Is Kansas nonwage business income (from an LLC, S corp, or sole proprietorship) taxable again after Senate Bill 30?

Plain-English summary

Kansas Notice 17-03 (revised December 6, 2017) explains how Senate Bill 30 (2017), Section 5, amended K.S.A. 79-32,117 to end the 2012 exemption for nonwage business income -- reversing the signature feature of the 2012 Kansas tax cuts.

Background. Kansas income tax starts from federal adjusted gross income, then applies addition and subtraction modifications under K.S.A. 79-32,117. In 2012, Kansas made certain nonwage business income exempt by allowing it to be subtracted, while requiring the related losses and deductions to be added back so taxpayers couldn't claim excess losses against exempt income.

What Senate Bill 30 did. It limited both sets of modifications to tax years beginning after December 31, 2012 and ending before January 1, 2017. That means, starting with tax year 2017:

• Subtraction modifications end -- income from a sole proprietorship (Schedule C), partnerships, S corporations, LLCs, estates and trusts, and rental/royalty income (Schedule E), and farm income (Schedule F) may no longer be subtracted, so it is again subject to Kansas income tax.
• Addition modifications end -- the required add-back of the related business losses (Schedule C/E/F) and deductions (self-employment tax, self-employed retirement and health insurance, domestic production activities) is removed, so those losses and deductions may again offset income.

Overall effect. Nonwage business income is taxable again, while related losses and deductions may again be offset against it.

Estimated tax. Because this income is taxable once more, affected taxpayers -- who stopped paying estimates for several years -- should immediately resume making estimated tax payments for 2017 (see Notice 17-09).

What this means for you

Owners of pass-through businesses (LLCs, S corps, partnerships, sole proprietors)

• Your business income is subject to Kansas income tax again beginning with tax year 2017.
• The related losses and deductions the 2012 law made you add back can again be used.

Farmers and rental-property owners

• Schedule F farm income and Schedule E rental/royalty income are taxable again from 2017.

Anyone who stopped paying Kansas estimates

• Resume estimated tax payments now to avoid a large unpaid bill; see Notice 17-09 for details.

Common questions

Is my LLC/S corp/sole proprietor income taxable again? Yes -- from tax year 2017, nonwage business income is subject to Kansas income tax.

Can I still use the related losses and deductions? Yes -- the add-back requirement is removed, so they may offset income again.

Do I need to make estimated payments again? Yes -- the Department urges affected taxpayers to resume estimates for 2017 (Notice 17-09).

When did the exemption end? For tax years beginning on or after January 1, 2017.

Citations and references

• Senate Bill 30 (2017), Section 5 -- amended K.S.A. 79-32,117 to limit the nonwage-business-income subtraction and related addition modifications to tax years 2013 through 2016.
• Result from tax year 2017: nonwage business income taxable again; related losses/deductions again allowed.
• Estimated tax payments should resume -- see Notice 17-09.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 17-03

Original ruling text

Tax Policy Group Phone: 785-296-3081
915 SW Harrison St FAX: 785-296-7928
Topeka KS 66612-1588 www.ksrevenue.org
Samuel M. Williams, Secretary Department of Revenue Sam Brownback, Governor

                                      Notice 17-03

           Changes To Addition And Subtraction Modifications Related To
                            Nonwage Business Income
                           (Revised December 6, 2017)

                                        Generally

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.

The 2017 Kansas Legislature approved Senate Bill 30, which impacts state income tax law.
Provisions in Section 5 of the Bill amended K.S.A. 79-32,117 to limit the time period for which
five addition modifications and four subtraction modifications are effective. The overall effect of
these amendments is to make these modifications effective only for tax years beginning after
December 31, 2012 and ending before January 1, 2017.

                                  Changes In The Law

Addition Modifications – Certain Losses and Deductions No Longer Subject to Tax

As explained in Notice 12-11, in 2012, Kansas law was amended to provide that for tax years
beginning after December 31, 2012, certain categories of nonwage business income were exempt
from income tax. To prevent individuals from claiming excessive losses or deductions associated
with this nonwage business income there was a requirement that certain losses or deductions be
added to the taxpayer's federal adjusted gross income when computing Kansas income tax.
Because Senate Bill 30 provides this nonwage business income is no longer exempt from Kansas
income tax (as explained below in the section on Subtraction Modifications) the requirement that
certain losses or deductions associated with this nonwage business income be added to federal
adjusted gross income when computing Kansas income tax has been removed.

                                          Losses

                                   (1) Business losses

Prior to passage of Senate Bill 30, subsection (b)(xix) provided an addition modification for
business losses reported on federal Schedule C and line 12 of federal Form 1040. Under federal
law, Schedule C is used to report income or losses from a sole proprietorship, and income paid to
individuals considered statutory employees for federal income tax purposes. Now this
modification is limited to tax years beginning after December 31, 2012, and ending before January
1, 2017. As a result, these losses are no longer added to federal adjusted gross income when
calculating Kansas income tax. Specifically, the statute now provides:

       (b) There shall be added to federal adjusted gross income:

      (xix) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of any: (1) Loss from business as determined under the
 federal internal revenue code and reported from schedule C and on line 12 of the
 taxpayer's form 1040 federal individual income tax return; . . .

              (2) Losses From Certain Entities and Certain Types of Losses

Prior to passage of Senate Bill 30, subsection (b)(xix) provided an addition modification for losses
reported on federal Schedule E and line 17 of federal From 1040. Under federal law, Schedule E
is used to report income received from, or losses related to, certain entities (including partnerships,
S corporations, limited liability companies, estates and trusts) and certain types of income
(including income from rental real estate, royalties, residual interests in real estate mortgage
investment conduits, and net farm rental). Now this modification is limited to tax years beginning
after December 31, 2012, and ending before January 1, 2017. As a result, these losses are no longer
added to federal adjusted gross income when calculating Kansas income tax. Specifically, the
statute now provides:

       (b) There shall be added to federal adjusted gross income:

       (xix) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of any: . . . . . (2) loss from rental real estate, royalties,
 partnerships, S corporations, except those wholly owned subsidiaries subject to the
 Kansas privilege tax, estates, trusts, residual interest in real estate mortgage investment
 conduits and net farm rental as determined under the federal internal revenue code and
 reported from schedule E and on line 17 of the taxpayer's form 1040 federal individual
 income tax return;

                                      (3) Farm Income

Prior to passage of Senate Bill 30, subsection (b)(xix) provided an addition modification for farm
losses reported on federal Schedule F and line 18 of federal Form 1040. Under federal law,
Schedule F is used to report net farm profit or loss. Now this modification is limited to tax years
beginning after December 31, 2012, and ending before January 1, 2017. As a result, these losses
are no longer added to federal adjusted gross income when calculating Kansas income tax.
Specifically, the statue now provides:

       (b) There shall be added to federal adjusted gross income:

       (xix) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of any: . . . . farm loss as determined under the federal
 internal revenue code and reported from schedule F and on line 18 of the taxpayer's
 form 1040 federal income tax return;

                                       Deductions

Certain items are deductible under federal law, but the deduction is not shown on federal Schedule
C, E, or F. Instead, the deduction is shown on a line of the federal Form 1040. These include:

 A.    One-half of self-employment taxes. Line 27, IRC §164(f)

 B.    Contributions to retirement plans by self-employed. Line 28, IRC §62(a)(6)

 C.    Purchases of health insurance by self-employed. Line 28, IRC §162(l)

 D.    Deduction for domestic production activities. Line 35, IRC §199

Prior to passage of Senate Bill 30, subsection (b) provided addition modifications for these
deductions. Now these modifications are limited to tax years beginning after December 31, 2012,
and ending before January 1, 2017. As a result, these deductions are no longer added to federal
adjusted gross income when calculating Kansas income tax. Specifically, the statute now provides:

Self-employment taxes

       (b) There shall be added to federal adjusted gross income:

       (xx) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of any deduction for self-employment taxes under section
 164(f) of the federal internal revenue code as in effect on January 1, 2012, and
 amendments thereto, in determining the federal adjusted gross income of an individual
 taxpayer, to the extent the deduction is attributable to income reported on schedule C,
 E or F and on line 12, 17 or 18 of the taxpayer's from 1040 federal income tax return.

Retirement plans by self-employed

       (b) There shall be added to federal adjusted gross income:

       (xxi) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of any deduction for pension, profit sharing, and annuity
 plans of self-employed individuals under section 62(a)(6) of the federal internal
 revenue code as in effect on January 1, 2012, and amendments thereto, in determining
 the federal adjusted gross income of an individual taxpayer.

Purchases of health insurance by self-employed.

       (b) There shall be added to federal adjusted gross income:

       (xxii) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of any deduction for health insurance under section 162(l)
 of the federal internal revenue code as in effect on January 1, 2012, and amendments
 thereto, in determining the federal adjusted gross income of an individual taxpayer.

Domestic production activities.

       (b) There shall be added to federal adjusted gross income:

       (xxiii) For all taxable years beginning after December 31, 2012, and ending
 before January 1, 2017, the amount of any deduction for domestic production activities
 under section 199 of the federal internal revenue code as in effect on January 1, 2012,
 and amendments thereto, in determining the federal adjusted gross income of an
 individual taxpayer.

Subtraction Modifications – Nonwage Business Income No Longer Exempt

In 2012, Kansas law was amended to provide that for tax years beginning after December 31, 2012,
there would be a subtraction modification for three categories of income: (1) nonwage business
income; (2) income from certain types of entities; and (3) farm income. Subsequent amendments
added other, related, subtraction modifications. Senate Bill 30 amends subsection (c) to remove
these subtraction modifications. By not allowing this income to be subtracted from federal adjusted
gross income when calculating Kansas adjusted gross income, this income is now subject to
Kansas income tax.

                    (1) Stockholders in Banks and Savings and Loans

Prior to passage of Senate Bill 30, subsection (c)(xiv) provided the subtraction modification, for
income received by a taxpayer who is a stockholder in a Kansas bank, national banking association,
savings and loan, or federal savings association, for which an S corporation election has been
made, excluded the portion of income or loss reported on schedule E and included on line 17 of
the taxpayer's form 1040 federal individual income tax return. This exclusion prevented a taxpayer
from claiming a deduction for this income twice; once under (c)(xiv) and once under (c)(xx). Now
this exclusion is limited to tax years beginning after December 31, 2012, and ending before January
1, 2017. As a result, all income that qualifies under (c)(xiv) may be subtracted from federal
adjusted gross income when calculating Kansas income tax. Specifically, the statute now provides:

       (xiv) For all taxable years commencing after December 31, 1996, that portion of
 any income of a bank organized under the laws of this state or any other state, a national
 banking association organized under the laws of the United States, an association
 organized under the savings and loan code of this state or any other state, or a federal
 savings association organized under the laws of the United States, for which an election
 as an S corporation under subchapter S of the federal internal revenue code is in effect,
 which accrues to the taxpayer who is a stockholder of such corporation and which is
 not distributed to the stockholders as dividends of the corporation. For all taxable years
 beginning after December 31, 2012, and ending before January 1, 2017, the amount of
 modification under this subsection shall exclude the portion of income or loss reported
 on schedule E and included on line 17 of the taxpayer's form 1040 federal individual
 income tax return.

                              (2) Nonwage Business Income

Prior to passage of Senate Bill 30, subsection (c)(xx) provided a subtraction modification for
income reported on federal Schedule C and line 12 of federal Form 1040. Under federal law,
Schedule C is available only to sole proprietors and to individuals considered statutory employees
for federal income tax purposes. Now this modification is limited to tax years beginning after
December 31, 2012, and ending before January 1, 2017. As a result, this income may no longer be
subtracted from federal adjusted gross income when calculating Kansas income tax. Specifically,
the statute now provides:

       (c) There shall be subtracted from federal adjusted gross income:

       (xx) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of any: (1) Net profit from business as determined under
 the federal internal revenue code and reported from schedule C and on line 12 of the
 taxpayer's form 1040 federal individual income tax return; . . .

             (3) Income From Certain Entities and Certain Types of Income

Prior to passage of Senate Bill 30, subsection (c)(xx) provided a subtraction modification for
income reported on federal Schedule E and line 17 of federal From 1040. Under federal law,
Schedule E is used to report income received from certain entities (including partnerships, S
corporations, limited liability companies, estates and trusts) and certain types of income (including
income from rental real estate, royalties, residual interests in real estate mortgage investment
conduits, and net farm rental). Now this modification is limited to tax years beginning after
December 31, 2012, and ending before January 1, 2017. As a result, this income may no longer be
subtracted from federal adjusted gross income when calculating Kansas income tax. Specifically,
the statute now provides:

       (c) There shall be subtracted from federal adjusted gross income:

       (xx) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of any: . . . . . (2) net income from rental real estate,
 royalties, partnerships, S corporations, estates, trusts, residual interest in real estate
 mortgage investment conduits and net farm rental as determined under the federal
 internal revenue code and reported from schedule E and on line 17 of the taxpayer's
 form 1040 federal individual income tax return;

                                     (4) Farm Income

Prior to passage of Senate Bill 30, subsection (c)(xx) provided a subtraction modification for farm
income reported on federal Schedule F and line 18 of federal Form 1040. Under federal law,
Schedule E is used to report net farm profit. Now, this modification is limited to tax years
beginning after December 31, 2012, and ending before January 1, 2017. As a result, this income
may no longer be subtracted from federal adjusted gross income when calculating Kansas income
tax. Specifically, the statute now provides:

       (c) There shall be subtracted from federal adjusted gross income:

      (xx) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of any: . . . . (3) net farm profit as determined under the
 federal internal revenue code and reported from schedule F and on line 18 of the
 taxpayer's form 1040 federal income tax return;

      (5) Draft, Breeding, Dairy Animals, and Animals Used for Sporting Purposes

Prior to passage of Senate Bill 30, subsection (c)(xxii) provided a subtraction modification for net
gain from the sale of breeding animals subject to depreciation. Now, this modification is limited
to tax years beginning after December 31, 2012, and ending before January 1, 2017. As a result,
this income may no longer be subtracted from federal adjusted gross income when calculating
Kansas income tax. Specifically, the statute now provides:

       (xxii) For all taxable years beginning after December 31, 2012, and ending before
 January 1, 2017, the amount of net gain from the sale of: (1) Cattle and horses,
 regardless of age, held by the taxpayer for draft, breeding, dairy or sporting purposes,
 and held by such taxpayer for 24 months or more from the date of acquisition; and (2)
 other livestock, regardless of age, held by the taxpayer for draft, breeding, dairy or
 sporting purposes, and held by such taxpayer for 12 months or more from the date of
 acquisition. The subtraction from federal adjusted gross income shall be limited to the
 amount of the additions recognized under the provisions of subsection (b)(xix)
 attributable to the business in which the livestock sold had been used. As used in this
 paragraph, the term "livestock" shall not include poultry.

                                    (5) Christmas Trees

Prior to passage of Senate Bill 30, subsection (c)(xxiv) provided a subtraction modification for net
gain from the sale of Christmas trees. Now, this modification is limited to tax years beginning after
December 31, 2012, and ending before January 1, 2017. As a result, this income may no longer be
subtracted from federal adjusted gross income when calculating Kansas income tax. Specifically,
the statute now provides:

      (xxiv) For all taxable years beginning after December 31, 2013, and ending
 before January 1, 2017, the net gain from the sale from Christmas trees grown in
 Kansas and held by the taxpayer for six years or more.

Overall Effect of Changes

The changes made to K.S.A. 79-32,117 by Section 5 of Senate Bill 30 make certain nonwage
income subject to Kansas income tax by eliminating the ability to subtract it from federal adjusted
gross income in calculating Kansas adjusted gross income, while at the same time permitting
certain losses and deductions to be subtracted. The overall effect is to tax nonwage business income
while allowing related losses and deductions to be offset against any taxable income.

Estimated Tax Payments

As noted above, Kansas tax law changes made in 2012 stated that beginning after December 31,
2012, certain categories of nonwage business income were exempt from income tax. As a result,
taxpayers receiving this nonwage business income were no longer required to make estimated tax
payments, and have not made such payments for the last several years. The provisions of Senate
Bill 30 change this, so taxpayers receiving nonwage business income should immediately
begin making estimated tax payments.

The Department strongly encourages all taxpayers receiving nonwage business income to make
estimated tax payments for tax year 2017, and to review their personal tax situation with their tax
preparer or tax professional. Making estimated payments now will help avoid a large, unpaid tax
bill later.

For additional information regarding estimated tax payment for nonwage business income, please
see our Notice 17-09.

                                  Taxpayer Assistance

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

                              Taxpayer Assistance Center
                             Kansas Department of Revenue
                                Topeka, KS 66612-1588
                                 Phone: 785-368-8222
                                  Fax: 785-291-3614