be made by or after April 30, 2022. As many properties are struggling to maintain their value during the pandemic, this could offer an opportunity to rejuvenate and expand existing structures.
Another technology-based tax incentive draft (HB 372) was developed to create significant state and local tax incentives for large data center developments. Although it happened to both houses of the General Assembly, Governor Beshear vetoed it on April 9; however, similar legislation is likely to be revisited during the regular session next year or possibly during a special session later this year. The General Assembly made it clear that it intends to promote the development of the technology and advanced manufacturing industries in Kentucky.
COVID-19 Recovery Easements – Business Expense Deductions for PPP Loans and Tax Protection for Out-of-State Corporations
As the General Assembly made progress to incentivize new and expanding industries, it also provided additional and immediate COVID-19 aid to all companies. During the legislative period in spring 2020, the General Assembly passed SB 150, which offers taxpayers a variety of immediate facilities, from extending the submission and payment deadlines to extending the right to unemployment. Since then, the federal government has passed two additional stimulus packages that provide ongoing aid; However, it was unclear how much of this aid would be copied by the states.
One example was the deductibility of business expenses paid with federal Paycheck Protection Program (PPP) loan funds. In the Consolidated Appropriations Act (CAA) of December, Congress made it clear that taxpayers who have used PPP funds to cover business expenses can continue to deduct those expenses as normal on their federal income tax returns; however, the Kentucky Department of Revenue issued notice that these deductions are not allowed on state income tax returns unless approved by the General Assembly.[1]
In response, the General Assembly amended Kentucky income tax laws through HB 278, which specifically allowed companies to deduct ordinary and ordinary business expenses paid on PPP loans from their Kentucky income tax returns. With many Kentucky businesses still struggling to keep up and running, this legislation will allow businesses to better maintain cash flow as they are not expected to essentially repay the business costs covered by PPP loans.
Another law passed tries to encourage further pandemic aid. HB 84 grants protection to non-state companies performing emergency-related work while Kentucky remains in a state of emergency from both state income tax liability and local business tax. The work that the foreign company must perform includes “repairing, renovating, installing, building or providing services necessary to restore critical infrastructure that has been damaged, compromised or destroyed by a declared state”. Disaster or emergency. ”In order to qualify for the protection of the tax declaration obligation before a tax return, the company may not have any other nexus-forming activities in the state, such as B. Real estate or other business activities.
Despite tax changes to help Kentucky residents through the pandemic, the silence on some issues has left room for uncertainty in the future. A problematic area is the taxation of unemployment benefits. While the federal government and several other states specifically stipulated that unemployment benefits were not considered taxable income, the department issued a statement April 1 stating that “all unemployment benefits earned as a Kentucky resident are subject to Kentucky income tax.” Effective immediately, Kentuckians who have received unemployment benefits are expected to pay state income tax on those funds.
Kentucky Board of Tax Appeals Reorganization
Another important tax-related legislative move concerns the reorganization of the Cabinet for Public Protection by Governor Beshear in the fall of 2020, which abolished the Kentucky Claims Commission (KCC), which is responsible for hearing tax proceedings and reinstating the Kentucky Board of Tax Appeals (KBTA ) was responsible. Any reorganization of the executive branch requires the legal approval of the general assembly. Through SB 162, the General Assembly kept the general KBTA structure, but now requires that the chairman as well as one other member of the KBTA is a lawyer (the chairman having the qualification of a district judge) with at least one member of the three people having a tax background . In addition, the General Assembly removed bond reinstatement through governor’s ordinance, thereby preventing Kentucky from being viewed as a “pay-to-play” state on tax complaints. SB 162 also made it clear that all local tax matters now fall within the purview of the KBTA and no longer a district court which may not deal with tax cases often.
While the General Assembly upheld the re-establishment of the governor’s KBTA to some extent, it also took legislative steps to prevent such widespread reorganization of the executive branch in the future. HB 5, issued despite the governor’s veto, limits a governor’s ability to reorganize executive cabinet bodies and boards by executive resolution while the general assembly is not in session. This will have a major impact on future administrations as it is common for new governors to reorganize executive agencies after taking office.
While this legislature has turned into a whirlwind of vetoes, overrides, changes, and more, the 2022 legislature is expected to pick up on many issues that were still on the table at the end of the 2021 session, including draft laws suggesting repeal and amendments to the wholesale common tax exemptions as well as potentially adverse changes in the valuation of real estate for property tax purposes.