Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
141.120(12)(a) 2., 141.121,
141.901
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
141.121 and
141.901
require business or apportionable income of multistate corporations to be
apportioned to Kentucky by multiplying the income by a fractionKRS
131.130(1) authorizes the
department to promulgate administrative regulations to administer and enforce
Kentucky's tax laws. This administrative regulation establishes the
requirements for determining the property factor of a multistate
corporation.
Section 1. Definitions.
(1) "Annual rent" means the actual sum of
money or other consideration payable, directly or indirectly, by the
corporation for its benefit for the use of the property;
(a) Including:
1. Any amount payable for the use of real or
tangible personal property whether designated as a fixed sum of money or as a
percentage of sales, profits or otherwise; and
2. Any amount payable as additional rent or
in lieu of rents, such as interest, taxes, insurance, repairs or any other
items which are required to be paid by the terms of the lease or other
arrangement; and
(b) Not
including:
1. Amounts paid as service
charges, such as utilities or janitorial services; and
2. Incidental day-to-day expenses such as
hotel or motel accommodations, or daily rental of automobiles.
(2) "Net annual rental
rate" means the total annual rental paid, less total annual rental received
from subrentals, which shall:
(a) Be
subtracted if they constitute nonbusiness or non-apportionable income;
and
(b) Not be subtracted if they
constitute business or apportionable income because the property which produces
the subrentals is used in the regular course of a trade or business of the
taxpayer when it is producing business or apportionable income.
(3) "Original cost" means the
basis of the property for federal income tax purposes, prior to any federal
adjustments, at the time of acquisition by the corporation and adjusted by
subsequent capital additions or improvements thereto and partial disposition
thereof, by reason of sale, exchange, or abandonment.
Section 2. General. The property factor shall
include all real and tangible personal property owned or rented and used during
the taxable year, except coin, and currency.
Section 3. Property Used.
(1) Property shall be included in the
property factor if it is actually used or is available for or capable of being
used during the taxable year. Property held as reserves or standby facilities
or property held as a reserve source of materials shall be included in the
factor. For example, a plant temporarily idle or raw material reserves not
currently being processed shall be included in the factor.
(2) Inventory in process shall be included in
the factor. Property or equipment under construction during the taxable year
shall be excluded from the factor until it is actually used or is available for
or capable of being used during the taxable year.
(3) Property used shall remain in the
property factor until its permanent withdrawal is established by an
identifiable event such as its sale.
Section 4. Consistency in Reporting.
(1) Year-to-year consistency. In filing
returns with this state, if the taxpayer departs from or modifies the manner of
valuing property or of excluding property from or including property in the
property factor used in returns for prior years, the taxpayer shall disclose in
the return for the current year the nature and extent of the
modification.
(2) State-to-state
consistency. If the returns or reports filed by the taxpayer with all states to
which the taxpayer reports are not uniform in the valuation of property and in
the exclusion of property from or the inclusion of property in the property
factor, the taxpayer shall disclose in its return to this state the nature and
extent of the variance.
Section
5. Property Factor: Numerator.
(1) Property in transit between a buyer and
seller shall be included in the numerator according to the state of
destination. Property in transit between locations of the same corporation
shall be considered at the destination location for purposes of the property
factor.
(2) The value of mobile or
movable property such as construction equipment, trucks or leased electronic
equipment which is located within and without Kentucky during the taxable year
shall be determined, for purposes of the numerator of the factor, on the basis
of total time within the state during the taxable year. An automobile assigned
to a traveling employee shall be included in the numerator of the factor of the
state to which the employee's compensation is assigned under the payroll factor
or in the numerator of the state in which the automobile is licensed.
Section 6. Valuation of Owned
Property.
(1) Property owned by the
corporation shall be valued at original cost.
(2) Capitalized intangible drilling and
development costs shall be included in the property factor whether or not they
have been expensed for either federal or state purposes.
(3) If the original cost of property is not
ascertainable, is nominal, or is zero, the property shall be included in the
factor at its fair market value at the date of acquisition by the
corporation.
(4) Inventory shall be
included in the factor by the valuation method used for federal income tax
purposes.
(5) Property acquired by
gift or inheritance shall be included in the factor at its basis for
depreciation for federal income tax purposes.
Section 7. Rented Property.
(1) Annual rental rate shall be determined as
follows:
(a) If the property is rented for a
twelve (12) month period, the annual rental payment;
(b) If the property is rented for less than a
twelve (12) month period, the net rent paid for the actual period of rental;
or
(c) If the property is rented
for a period of twelve (12) or more months, and the current tax period covers a
period of less than twelve (12) months due, for example, to a reorganization or
change of accounting period, the net rent paid for the short tax period shall
be annualized.
(2)
(a) Property rented by a corporation shall be
valued at eight (8) times the net annual rental rate.
(b) If this calculation results in a negative
value or a clearly inaccurate valuation, any other method which will properly
reflect the value may be required by the department or may be requested by the
corporation, except the net annual rental rate shall not be less than the total
annual rental rate multiplied by a fraction, the numerator of which is the fair
market value of rent applicable to rental property used by the corporation
divided by the fair market value of rent applicable to all of the corporation's
rental property.
(c) If a payment
includes rent and other charges unsegregated, the amount of rent shall be
determined by consideration of the relative values of the rent and the other
items.
(3) If property is
used at no charge or rented for a nominal rate, the property shall be included
in the property factor on the basis of the fair market value of rent for
comparable property in the area.
(4) Leasehold improvements shall, for the
purposes of the property factor, be treated as property owned by the
corporation regardless of whether the corporation is entitled to remove the
improvements or the improvements revert to the lessor upon expiration of the
lease. The original cost of a leasehold improvement shall be included in the
factor.
Section 8.
Monthly Averaging of Property. Averaging by monthly values shall apply if:
(1) Fluctuations in the values of the
property exist during the tax period;
(2) Property is acquired after the beginning
of the tax period or disposed of before the end of the tax period; or
(3) Fluctuations in the percentage of
property used in Kentucky exist during the tax period.
Section 9. This administrative regulation
shall be effective for tax periods beginning on or after January 1,
2005.
STATUTORY AUTHORITY:
KRS
131.130,
141.120(12)(a)
2., 141.121, 141.901