The Bluegrass State has embarked on one of the most ambitious tax transformations in the United States, aggressively shifting its fiscal model from income-based taxation to consumption-based taxation. For businesses and startups, understanding Kentucky corporate state taxes is essential, as the state offers a highly competitive environment with a flat corporate rate and a clear path toward potentially eliminating state income tax entirely. However, this shift has brought about a significant broadening of the sales tax base, particularly affecting digital service providers.
Key Takeaways
- Flat Corporate Rate: Kentucky imposes a flat 5% corporate income tax rate.
- SaaS is Taxable: Since January 1, 2023, Software as a Service (SaaS) and remotely accessed software are subject to Kentucky’s 6% sales tax.
- LLET Requirement: Most businesses must pay the Limited Liability Entity Tax (LLET), which is a minimum tax based on gross receipts or Kentucky net capital.
- Economic Nexus: Out-of-state retailers trigger sales tax obligations if they exceed $100,000 in annual gross sales or 200 separate transactions in Kentucky.
If I Want To Open A Business In Kentucky, What Will I Have To Do?
Starting a business in Kentucky requires registering your legal entity with the Kentucky Secretary of State. Following registration, you must create an account with the Kentucky Department of Revenue through the OneStop Business Portal to manage your Kentucky corporate state taxes and other obligations.
You will need to register for a Kentucky Tax Registration Number to handle corporate income tax, sales and use tax, and employer withholding. If your business sells tangible goods or taxable services (including SaaS), obtaining a Sales and Use Tax Permit is mandatory. For international founders, our guide on state taxes for foreign-owned businesses provides essential context for navigating these requirements.
Does Kentucky Have an Income Tax?
Yes. Kentucky imposes a corporate income tax on C-Corporations doing business in the state. The flat 5% rate for Kentucky corporate state taxes is one of the most competitive in the region for the 2026 tax year. Kentucky uses federal taxable income as the starting point for its calculation, with specific adjustments for state-level compliance.
Does Kentucky Have a Franchise Tax?
Kentucky does not have a “franchise tax” in the traditional sense for general business corporations. Instead, it utilizes the Limited Liability Entity Tax (LLET). Every corporation and limited liability entity (except certain exempt organizations) must pay the LLET, which is the greater of:
- $0.095 per $100 of Kentucky gross receipts.
- $0.75 per $100 of Kentucky net capital.
There is a $175 minimum LLET for all entities. For many small businesses, the LLET functions as the state’s minimum corporate tax.
What Triggers Corporate Income Tax Nexus in Kentucky?
Kentucky corporate state taxes nexus is established when a business has a sufficient connection to the state.
- Physical Presence: Maintaining an office, warehouse, or retail location in Kentucky. This includes inventory stored in third-party fulfillment centers within the state.
- Employee Nexus: Having even a single employee working in Kentucky, including remote workers in home offices, typically establishes nexus for both income and payroll taxes.
- Solicitation: Regularly sending sales representatives or employees into the state to solicit orders or perform essential business functions can trigger a filing requirement.
Does Having a Mailing Address in Kentucky Trigger Corporate Income Tax or Registration?
Generally, a mere mailing address or the use of a registered agent in Kentucky does not trigger corporate income tax nexus. However, if that address is used as a base for management operations or for storing business assets, the state may determine that the business is “domiciled” in Kentucky and subject to tax.
If I Have My Business in Kentucky but Live in a Different State, Will I Pay Tax?
Yes. If your business has nexus in Kentucky, the income it generates from Kentucky sources is subject to tax. For pass-through entities (LLCs, S-Corps), the income is apportioned to Kentucky, and non-resident owners must pay Kentucky individual income tax on their share. You can explore our guide to filing for disregarded entities to see how this affects your personal liability.
If All My Activities Are Outside the U.S. and I Live Abroad, But Have a Company in Kentucky, Do I Have to Pay Tax?
Domestic Kentucky corporations are taxed on their apportioned income regardless of where the owners reside. Foreign-owned LLCs may not owe Kentucky income tax if they have no “effectively connected income” in the state, but they must still satisfy federal IRS requirements and may have state informational filing duties.
Does Having an Employee in Kentucky Trigger Corporate Income Tax?
Yes. Kentucky is strict regarding remote work. Having a single employee performing services within the state generally establishes physical nexus, requiring the employer to register for corporate income tax and set up a withholding account.
Does Having an Independent Contractor in Kentucky Trigger Corporate Income Tax?
It depends on the scope of their work. If an independent contractor is soliciting sales or performing essential business functions that help establish and maintain a market in Kentucky, the state will likely claim that the company has nexus.
Does Having a Founder Living in Kentucky Trigger Corporate Income Tax?
Typically, yes. If a founder or executive resides in Kentucky and performs management duties or directs the operations of the company from their home, the company is considered to be “doing business” in Kentucky.
If You Hold Board Meetings in Kentucky, Will It Trigger Corporate Income Tax?
Holding board meetings is a corporate management activity. If these meetings are held regularly in Kentucky, it can be used as evidence that the company’s “commercial domicile” is in Kentucky.
Does Kentucky Collect Sales Tax?
Yes. Kentucky has a state sales tax rate of 6%. Unlike many other states, Kentucky does not allow local city or county sales taxes, keeping the total effective rate at 6% statewide.
Does Kentucky Tax SaaS Income?
Yes. This was a major legislative change effective January 1, 2023. Kentucky SaaS sales tax now applies at the 6% state rate because SaaS is classified as a “prewritten computer software access service.” This is a sharp contrast to states like Indiana, where SaaS remains exempt.
Does Kentucky Tax Online Marketplaces?
Yes. Kentucky has Marketplace Facilitator laws. Platforms like Amazon and Etsy are required to collect and remit sales tax on behalf of third-party sellers for all Kentucky deliveries.
Does Kentucky Tax Remote Software Sales?
Yes. All prewritten computer software that is downloaded or delivered electronically is subject to Kentucky sales tax.
If I Want to Close My Business in Kentucky, What Will I Have to Do?
To close a business in Kentucky:
- File a final tax return (Form 720 or 765) and check the “Final” box.
- Formally dissolve the entity with the Secretary of State.
- Cancel your tax accounts through the Department of Revenue.
When Is My Tax Return Due for Kentucky?
Kentucky state tax deadlines 2026 align with federal IRS dates:
- C-Corporations (Form 720): Due April 15, 2026 (for calendar year filers).
- Pass-Through Entities (Form 765): Due March 16, 2026.
What Happens If I File My Kentucky Tax Return Late?
Late filings for Kentucky corporate state taxes face a failure-to-file penalty of 2% of the tax due per month, up to 20%. Late payments are subject to a 2% penalty per month, up to 20%. For the 2026 calendar year, the Kentucky Department of Revenue has set the interest rate for underpayments at 9.0%. It is important to note that the minimum penalty for late filing is $10, even if no tax is owed. These are in addition to any federal IRS penalties.
Can You Help Me With Filing Kentucky Corporate State Taxes?
Absolutely! At Cleer Tax, our dedicated team is committed to addressing the distinct requirements of your business.
We provide comprehensive tax advisory services tailored to your specific needs, covering every aspect of compliance and optimization – including helping you reduce tax liability wherever possible. Our goal is to ensure that you capitalize on every available opportunity, leaving no stone unturned when maximizing your tax benefits and minimizing any potential liabilities.
Cleer provides Corporate Income Tax Packages encompassing federal and state income tax filings for a hassle-free experience. Our accurate, affordable, and efficient financial and tax services are tailor-made for U.S. businesses and subsidiaries to help entrepreneurs do it right from the start.
We also offer monthly bookkeeping packages, which include your monthly statements. If you need help getting up to date on your books, we also offer support for companies that have fallen behind on their bookkeeping with our bookkeeping catch-up package.
If you need any help with reducing your tax liability or your company’s bookkeeping needs, feel free to contact us. For more information, you can also visit our pricing page.
