Must the Kansas expensing deduction be added back when figuring income for a homestead refund?

Plain-English summary

Kansas Notice 13-06 answers whether the Kansas expensing deduction can reduce a homestead claimant's income. It cannot.

How homestead income is defined. "Income" for a homestead property tax refund is defined in K.S.A. 79-4502 as the sum of adjusted gross income under the Kansas income tax act (plus other items). The Homestead Claim form (Line 4) instructs claimants to start from Form K-40 line 3 (Kansas adjusted gross income), adding back net operating losses and net capital losses.

Why the expensing deduction is added back. The Kansas expensing deduction shows up as a subtraction modification on Schedule S, Part A, Line A18, but it is authorized by K.S.A. 79-32,143a, not by the modifications listed in K.S.A. 79-32,117. Because Kansas adjusted gross income is federal AGI adjusted by the K.S.A. 79-32,117 modifications, the expensing deduction is not part of that figure for homestead purposes. So the Homestead Claim Line 4 instruction is incomplete: in addition to adding back net operating and net capital losses, the claimant must also add back the Kansas expensing deduction to arrive at the correct Kansas adjusted gross income for the refund.

No income-tax effect. How the expensing deduction is treated for homestead purposes has no effect on the taxpayer's income tax liability.

Date note. The notice bears no printed issue date.

What this means for you

Homestead refund claimants who took the Kansas expensing deduction

• Add the expensing deduction back (along with net operating and net capital losses) when figuring your income for the homestead refund; it does not lower your refund "income."

Tax preparers

• Do not let the Schedule S expensing deduction reduce homestead income; the Line 4 instruction needs this extra add-back.

Common questions

Can the expensing deduction lower homestead income? No -- it must be added back.

Why? It is authorized by K.S.A. 79-32,143a, not by the K.S.A. 79-32,117 modifications that define Kansas adjusted gross income.

Does this change my income tax? No -- it only affects the homestead refund income calculation.

What else gets added back on Line 4? Net operating losses and net capital losses, per the Homestead Claim instructions.

Citations and references

• K.S.A. 79-4502 -- definition of "income" for homestead property tax refund claims.
• K.S.A. 79-32,117 -- the modifications that define Kansas adjusted gross income (which do not include the expensing deduction).
• K.S.A. 79-32,143a -- the Kansas expensing deduction, which must be added back for homestead income.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 13-06

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 13-06

           HOMESTEAD PROPERTY TAX REFUNDS – EXPENSING DEDUCTIONS

  Advice has been requested regarding the calculation of "income" for homestead property

tax refund purposes, and specifically whether the Kansas expensing deduction can be used to
reduce a claimant's income.

 The definition of "income" for the purpose of the homestead property tax refund claims is

found in K.S.A. 4502. The statute begins by stating:

       (a) "Income" means the sum of adjusted gross income under the Kansas income
 tax act . . ."

 The instructions for the Kansas Homestead Claim form, Line 4, state, "If you file a Kansas

income tax return, enter in the first space your adjusted gross income from line 3 of your Form
K-40 (adding back any net operating loss or net capital losses)."

  On the Kansas income tax return, Form K-40, line 1 is "Federal adjusted gross income"

from the taxpayer's federal return. Line 2 is "Modifications" from Kansas Schedule S, Line
A21. Line 3 is "Kansas adjusted gross income", which is the result of adding or subtracting Line
2 to or from Line 1.

  On Schedule S, modifications are listed on Part A. Addition modifications are listed on

lines A1 through A7. Subtraction modifications are listed on lines A8 through A20. One of the
subtraction modifications, on line A18, is shown as "Kansas expensing deduction".

  Although the Kansas expensing deduction is shown as a modification on Schedule S, Part

A, it is not a modification contained in K.S.A. 79-32, 117, and so it cannot be used in the
calculation of income for homestead property tax refund purposes.

 Under the Kansas income tax act, the term "adjusted gross income" is defined in K.S.A.

79-32,117. Subsection (a) of the statute provides:

       (a) The Kansas adjusted gross income of an individual means such individual's
 federal adjusted gross income for the taxable year, with the modifications specified in
 this section.

  Specific addition modifications are found in subsection (b) of the statute.        Specific

subtraction modifications are found in subsection (c) of the statute.

                                                                                        Page 2

   The Kansas expensing deduction is found in K.S.A. 79-32,143a. The statute provides, in

part, that "a taxpayer may elect to take an expense deduction from Kansas net income tax." The
term "Kansas net income" is synonymous with "Kansas adjusted gross income", and the
Department interprets "Kansas net income" as meaning "Kansas adjusted gross income".

 The expensing deduction is claimed against Kansas adjusted gross income for Kansas

income tax purposes, but it is not a modification from federal adjusted gross income as set forth
in K.S.A. 79-32,117.

  Because the Kansas expensing deduction cannot be subtracted from federal adjusted gross

income in computing Kansas adjusted gross income for purposes of the homestead property tax
refund, the instructions for the Kansas Homestead Claim form, Line 4, which state, "If you file a
Kansas income tax return, enter in the first space your adjusted gross income from line 3 of your
Form K-40 (adding back any net operating loss or net capital losses)" are incomplete. In
addition to adding back any net operating loss or net capital losses the claimant must also "add
back" the amount of the Kansas expensing deduction in determining Kansas adjusted gross
income for purposes of the homestead property tax refund. This "add back" corrects the amount
shown on Line 3 of Kansas Form K-40 to be Kansas adjusted gross income as it is defined under
the Kansas income tax act and for purposes of Kansas homestead property tax refunds.

 It should be noted the manner in which the expensing deduction is treated for homestead

property tax refund purposes has no effect on the calculation of a taxpayer's income tax liability.

                                  Taxpayer Assistance

 Additional copies of this notice, forms or publications are available from our web site,

www.ksrevenue.org. If you have questions about homestead property tax refunds, 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