Kentucky State Subtractions

Enter the amount of taxable state income tax refund or credit reported on your federal return and included as income on Form 740, page 1, line 5.

Enter interest income from U.S. government bonds and securities. Do not include taxable interest from securities, such as FNMA (Fannie Mae), GNMA (Ginnie Mae) and FHLMC (Freddie Mac), which are merely guaranteed by the U.S. government.

Pension Income Exclusion—The exclusion amount is 100 percent of taxable retirement benefits or $31,110, whichever is less. All pension and retirement income paid under a written retirement plan (qualified or unqualified) is eligible for exclusion. This includes pensions, annuities, IRA accounts, 401(k) and similar deferred compensation plans, income received from converting a regular IRA to a Roth IRA, death benefits, disability retirement benefits and other similar accounts or plans.

This exclusion is for each taxpayer and must be computed independently of your spouse who may be filing on the same return. A taxpayer and spouse must complete and claim their own exclusion, regardless of filing status. Joint filers—Combine the separately computed pension exclusion amounts and enter on Schedule M, Line 9, Column B.

Enter Social Security and Social Security equivalent U.S. Railroad Retirement Board benefits included on Form 740, page 1, line 5. These amounts are reported on federal Form 1040 or 1040–SR, line 6(b).

Enter resident adjustment from Kentucky Schedule K-1. Partners, beneficiaries of estates and trusts and S corporation shareholders, see Kentucky Schedule K-1 instructions. Subtract the distributive share of net income from an S corporation subject to the franchise tax imposed under KRS 136.505 or the capital stock tax imposed under KRS 136.300.

Depreciation, Section 179 Deduction and Gains/ Losses From Disposition of Assets—Important: Use Schedule M, lines 3 and 12 only if you have elected for federal income tax purposes to take the 30 percent or the 50 percent special depreciation allowance or the increased Section 179 deduction for property placed in service after September 10, 2001. A copy of the federal Form 4562 if filed for federal income tax purposes must be submitted with Form 740 to verify that no adjustments are required. Reporting Depreciation and Section 179 Deduction Differences for Property Placed in Service After September 10, 2001 Create a Kentucky Form 4562 by entering Kentucky at the top center of a federal Form 4562 above Depreciation and Amortization. In Part I, line 1 enter the Kentucky limit of $25,000 and in Part I, line 3 enter the Kentucky phase-out amount of $200,000. In Part II, strike through and ignore line 14, Special depreciation allowance for qualified property placed in service during the tax year. Use the created Kentucky Form 4562 to compute Kentucky depreciation and Section 179 deduction in accordance with the IRC in effect on December 31, 2001. Note: In determining the Section 179 deduction for Kentucky the income limitation on line 11 is Kentucky net income before the Section 179 deduction instead of federal taxable income. Enclose the created Kentucky Form 4562 to Form 740 and enter the amount of Kentucky depreciation from line 22 on line 12.

Enter Active Duty Military Pay—Enter active duty military pay included on Form 740, page 1, line 5. All military pay received by members of the Armed Forces while on active duty can be excluded. Active duty is defined in KRS 141.175.

Enter other subtractions from federal adjusted gross income not listed above (enclose detailed schedule). Include:

• income of precinct workers for election training or working at election booths;

• capital gains on property taken by eminent domain;

• passive activity loss adjustment (see Form 8582-K and instructions);

• income of a child reported on the parent’s return;

• artistic charitable contributions (if you do not itemize deductions);

• the federal work opportunity credit used to reduce wages;

• at-risk limitations (see instructions below);

• qualified farm networking project differences per KRS 141.0101(15);

• differences in the gains (losses) from the sale of intangible assets amortized under the provisions of the Revenue Reconciliation Act of 1993;

• differences in gains (losses) from assets purchased after September 10, 2001;

• income of military personnel killed in the line of duty; and

•federal excess business loss deduction.

Kentucky Net Operating Loss—Enter Kentucky net operating loss calculated from prior years using Kentucky Schedule KNOL. Net operating losses generated on or after January 1, 2018, are limited to 80% of the Kentucky taxable income without regard to the net operating loss, but any unused amounts are available for carryforward indefinitely. Schedule KNOL must be completed if you are claiming a Kentucky net operating loss deduction on Kentucky Schedule M. See Schedule KNOL instructions. Note: If your net operating loss occurred in 2019, complete Part I of Kentucky Schedule KNOL to determine the amount of loss to be carried forward in any future years. Retain a copy for your records and enclose a copy with your return.