Corporate Close-Up: Tell Me Something I Don’t Know About Kentucky’s LLET

Freakonomics Radio creator Stephen J. Dubner recently launched a new game show called “Tell Me Something I Don’t Know,” in which guests present a little-known fact to a panel of experts. This week we’re adapting the new gameshow format for this installment of the Corporate Close-Up SALT Talk blog. Our guest Erica Horn, a prominent tax attorney and co-author of Bloomberg BNA’s Kentucky Corporate Income Tax Navigator, describes an important nuance regarding Kentucky’s Limited Liability Entity Tax (LLET).

But first, your gameshow host Steve Roll with some background: The LLET is an annual tax on the Kentucky gross receipts or gross profits of a business entity that is doing business in Kentucky and grants any of its partners, members, shareholders or owners, through the function of law, protection from general liability for actions of the entity. If the entity is engaged in manufacturing, producing, reselling, retailing or wholesaling, it must compute its LLET based on gross profits. To do so, it must determine its cost of goods sold.

Horn cautions taxpayers who might not be familiar with the LLET that Kentucky’s definition of “cost of goods sold” for purposes of computing the LLET is not the same as the definition found in the Internal Revenue Code (IRC). Cost of goods sold for purposes of the LLET includes only direct labor costs and direct material costs, she said in an Nov. 21 email to Bloomberg BNA. “Direct labor” means labor that is incorporated into the tangible product sold or is an integral part of the manufacturing process, she added. She explained that the fact that the cost is “necessary” is not determinative. “By like token, no indirect labor costs are allowed. Additional categories of costs disallowed when computing the LLET but typically allowed by the IRC include: utilities; repairs and maintenance; depreciation; insurance; quality control; and rent,” she said.

A Kentucky Tax Alert from September 2013 provides further guidance on calculating the cost of goods sold for purposes of the LLET.

Tune in to Corporate Close-Up next week to learn more about the intricacies of state businesses taxes

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What else don’t we know about Kentucky’s LLET?

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