Can individuals use a federal net operating loss deduction on their Kansas return after Senate Bill 30?

Plain-English summary

Kansas Notice 17-05 explains how Senate Bill 30 (2017), Section 5, amended K.S.A. 79-32,117(b)(iii) so an individual's federal net operating loss (NOL) deduction flows through to Kansas again.

The change. For tax years beginning after December 31, 2016, there is no requirement to add back the federal NOL deduction as an addition modification. As amended, the statute keeps the general add-back of the federal NOL deduction "except that the federal net operating loss deduction shall not be added to an individual's federal adjusted gross income for tax years beginning after December 31, 2016." The effect is to let a federal NOL taken on Form 1040 flow through to the Kansas return.

What it reverses. This undoes part of the 2012 changes (see Notice 12-08), which had (1) eliminated the individual NOL deduction starting in 2013, (2) barred carrying NOLs forward to 2013+ or back, and (3) kept the federal-NOL add-back in place.

Prior-year NOLs unchanged. The amendment does not change how prior-year NOLs are treated. Except as permitted or required on the federal return for tax years beginning after December 31, 2016, an individual still may not carry a prior-year NOL forward to tax year 2013 or later, or back to an earlier year.

What this means for you

Individuals with a federal NOL

• For tax years beginning after 2016, your federal NOL deduction is no longer added back, so it flows through to your Kansas return.

Taxpayers with older (pre-2017) Kansas NOLs

• The treatment of prior-year losses is unchanged -- you still cannot carry a prior-year NOL forward to 2013+ or back to earlier years.

Common questions

Can my federal NOL reduce my Kansas income now? Yes -- for tax years beginning after December 31, 2016 there is no add-back, so it flows through.

Does this restore my old, pre-2017 Kansas NOLs? No -- prior-year NOL treatment is unchanged.

What earlier change does this reverse? The 2012 changes described in Notice 12-08.

Citations and references

• Senate Bill 30 (2017), Section 5 -- amended K.S.A. 79-32,117(b)(iii) to end the federal-NOL add-back for tax years beginning after December 31, 2016.
• Prior-year NOL carryforward/carryback rules unchanged; see Notice 12-08 for the 2012 changes reversed.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 17-05

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 17-05

                         NET OPERATING LOSSES FOR INDIVIDUALS
                                    (JULY 1, 2017)

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 Legislature enacted Senate Bill 30 which makes modifications to state income tax rates
and other changes. Section 5 of the Bill amends K.S.A. 79-32,117(b)(iii) to provide that for tax
years beginning after December 31, 2016, there is no requirement for an individual to add-back a
federal net operating loss as an addition modification. The amended provision states:

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

        (iii) The federal net operating loss deduction, except that the federal net operating
  loss deduction shall not be added to an individual's federal adjusted gross income for
  tax years beginning after December 31, 2016.

The effect of this amendment is to allow a federal net operating loss taken on an individual's
federal Form 1040 to "flow through" to Kansas.

The amendment made by Senate Bill 30 reverses changes made during the 2012 Legislative
Session. As explained in Notice 12-08, those changes provided:

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

  2)    An individual was not allowed to 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 remained in effect.

It should be noted that the amendment in Senate Bill 30 does not change the manner in which prior
year net operating losses are treated. Except as permitted or required on their federal income tax
return for tax years beginning after December 31, 2016, an individual may not carry a prior year
net operating loss forward to tax year 2013 or later years, or back to any earlier tax year.

                               Taxpayer Assistance

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