Kentucky's Pass-Through Entity Tax Election: Who It Helps and How It Works
Kentucky lets an S corporation or partnership choose, each year, to pay its owners' Kentucky income tax itself. The Kentucky tax comes out about the same. The point is the federal return: tax the business pays is a business deduction, while tax the owners pay themselves runs into the federal cap on state and local tax deductions. For the right owners, that is real money for a form and a payment.
Written by the licensed tax advisors at Framework Advisory, Louisville. Kentucky rules are from the Department of Revenue's 2025 pass-through entity tax instructions and election form; the federal treatment is from IRS Notice 2020-75. General information, not advice for your business.
1. What the election does
Normally an S corporation or partnership pays no Kentucky income tax itself; its income passes to the owners, who pay on their own returns. With the election, the entity pays Kentucky income tax on that income instead, files Form 740-PTET, and gives each owner a Form PTET-CR showing the tax paid on their share. Individual owners claim that amount as a refundable credit on their Kentucky return.
2. Why anyone would pay tax at the entity
Under IRS Notice 2020-75, state income tax that a partnership or S corporation pays on its own income is deducted by the entity in the year it's paid. It reduces the ordinary income on every owner's K-1, and it doesn't count toward any owner's federal limit on deducting state and local taxes (the SALT cap). Paid by the owner personally, the same tax is an itemized deduction subject to that cap.
So the election turns a capped personal deduction into an uncapped business one. What the cap is for you depends on your income, and the 2025 tax law changed it: see what changed with the SALT cap.
3. Who it helps, and who it doesn't
It tends to help owners who:
- Already pay more state and local tax than the federal cap allows them to deduct, so the Kentucky tax on their business income currently buys them nothing federally.
- Have income high enough that the cap phases back down for them.
- Itemize, or would be pushed into itemizing, for other reasons.
It can do little or nothing, or need a closer look, when:
- The owners take the standard deduction or are comfortably under the cap anyway; then the personal deduction wasn't being lost.
- Owners are in different positions: the election binds all of them, and one owner's benefit can be another's shrug.
- Cash is tight: the entity has to fund the tax, and estimated payments, on the owners' behalf.
- The business is a single-member LLC the IRS disregards, which isn't a partnership or S corporation for the federal rule.
4. How the tax is figured
The base is the owners' distributive share income: ordinary income plus separately stated items such as interest, dividends, capital gains, guaranteed payments and rents, apportioned to Kentucky. The rate is the individual income tax rate: 4.0% for 2025. The Department's instructions note that House Bill 1 set the individual rate at 3.5% for tax years beginning in 2026.
| Amount | |
|---|---|
| Owners' distributive share income | $400,000 |
| Kentucky pass-through entity tax at 4.0% (2025) | $16,000 |
| Federal deduction on the S corporation's return | $16,000 |
| Federal tax saved if both owners were already over the SALT cap, at a 32% bracket | $5,120 |
| Kentucky: refundable credit to the owners (on Forms PTET-CR) | $16,000 |
Made-up business and owners. The $5,120 only exists if the owners' own state and local taxes were already over their cap; if they weren't, the federal saving could be close to zero. That is the whole decision.
5. Electing, paying and estimates
| Rule | |
|---|---|
| Making the election | Form 740-PTET-ELECT, or the box on Form 740-PTET. Any time in the year, and by the 15th day of the 4th month after year end (or the extended due date if extended). |
| Changing your mind | Irrevocable for that year, and binding on all owners. Made fresh each year. |
| Paying the tax | Due on the entity's annual return due date, without regard to extensions. Payments are electronic. |
| Estimated payments | Required when the estimated tax is expected to exceed $500 for an individual owner: 25% each on April 15, June 15, September 15 and January 15 (calendar year). |
| Extension to file | Form 740-PTET-EXT, or a copy of the Kentucky 720-EXT or 40A102, or federal Form 7004, with the return. |
Source: Kentucky Department of Revenue, Instructions for Kentucky Pass-through Entity Tax (2025) and Form 740-PTET-ELECT (2026).
One timing point from the federal side: the notice allows the deduction in the year the entity pays the tax. Tax for this year paid next spring is a deduction next year, which is one more reason to plan the election before December rather than at filing time.
6. The Louisville wrinkle
Louisville Metro's occupational license tax starts from the federal return and adds back state income tax deducted there. So the entity-level deduction that lowers federal income doesn't lower the Louisville tax on net profits. It isn't a reason not to elect; it's a reason the numbers should be run on all three returns, not one. More on the city tax: Louisville occupational license tax (Form OL-3).
We run the election decision for our S corporation and partnership clients every year, alongside owner pay and estimated payments, and model it before year end so the payment lands in the right year. Medical practices are one of the groups it most often helps: Louisville accounting for medical practices.
7. Common questions
When is the deadline for Kentucky's pass-through entity tax election?+
The election can be made any time during the tax year, and no later than the 15th day of the fourth month after the year ends, or the extended due date if the entity filed an extension. It's made on Form 740-PTET-ELECT or by checking the box on Form 740-PTET.
Can we undo the election?+
No. Once made for a tax year it is irrevocable and binds every owner. It is made fresh each year, though, so electing this year doesn't commit the entity to next year.
What is the Kentucky PTET rate?+
4.0% for 2025, the individual income tax rate, because the entity-level tax is imposed under the individual income tax statute. The Department of Revenue's instructions note that House Bill 1 set the individual rate at 3.5% for tax years beginning in 2026.
Do the owners pay Kentucky tax twice?+
No. Individual owners get a refundable credit on their Kentucky return (Form 740 or 740-NP) for the tax the entity paid on their share, reported to them on Form PTET-CR.
Does it work for a single-member LLC?+
The federal benefit comes from an IRS notice that covers tax paid by partnerships and S corporations. A single-member LLC that the IRS disregards is neither, so the election's federal advantage is built around those two. An LLC taxed as an S corporation is an S corporation for this purpose.
Should your business elect this year?
A licensed advisor will run the election against your owners' actual returns before the deadline.
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