What Is the Kentucky Pass-Through Entity Tax?

The Kentucky pass-through entity tax is an optional, entity-level income tax that partnerships and S-corporations can elect to pay on behalf of their owners. For 2026, the rate is 3.5% of the entity’s Kentucky-source income, matching the individual income tax rate under KRS 141.020.¹ Owners receive a refundable credit on their personal Kentucky returns for their share of what the entity paid. The election is voluntary, annual, and once made, irrevocable for that year.

The point of the tax is to work around the federal cap on state and local tax deductions. Whether the election saves your business real money depends on your owners’ federal situations, so the mechanics matter.

Why Kentucky Created the PTET

The Tax Cuts and Jobs Act of 2017 capped the federal deduction for state and local taxes at $10,000 per return.² A business owner paying $15,000 in Kentucky income tax on pass-through earnings could only deduct $10,000 federally. The rest was lost.

The PTET sidesteps the cap by moving the state tax payment up to the entity. When a partnership or S-corporation pays Kentucky income tax itself, that payment becomes a business expense deductible against the entity’s federal income. Business expenses aren’t subject to the SALT cap. The IRS blessed this structure in Notice 2020-75.³

The One Big Beautiful Bill Act raised the SALT cap to roughly $40,400 for 2026, which eases the pressure for many owners. But the higher cap phases down for taxpayers with modified adjusted gross income above $505,000, pushing their effective cap back toward $10,000. The PTET deduction has no dollar ceiling, which is why it still matters at the top end.

Which Entities Can Elect

The PTET is available to general partnerships, limited partnerships, limited liability partnerships, LLCs taxed as partnerships or S-corporations, and S-corporations.⁴

Single-member LLCs that the IRS treats as disregarded entities cannot elect. There’s no separate entity return for the tax to attach to. If you own a single-member LLC and want in, you’d need to elect S-corporation treatment federally or restructure first.

C-corporations are also excluded. They pay their own tax under a different framework.

How to Make the Election

The election is made annually on Form 740-PTET, which functions as the election, the return, and the payment vehicle all in one.⁵ The entity can elect any time during the tax year, but no later than the return’s due date. For calendar-year filers, that means April 15 of the following year, or the extended due date if an extension was filed.⁴

Two features of the election trip people up. First, it’s irrevocable for the year once made.⁶ A partner who changes their mind in March after a September election is out of luck. Second, it binds every owner of the entity. Before filing, check your operating agreement or bylaws to confirm who has authority to make the call, and get your partners, members, or shareholders on the same page. A unilateral election can create tax disputes among owners who never agreed to it.

The election does not carry over. If the entity wants to use the PTET again next year, it files a new election on next year’s Form 740-PTET.

What Gets Taxed and at What Rate

The PTET rate tracks the individual income tax rate under KRS 141.020. For 2026, that’s 3.5%.¹ The base includes the entity’s ordinary income and separately stated items: interest, dividends, capital gains, guaranteed payments, and rents.⁴

Entities with income from both inside and outside Kentucky apportion first. Only Kentucky-source income is subject to the PTET, following the apportionment rules in KRS 141.206.⁷

Estimated Payments and Deadlines

Electing entities must make quarterly estimated payments if any individual partner, member, or shareholder’s expected tax exceeds $500.⁸ For calendar-year entities, the installments fall on April 15, June 15, September 15, and January 15 of the following year, each covering 25% of the estimated annual tax.

Fiscal-year filers follow the same cadence against their own calendar: the 15th day of the fourth, sixth, and ninth months of the fiscal year, then the 15th day of the first month after year-end. When any payment date lands on a weekend or holiday, it shifts to the next business day.⁸

The final return and any remaining balance are due the 15th day of the fourth month after the tax year closes. Extensions push the return deadline but not the payment deadline; unpaid tax accrues interest from the original date. Shortfalls on estimated payments trigger underpayment penalties under KRS 141.985.⁸ Electronic filing through the Kentucky Tax Center is standard, though paper filing remains technically available.⁹

How Owners Claim the Credit

Each owner receives a refundable credit equal to their proportionate share of the tax the entity paid. Refundable is the important word: if the credit exceeds the owner’s Kentucky tax liability, the excess comes back as a cash refund.⁴ Some older descriptions call this credit nonrefundable; that’s wrong under current Department of Revenue guidance.

The entity reports each owner’s share on Form PTET-CR, a separate form prepared for every partner, member, or shareholder. The entity files all the PTET-CRs with its Form 740-PTET. Each owner attaches their copy of PTET-CR to their personal return: Form 740 for residents, Form 740-NP for nonresidents.⁴

The Schedule K-1 still exists and still reports each owner’s distributive share of income, deductions, and other items. Form PTET-CR is additional, not a replacement. The K-1 is the income report; the PTET-CR is the credit receipt.

Tiered Ownership Structures

When one pass-through entity owns an interest in another, the credit flows through both levels. If an upper-tier entity elects the PTET and one of its owners is itself a lower-tier pass-through, the upper-tier files a PTET-CR for that lower-tier owner. The lower-tier entity then claims the credit on its own Form 740-PTET.⁴ The layered reporting prevents the same income from being taxed twice.

Is Electing Worth It for Your Business?

The answer turns on your owners’ federal tax situations. The PTET helps most when owners are either itemizing and already hitting the SALT cap, or earning enough that the cap phases down toward $10,000. For an owner with $200,000 in Kentucky pass-through income and a 24% federal marginal rate, moving the state tax to the entity saves roughly $1,400 in federal tax at the 2026 rate of 3.5%. The $7,000 in Kentucky tax becomes a business deduction rather than a capped itemized one. The savings grow with income and federal bracket.

Owners above the $505,000 MAGI threshold see the biggest benefit, because their SALT cap phases down. Owners who take the federal standard deduction still come out ahead; they get the business deduction at the entity level without needing to itemize at all.

The cost is administrative. The entity picks up additional filing, estimated payments, and the responsibility of preparing a PTET-CR for every owner. For entities with many small-stake partners, the overhead per owner may eat the savings. And because the election is irrevocable and binds everyone, make the decision as a group, in writing, before the entity files.

1
Kentucky Department of Revenue. 2026 Kentucky Withholding Tax Formula
2
Tax Policy Center. How Did the TCJA and OBBBA Change the Standard Deduction and Itemized Deductions
3
Internal Revenue Service. Notice 2020-75
4
Kentucky Department of Revenue. Instructions for Kentucky Pass-Through Entity Tax
5
Kentucky Department of Revenue. New Pass-Through Entity Tax Forms Available for Filing
6
Kentucky Department of Revenue. 2023 Kentucky Income Tax Changes
7
Justia Law. Kentucky Code 141 – 141.206 Filing of Returns by Pass-Through Entities
8
Kentucky Department of Revenue. Instructions for Kentucky Pass-Through Entity Tax – 2024
9
Kentucky Department of Revenue. Form 740-PTET 2024