How to Claim the Kentucky Inventory Tax Credit

The Kentucky Inventory Tax Credit allows businesses to recover costs from local property taxes paid on their inventory. This nonrefundable credit is applied against a business’s state income tax or its limited liability entity tax liability. The credit reimburses companies for the ad valorem taxes, which are taxes based on the assessed value of property, that they have paid on their stock of goods.

Determining Eligibility for the Credit

To qualify for the inventory tax credit, a business must be subject to Kentucky’s income tax or the limited liability entity tax (LLET). This includes C corporations, S corporations, partnerships, and limited liability companies. Sole proprietors who report their business income on a Schedule C are also eligible. The credit can also pass through from partnerships and S corporations to their individual owners for use on their personal returns.

Qualifying inventory encompasses goods held for sale or lease in the ordinary course of business, including raw materials, work-in-progress, and finished products. For example, a car dealership’s vehicles on the lot or a manufacturer’s stockpile of parts and completed goods would be considered qualifying inventory. Inventory that is merely in transit through Kentucky and not intended for a final destination within the state does not qualify, as it must have a taxable presence, or “situs,” in a Kentucky locality. The property must be reported on the Tangible Personal Property Tax Return, Form 62A500.

Calculating the Credit Amount

The credit is equal to 100% of the Kentucky ad valorem tax that a business has timely paid on its qualifying inventory. This credit is nonrefundable, which means it can reduce a taxpayer’s liability to zero but will not generate a tax refund for any excess amount. Kentucky law does not allow any unused portion of the credit to be carried forward, so it must be used in the tax year the ad valorem tax was paid.

Required Information and Forms

The primary document for this purpose is Kentucky Schedule INV, “Credit for Ad Valorem Taxes Paid on Inventory.” This schedule is used to calculate the total credit amount and must be submitted with the business’s annual tax return.

To properly complete Schedule INV, a taxpayer needs detailed information from their local property tax records. All of this information is found on the tangible personal property tax bill received from the local county sheriff’s office. This includes:

• The county where the inventory tax was paid
• The specific property tax bill number
• The date the payment was made
• The exact amount of ad valorem tax paid on the inventory portion of the property

The taxpayer must attach photocopies of the front and back of the relevant property tax bills to Schedule INV as supporting documentation.

How to Claim the Credit

The completed Schedule INV must be attached to the business’s primary tax filing. For corporations, this is Form 720, the Kentucky Corporation Income and LLET Return; for S corporations, it is Form 720S; and for partnerships, it is Form 765. The total credit amount from Schedule INV is transferred to the main tax return, directly reducing the calculated tax liability for the year.

A prerequisite for claiming the credit is the timely payment of the property tax bill. This requires filing the separate tangible property tax return with the local Property Valuation Administrator (PVA) between January 1 and May 15. Failure to attach Schedule INV and the supporting tax bills to the income tax return will result in the credit being disallowed.