AN ACT relating to the limited liability entity tax.
The bill effectively alters existing tax obligations for businesses in Kentucky, streamlining the taxation process for smaller businesses while increasing obligations for larger corporations. A notable adjustment is the introduction of a small business exemption — beginning from the 2026 tax year, corporations with Kentucky gross receipts below $100,000 will no longer be subject to the limited liability entity tax. This change is expected to alleviate some of the tax burdens on emerging and small businesses, promoting local entrepreneurship and economic growth in Kentucky.
House Bill 721 introduces amendments to the limited liability entity tax in Kentucky, establishing new tax rates based on gross profits for various business entities. The bill primarily targets corporations and limited liability pass-through entities, instituting a scaled tax structure. Entities with gross profits of up to $3 million will be taxed a flat rate of $175, while those between $3 million and $6 million will see a gradual increase in their tax depending on their precise profits. For businesses with gross profits exceeding $6 million, the tax rate is set at $0.75 per $100 of Kentucky gross profits, thus creating a tiered taxation model that reflects the profitability of the entities.
The discussions around HB 721 appear to reflect a generally positive sentiment among proponents, particularly from business advocacy groups who argue that the tax revisions will encourage business growth and investment in Kentucky. However, there may be concerns regarding the fairness of tax rates, especially among smaller enterprises who fear that the phase-out of taxes for those below the new threshold may not adequately compensate for larger corporations' tax load. Opponents could argue that these changes may not provide enough incentives or protections for smaller businesses trying to compete with larger entities.
Notable points of contention arise from the bill's structured approach to taxing different levels of gross receipts. Some legislators and stakeholders in the small business community are wary of the potential disparities created by the tiered tax system, fearing that it could create inequities that favor larger companies while smaller firms may struggle to keep pace with operational costs associated with taxation. The overall debate centers on finding a balance between fostering economic growth and ensuring an equitable tax system that does not overlook the unique challenges faced by smaller businesses.