These changes include adding an additional tax bracket, increasing tax rates, changing additions to and subtractions from federal gross income, broadening Kansas itemized deductions, enacting a child and dependent care credit, and extending sales tax and revenue (STAR) bond projects. This tax alert focuses on the repeal of the pass-through income subtraction that was enacted in 2012.
In 2012, the Kansas Legislature enacted House Bill 2117 which allowed individual income taxpayers a subtraction from their federal adjusted gross income for net profit from business from federal Schedule C, net income from rental real estate, royalties, partnerships, S corporations, estates, and trusts from federal Schedule E, and nonfarm income from federal Schedule F. The recently passed Senate Bill 30 removes this subtraction retroactively to Jan.1, 2017. This means, that effective Jan. 1, 2017, pass-through income reported on Schedules C, E, and F becomes taxable to the recipient on their Kansas individual income tax return.
Pass-through entities with Kansas activity may have decided to forgo filing a composite return in past years so that their owners could utilize the pass-through income subtraction on their individual income tax returns. Entities who decided to forgo the composite return based on the subtraction should revisit this decision now that the subtraction is no longer available. Additionally, taxpayers who have Kansas pass-through income should calculate their Kansas individual income tax quarterly estimates taking into consideration the repeal of the pass-through income subtraction. The state is providing penalty relief for underpayments related to the changes enacted under Senate Bill 30 as long as the underpayment is rectified prior to April 17, 2018.
For additional information or for assistance with determining how Kansas Senate Bill 30 may affect your state filings, please contact your Plante Moran tax advisor.