Tax season can be a dreaded time of year for small business owners. 

If your company grew quickly last year, adjusting your estimated tax withholdings is a must. Otherwise, those unexpected costs (and potential penalties) can hit the bank account hard. 

We have some great news for small business owners in Eastern Kentucky. There’s a state tax credit that could save you thousands of dollars – possibly even tens of thousands. And many small businesses in our region are eligible to apply for this benefit.

How? Keep reading for our guide to the Kentucky Small Business Tax Credit (KSBTC). Be sure to also share this article with your CPA to review your eligibility and apply for the KSBTC on your 2022 return. 

What is the Kentucky Small Business Tax Credit?

The Kentucky Small Business Tax Credit (KSBTC), offered by the Kentucky Cabinet for Economic Development (CED), is an incentive program for small businesses. 

CED wants to see our small business community grow and thrive. CED is also interested in supporting the small businesses creating sustainable jobs for local workers. 

According to the US Small Business Administration, small businesses generated 12.9 million net new jobs over the past 25 years. This accounts for 2 out of every 3 jobs added to the economy.

By allowing small businesses to retain a larger share of their earnings, CED hopes it will help more small businesses to overcome the challenges of long-term survival. This also tends to form a virtuous cycle: more thriving local businesses creating and retaining more high-quality, local jobs, which results in a stronger regional economy. 

How much may small business owners receive through the Kentucky Small Business Tax Credit program?

The amount offered through the KSBTC ranges between $3,500 to $25,000 per year. This could either reduce your remaining tax bill or result in a tax return. It’ll depend on how much you owe, plus what you’ve already remitted to the state through estimated quarterly payments.  

The state calculates the KSBTC based on the number of eligible hires made and the value of qualified technology investments in a calendar year. Your credit may be the lesser of: 

• $3,500 times the number of eligible hires.
• The rounded dollar amount of the technology investment.

This will vary from business to business.

Eligibility for the Kentucky Small Business Tax Credit

Let’s unpack the criteria in greater detail. 

To be eligible for the KSBTC, you must have: 

• Hired and sustained at least one new job in the last year, paying at least $10.88/hour.
• Purchased at least $5,000 in qualifying equipment or technology.
• 50 or fewer employees (typically).

Most industry segments are eligible, including retail, food service, e-commerce, tech, and more.

Putting the KSBTC into practice

Let’s play out a few hypothetical scenarios with fictitious companies. Each example assumes KSBTC program eligibility and calculates its unique tax credit for the 2022 tax year.

Example #1: Artie’s Mufflers

In June 2022, Artie’s Mufflers invested $8,000 in new diagnostic equipment to speed up their customer throughput capacity. In January 2022, the shop hired a new technician at $20 per hour. 

The KSBTC offers $3,500 per qualified worker or the rounded dollar amount of eligible technology investments — whichever is lower. Artie’s Mufflers would be eligible for a $3,500 tax credit in the 2022 tax year after completing an application.

Example #2: Sammie’s Shoe Store 

Sammie’s Shoe Store sells retail items, including shoes and accessories, via their brick-and-mortar location and online. In 2022, they invested $6,000 in a new point-of-sale system, computers, and front desk furniture. They hired and retained 3 full-time employees in July 2021 with a wage of $12 per hour. 

As we know, the KSBTC offers $3,500 per qualified worker or the total eligible technology investments — whichever is the lower dollar amount. In this case, Sammie’s Shoe Store would be eligible for a $6,000 tax credit in the 2022 tax year.

Example #3: Rocky Road Ice Cream Parlor
Rocky Road Ice Cream Parlor opened its doors in July 2021. It sells ice cream scoops to tourists in the summer and fulfills local orders for cakes, pastries, and ice cream pints. It hired 2 full-time employees in September 2021.  

In August 2022, Rocky Road Ice Cream Parlor invested $25,000 in a larger fridge, freezer, and oven to support its expanding operations. 

According to the KSBTC guidelines, they may receive a $7,000 tax credit for the 2 workers they hired and retained. 

Review the complete KSBTC Guidelines with your CPA

You should review the KSBTC Guidelines on your own and with your CPA. 

By the way — do you have a CPA? If you don’t, you may be missing out on tax credits like the KSBTC. Plus, a CPA can help you optimize your overall tax strategy. 

If you’re not already using a tool like Quickbooks Online, a CPA can help you get onboarded. Or if you’re already using accounting software, they can help with best practices and bookkeeping reconciliations. 

Most importantly, your CPA will identify common expense categories to ensure you’re making accurate tax payments and maximizing your potential savings. Knowing you aren’t overpaying on your taxes — or underpaying and subject to penalties — gives you peace of mind that’s irreplaceable. 

Apply for the KSBTC now

Consult your CPA today. Ask if you’re eligible for the KSBTC and enlist their help to gather the materials necessary to apply. 

If you determine that your company is eligible, make sure you complete an application. The staff at the CED Office of Entrepreneurship (OOE) encourages applicants to reach out for support with application completeness and accuracy. One percent of the eligible tax credit amount will be due if OOE approves your application. 

Email cedsbsd@ky.gov or call (800) 626-2930 for assistance with the KSBTC application. You may also contact SOAR Innovation with questions about the KSBTC — as well as other small business incentives and tax credits available to entrepreneurs in Eastern Kentucky.