After HB 2117, can Kansas individuals still deduct or carry net operating losses starting in 2013?

Plain-English summary

Kansas Notice 12-08 explains how 2012 House Bill 2117 treats net operating losses (NOLs) for individuals beginning in tax year 2013.

In brief, the notice states:

1. The NOL deduction for individuals is eliminated starting in tax year 2013.
2. An individual may not carry NOLs forward to 2013 or later, or back to earlier years.
3. The requirement to add back the federal NOL deduction as an addition modification remains in effect.

New language. Section 17 amends K.S.A. 79-32,143 to add subsection (g): for tax year 2013 and all years thereafter, an NOL is available only to taxpayers subject to the corporate income tax imposed by K.S.A. 79-32,110(c), and used only to determine that corporate income tax liability.

Why. The Bill exempts business income reported on lines 12, 17, and 18 of federal Form 1040 (Schedules C, E, and F) from Kansas tax, so the related losses are no longer deductible by individuals.

Carry-forward and carry-back. K.S.A. 79-32,143 generally requires post-1987 NOLs to be carried forward (up to ten years) before any carry-back. Because NOLs are not allowed on individual returns for 2013 and later, losses from 2012 and prior years cannot be carried forward to 2013 -- and this does not create a carry-back opportunity. Such carry-over losses simply become unavailable as of January 1, 2013.

Modifications. Kansas income tax starts from federal adjusted gross income with modifications under K.S.A. 79-32,117. K.S.A. 79-32,117(b)(iii) still requires the federal NOL deduction to be added back; HB 2117 did not change this, so the add-back continues for 2013 and later.

Date note. The notice bears no printed issue date; it is dated to mid-2012 by its position in the 2012 notice sequence (after Notice 12-01, June 11, 2012, and before Notice 12-15, July 19, 2012).

What this means for you

Individuals with business or farm losses

• For tax year 2013 and later, you cannot deduct a Kansas net operating loss.
• NOLs from 2012 and prior years cannot be carried forward into 2013, and they cannot be carried back instead.
• You must still add back the federal NOL deduction in computing Kansas adjusted gross income.

C corporations

• The NOL deduction remains available to corporations subject to the Kansas corporate income tax.

Tax preparers

• Treat individual carry-over NOLs as unavailable as of January 1, 2013, and continue the federal NOL add-back.

Common questions

Can an individual deduct a net operating loss in 2013? No -- the deduction is available only to C corporations for 2013 and later years.

Can I carry a 2012 individual NOL forward to 2013? No, and it cannot be carried back instead; it becomes unavailable as of January 1, 2013.

Does the federal NOL add-back still apply? Yes -- K.S.A. 79-32,117(b)(iii) still requires adding back the federal NOL deduction.

Who can still use NOLs? Taxpayers subject to the Kansas corporate income tax under K.S.A. 79-32,110(c).

Citations and references

• K.S.A. 79-32,143 -- net operating loss statute; Section 17 of HB 2117 adds subsection (g) limiting NOLs to C corporations for 2013 and later.
• K.S.A. 79-32,110(c) -- imposes the Kansas corporate income tax referenced by new subsection (g).
• K.S.A. 79-32,117(b)(iii) -- requires the federal net operating loss deduction to be added back; unchanged by HB 2117.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 12-08

Original ruling text

Policy & Research Phone: 785-296-3081
915 SW Harrison St FAX: 785-296-7928
Topeka KS 66612-1588 www.ksrevenue.org
Nick Jordan, Secretary Department of Revenue Sam Brownback, Governor
Richard Cram, Director

                                       NOTICE 12-08

                                 NET OPERATING LOSSES

In Brief

 During the 2012 Legislative Session House Bill 2117 was passed and signed into law. As

explained below, new provisions in the Bill provide:

 1)     The net operating deduction for individuals has been eliminated starting in tax
        year 2013.

 2)     An individual may not carry net operating losses forward to tax year 2013 or
        later years, or back to earlier years.

 3)     The requirement to add-back a federal net operating loss as an addition
        modification remains in effect.

Generally

  Provisions in the Bill change the way pass-through entities are taxed. These businesses,

including sole proprietorships, partnerships, S corporations, limited liability companies, and
other pass-through entities, are generally not taxed as corporations. Instead, if elected for federal
income tax purposes, the income is "passed through" to the business owner and, when the owner
is an individual, the income is taxed on the owner's individual income tax return.

  The Bill includes provisions which exempt the income of certain businesses from the

Kansas income tax beginning in tax year 2013. Specifically, the Bill exempts income reported
on lines 12, 17 and 18 of IRS Form 1040. Line 12 is self-employment income from federal
Schedule C. Line 17 is certain income from rental real estate, trusts and "pass-through" business
entities, including partnerships, Subchapter S corporations and limited liability companies
reported on federal Schedule E. Line 18 is farm income from federal Schedule F.

  Because these categories of income of certain businesses will no longer be subject to tax,

the Bill includes provisions which prohibit individuals from deducting losses arising from these
categories. Beginning in tax year 2013, these deductions will only be available to corporations
that are subject to the Kansas corporate income tax, i.e. C corporations. One of the deductions
that will not be available to individuals is the net operating loss deduction.

New Language

 The statute controlling the use of net operating losses is K.S.A. 79-32,143. Section 17 of

the Bill amends K.S.A. 79-32,143 to add new subsection (g) which provides:

       (g) For tax year 2013, and all years thereafter, a net operating loss allowed by
 this section shall only be available to taxpayers subject to the income tax on
 corporations imposed pursuant to subsection (c) of K.S.A. 79-32,110, and
 amendments thereto, and used only to determine such taxpayer's corporate income
 tax liability.

  In accordance with the new law, no net operating loss deduction will be allowed for an

individual for tax year 2013 or later years.

Carry-Forward and Carry-Back

  K.S.A. 79-32,143 requires that net operating losses which are incurred after December 31,

1987, be carried forward until fully used or until ten years has elapsed, whichever occurs first. If
ten years has elapsed, or the taxpayer has died, and unused loss remains, the loss may be carried
back. A Kansas net operating loss which is incurred after December 31, 1987 cannot be carried
back prior to carrying the loss forward.

  Because net operating losses will not be allowed on individual income tax returns for tax

year 2013 and later years, net operating losses from tax year 2012 and prior years cannot be
carried forward to tax year 2013 or later years. This does not mean, however, that these losses
can be carried back to prior years. New subsection (g) provides that net operating losses are
available only to C corporations, and not to individuals. It does not create a situation where a net
operating carry-back will be allowed. As a result, carry-over losses from tax year 2012 or prior
years will simply not be available as of January 1, 2013.

Modifications

  The calculation of an individual's Kansas income tax starts with federal adjusted gross

income. Certain modifications, either additions or subtractions, required by K.S.A. 79-32,117
are then made to arrive at Kansas adjusted gross income. K.S.A 79-32,117(b)(iii) currently
provides that the federal net operating loss deduction claimed on the taxpayer's federal income
tax return must be added to federal adjusted gross income in computing Kansas adjusted gross
income. HB 2117 did not amend this provision, so the requirement of adding back the amount of
the federal net operating loss deduction will continue for tax year 2013 and later years.

                               Taxpayer Assistance

Additional copies of this notice, forms or publications are available from our web site,
www.ksrevenue.org. If you have questions about income tax, please contact:

                           Taxpayer Assistance Center
                          Kansas Department of Revenue
                          915 SW Harrison St., 1st Floor
                            Topeka, KS 66612-1588
                              Phone: 785-368-8222
                               Fax: 785-291-3614