Kentucky LLET and Form 725: A Guide for Single-Member LLCs

1. The tax the IRS doesn't know about

Kentucky imposes the limited liability entity tax (LLET) on every business that the state's laws protect from liability: corporations, LLCs, S corporations, limited partnerships and others. Sole proprietorships and general partnerships don't pay it, because they don't have that protection.

For income tax, Kentucky follows the IRS: a single-member LLC owned by a person is disregarded, and its activity is reported on the owner's own Kentucky return. But for the LLET, the same LLC is a limited liability pass-through entity in its own right. So it has two lives: its income on your return, its LLET on Form 725. Other entity types pay the LLET too, on their own Kentucky returns; this guide is about the single-member LLC, the one most often missed.

2. Who files Form 725

A single-member LLC whose one member is an individual, an estate, a trust or a general partnership, and that is doing business in Kentucky. The instructions count any of these as doing business here:

• Organized under Kentucky law, or commercially domiciled in Kentucky.
• Owning or leasing property in Kentucky, which includes a rental property held in an LLC.
• Having one or more individuals performing services in Kentucky.
• Holding an interest in a pass-through entity doing business in Kentucky.
• Deriving income from Kentucky sources.
• Directing activities at Kentucky customers to sell them goods or services.

The last one matters for businesses based elsewhere: the instructions say the federal protection many out-of-state sellers rely on for income tax, Public Law 86-272, does not apply to the LLET.

Before it does business in Kentucky, the LLC should register for a Kentucky Corporation/LLET account number (Form 10A100, or online through the Department's MyTaxes portal). If its federal gross receipts are $1 million or more, it must file and pay electronically.

3. How much: $175 for most, a formula above $3 million

The LLET is measured on the business the LLC does in Kentucky, by either its Kentucky gross receipts or its Kentucky gross profits, and the LLC pays whichever gives the smaller tax. Only businesses that manufacture, produce, resell, retail or wholesale tangible goods may subtract cost of goods sold to reach gross profits, and Kentucky's cost of goods sold is not the same as the federal figure. For everyone else, gross profits are simply gross receipts.

The phase-in, from the instructions: on receipts, 0.095% of Kentucky gross receipts minus $2,850 × ($6 million − Kentucky gross receipts) ÷ $3 million; on profits, 0.75% of Kentucky gross profits minus $22,500 × ($6 million − Kentucky gross profits) ÷ $3 million; never below zero, then the lesser of the two, then the $175 floor.

4. The credit on your own return

An individual owner gets a nonrefundable credit against their Kentucky individual income tax for the LLC's LLET, after any other credits, reduced by $175. The credit can only be used against the income tax on the LLC's income, and any credit left over is lost.

Two things follow. For a small LLC paying the $175 minimum, the credit is zero: the $175 is a real cost every year, per LLC. And for a larger LLC, much of the LLET comes back on the owner's return, but only if the owner's return claims it. In the example above, the owner's credit would be up to $2,675 ($2,850 less $175), limited to the Kentucky income tax on the LLC's income.

For property owners with one LLC per property, the minimum adds up: five properties in five LLCs is five Form 725s and $875 of LLET a year, before anyone asks whether each of those LLCs needs to exist. More for landlords: Louisville accounting for real estate investors.

5. Due dates, extensions and estimated payments

Due date. Form 725 is filed and paid by the 15th day of the fourth month after the tax year ends, April 15 for a calendar year, moving to the next business day when that falls on a weekend or holiday.

Extension. Six months, by filing Form 720EXT or the Kentucky individual extension (40A102) by the original due date, or by attaching a copy of your federal Form 4868 to the Kentucky return when it's filed. A copy of the federal extension sent after the return is filed doesn't count. A payment made with an extension goes with Form 720EXT. An extension extends the filing, not the payment.

Estimated payments. Required when the LLET can reasonably be expected to exceed $5,000: 25% by the 15th day of the 4th, 6th, 9th and 12th months of the tax year (April 15, June 15, September 15 and December 15 for a calendar year), with Form 720ES.

6. Penalties and interest

7. What we see missed most

• Single-member LLCs that were never registered with the Department of Revenue, so no Form 725 was ever filed.
• Rental properties moved into LLCs, each of which now has its own Form 725.
• LLCs that stopped operating but were never closed with both the Department of Revenue and the Secretary of State, which have different requirements.
• The LLET credit left off the owner's Kentucky return in a year the LLC paid more than the minimum.
• Out-of-state LLCs with Kentucky customers or workers, which assumed they had no Kentucky filing.

We file Form 725 alongside the owner's federal and Kentucky returns, so the credit is claimed and the filings line up. The other Louisville layer is the city's own tax: Louisville occupational license tax (Form OL-3). And if you're deciding whether an LLC or an S corporation is right, start with our entity comparison tool.

8. Common questions