Louisville Occupational License Tax: A Guide to Form OL-3

1. What the tax is, and the rate

Louisville Metro taxes compensation and business net profits earned within Louisville Metro, which includes all of Jefferson County. It applies to every business, profession, trade or other activity for profit there, wherever the owner lives. Employees' share is usually withheld from their pay; the business files on its net profits.

2. Who has to file

An occupational license return is required from:

• Corporations, partnerships, LLCs, sole proprietors, estates, trusts and other businesses with a for-profit activity in Louisville Metro.
• Independent contractors paid for work in Louisville Metro with no tax withheld (the people who get a 1099-NEC).
• Employees whose employer withheld too little.
• Owners of Louisville commercial property, apartment buildings of four or more units, short-term or transient rentals, land leases and similar. Any of these makes renting a business activity, and then ALL of your rental income is reported.

The small-landlord exception. An individual whose rents are only from residential property in Louisville Metro, under $50,000 of gross receipts for the year, doesn't report that rental income on an OL-3. An LLC never qualifies: it files whatever the property type and whatever the receipts. A house moved into an LLC for liability reasons picks up a Louisville filing with it.

A return is due even when there's nothing to tax. The Revenue Commission requires one if the business had a loss, had no activity but intends to operate, closed during the year, closed without telling the Commission in writing, or registered for a tax number and never started.

State law exempts some businesses entirely, including banks and savings and loans, businesses whose only activity is making or selling alcoholic beverages, and certain life insurers and racetracks; local ordinance exempts groups such as chambers of commerce, trade associations, and organizations run exclusively for religious, charitable or scientific purposes. The full list is in the instructions.

3. OL-3, OL-3A or OL-3EZ

Returns can be filed and paid online through the Revenue Commission's EMINTS portal. Preparers who file 10 or more returns a year must file electronically.

4. The profit it taxes is not your federal number

The OL-3 starts from the federal return and then adjusts it. Two adjustments catch people most. First, any state income tax or occupational license tax deducted on the federal return is added back. Second, a partnership brings in items the federal return passes out separately to the partners, such as rental income, guaranteed payments to partners and portfolio income, and subtracts the separately stated deductions such as Section 179 expense.

Some things that reduce federal income don't reduce this tax at all. The instructions say plainly that contributions to KEOGH and SEP plans, and medical insurance premiums paid on behalf of partners, are not deductible on Form OL-3. An owner who funds a large SEP to cut federal tax shouldn't expect the same saving here.

5. Business outside Louisville: apportionment

A business that works both inside and outside Louisville Metro doesn't pay Louisville on all of its profit. The return apportions it with two percentages, each carried to five decimal places:

• Receipts: gross receipts from sales made or services performed in Louisville Metro, divided by gross receipts everywhere.
• Wages: gross wages paid for work performed in Louisville Metro, divided by gross wages everywhere. Officers' pay counts; guaranteed payments to partners, contract labor and subcontract labor do not.

If the business has both receipts and wages, the two percentages are added and divided by two. If it has only one, that one is the percentage. Separate accounting, where each location keeps its own books and reports its own profit, is not permitted on this return.

For a contractor, the wage side depends on where the crews actually worked, so a job log by county is worth keeping all year rather than reconstructing in April. More on that for the trades: Louisville accounting for contractors.

6. Due dates, extensions and estimated payments

Due date. The 15th day of the 4th month after the tax year ends: April 15 for a calendar year, the same day as the federal individual return but a month after a calendar-year partnership or S corporation's federal return.

Extension. File a Louisville extension (online, Form OL-3EXT, or a copy of your federal Form 4868 or 7004) by the due date for an automatic six months to file. It extends the filing, not the paying: at least 90% of the tax must be paid by the original due date to avoid the late-payment penalty, and interest runs on anything unpaid.

Estimated payments. A business whose tax on net profits is more than $5,000 for the year pays quarterly: April 15, June 15, September 15 and December 15 for a calendar year, online or on Form OL-3D. The December payment falls a month earlier than the federal fourth-quarter estimate. Sole proprietors and businesses in their first year in Louisville Metro aren't required to. To avoid penalties and interest, the payments must total at least the lesser of:

• 90% of this year's tax (four payments of 22.5%),
• 100% of last year's tax (four payments of 25%), or
• 100% of the average of the last three years' tax, if any of those three years exceeded $20,000.

7. Penalties, interest and refunds

The $25 minimum is the one that surprises people: a dormant LLC that simply never filed owes it every year, even with no tax.

8. What we see missed most

• LLCs that lost money or had no activity, and so assumed there was nothing to file.
• Rental property moved into an LLC, which loses the under-$50,000 residential exception.
• The Form 1099-SF: the OL-3 asks whether you paid more than $600 to a non-employee for services performed in Louisville Metro, and if so the Revenue Commission wants a 1099-SF.
• Quarterly payments once the tax passes $5,000, and the December 15 date.
• A SEP contribution or partner health insurance deducted on the OL-3 when the instructions say they aren't deductible.
• Businesses closed years ago with no written notice to the Commission, still expected to file.

We prepare Louisville occupational returns alongside the federal and Kentucky returns, so the numbers tie out and the dates sit on one calendar. If you're a Louisville business owner, start here: accounting and tax planning in Louisville.

9. Common questions