Must a corporation add back Kentucky's Limited Liability Entity Tax when computing Virginia taxable income?

Plain-English summary

Virginia did not require a corporation to add back Kentucky's Limited Liability Entity Tax itself. Kentucky measured the LLET by the lesser of specified rates on gross receipts or gross profits, with a $175 minimum.

Virginia's addback covered income taxes and other taxes based on, measured by, or computed with reference to net income when deducted federally. Because the LLET ignored most ordinary business expenses used to determine net income, Virginia did not classify it as a net-income tax.

Kentucky corporations also paid corporate income tax but received a credit for LLET liability above the minimum. Virginia required an addback only for the remaining Kentucky corporate income tax after that credit reduced it.

What this means for you

• Analyze the actual tax base, not the state's label.
• Gross-receipts and gross-profits measures can differ from net-income taxes.
• Reconcile credits between LLET and Kentucky corporate income tax.
• Add back only the net-income-tax amount deducted federally and remaining after the credit.

Common questions

Q: Was the LLET itself added back?
A: No.

Q: Why not?
A: It was based on gross receipts or gross profits rather than net income.

Q: What Kentucky tax was added back?
A: Corporate income tax after reduction by the LLET credit.

Citations and references

• Va. Code § 58.1-402(B)(4).
• Ky. Rev. Stat. Ann. § 141.0401.

Subject

Kentucky Limited Liability Entity Tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-147

Original ruling text

August 10, 2011

Re: Ruling Request: Corporate Income Tax

Dear *:

This will reply to your correspondence in which you request a ruling concerning the Kentucky Limited Liability Entity Tax and whether it must to be added back in determining a corporation's Virginia taxable income.

FACTS

For purposes of computing the taxable income of a corporation, Virginia requires an addition for the amount of income taxes and other taxes based on net income. See Va. Code § 58.1-402 B 4. You request a ruling as to whether the Kentucky Limited Liability Entity Tax, effective for taxable years beginning on or after January 1, 2007, is required to be added back under this statute.

RULING

Under Ky. Rev. Stat. Ann . § 141.0401, a tax is imposed on corporations and limited liability pass-through entities based on the lesser of $0.095 per $100 of an entity's gross receipts or $0.75 per $100 of the entity's gross profits. Corporations and limited liability pass-through entities must pay a minimum tax of at least $175. Corporations are required to pay both the Kentucky Limited Liability Entity Tax and the corporate income tax. However, corporations are granted a credit against corporate income tax for the amount of the Kentucky Limited Liability Entity Tax liability less the $175 minimum tax.

Virginia's modification under Va. Code § 58.1-402 B 4 requires an addition for net income taxes and "other taxes, including franchise and excise taxes, which are based on, measured by, or computed with reference to net income, imposed by the Commonwealth or any other taxing jurisdiction, to the extent deducted in determining federal taxable income." Because the Kentucky Limited Liability Entity Tax excludes almost all business expenses normally permitted in determining net income, the Department would not consider it to be a tax based on, measured by, or computed with reference to net income. Therefore, the Kentucky Limited Liability Entity Tax is not required to be added back under Va. Code § 58.1-402 B 4 when computing Virginia taxable income.

Further, because of the credit permitted against Kentucky's corporate income tax, corporations only pay income tax if it is more than the Kentucky Limited Liability Entity Tax. Accordingly, Virginia will only consider the Kentucky corporate income tax to be a tax based on net income to the extent that it exceeds the Kentucky Limited Liability Entity Tax. As such, corporations will only be required to make an addition under Va. Code § 58.1-402 B 4 for the amount of its Kentucky corporate income tax liability after it is reduced by the credit for the Kentucky Limited Liability Entity Tax.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

If you have any questions regarding this ruling, you may contact * in they Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4780008606.o