How does Kansas treat business interest expense that federal law limits under Section 163(j)?

Plain-English summary

Kansas Notice 24-16 explains how Kansas treats business interest expense that the federal government limits under Internal Revenue Code Section 163(j). The changes come from 2024 Senate Bill 410 (Section 18), which amended K.S.A. 79-32,117.

For tax years 2018, 2019, and 2020, Kansas followed the federal Code and allowed only the limited 163(j) deduction. Beginning with tax year 2021, Kansas decoupled from the federal limit and allows a deduction for the full current-year interest expense:

• K.S.A. 79-32,117(c)(xxvi) -- a subtraction modification for the amount of current-year interest expense disallowed under Section 163(j).
• K.S.A. 79-32,117(b)(xxvii) -- an addition modification for interest that is deducted on the federal return in the current year because of a carryforward of business interest that had been disallowed in an earlier year.

The clarified language confirms the subtraction is for current-year interest only, not for carryforwards of disallowed interest from prior years. A separate new provision, (c)(xxvi)(3), lets a taxpayer amend the 2021 Kansas return to recover, in one sum, the interest that had been disallowed in 2018, 2019, and 2020.

What this means for you

Businesses with disallowed 163(j) interest

• For 2021 and later, subtract current-year business interest that was disallowed on your federal return under Section 163(j).
• Add back any interest you deducted federally this year only because it was a carryforward of business interest disallowed in a prior year.
• Look at your federal business interest deduction and split it: the part attributable to a prior-year carryforward is an addition on the Kansas return, and current-year interest disallowed federally is a subtraction.
• To recover 2018-2020 disallowed interest, amend your 2021 Kansas return -- the deduction equals the interest paid or accrued in 2018, 2019, and 2020 less the amounts already allowed federally in those years. A three-year statute of limitations applies.
• Include a copy of federal Form 8990 for each of tax years 2018, 2019, 2020, and 2021, plus a worksheet showing how you computed the interest claimed for each year.

Common questions

When did Kansas decouple from the 163(j) limit? For tax years 2021 and beyond.

What can I subtract? Current-year business interest expense that Section 163(j) disallowed on your federal return.

What must I add back? Interest deducted federally this year because of a carryforward of business interest disallowed in a prior year.

Can I recover interest disallowed in 2018-2020? Yes -- amend your 2021 Kansas return to claim, in one sum, the 2018-2020 interest less what was already deducted federally. A three-year statute of limitations applies.

What should I attach? Federal Form 8990 for each of 2018-2021 and a worksheet showing your computation.

Citations and references

• Senate Bill 410 (2024) -- Section 18 clarified Kansas's treatment of Section 163(j) business interest.
• K.S.A. 79-32,117 -- Kansas addition and subtraction modifications to federal adjusted gross income.
• K.S.A. 79-32,117(b)(xxvii) -- addition modification for federally deducted carryforwards of disallowed business interest.
• K.S.A. 79-32,117(c)(xxvi) -- subtraction modification for current-year interest disallowed under Section 163(j), including the 2021 catch-up for 2018-2020.
• Internal Revenue Code Section 163(j) -- the federal business interest limitation Kansas has decoupled from.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 24-16

Original ruling text

Policy and Research
109 SW 9th Street Phone: 785-368-8222
PO Box 3506 Fax: 785-296-1279
Topeka KS 66601-3506 www.ksrevenue.gov
Mark A. Burghart, Secretary Laura Kelly, Governor

                                       NOTICE 24-16

                      INTEREST EXPENSE UNDER IRC SECTION 163(j)

                                     (AUGUST 7, 2024)

  During the 2024 Legislative Session Senate Bill 410 was passed and signed into law. Section

18 of the Bill amends K.S.A. 79-32,117, which requires or permits addition and subtraction
modifications to federal adjusted gross income when calculating Kansas adjusted gross income.

  K.S.A. 79-32,117 includes modifications that relate to the business interest deduction

allowed under Internal Revenue Code section 163(j). For tax years 2018, 2019, and 2020, Kansas
was coupled with the federal code and only recognized the business interest deduction allowed
under the Code.

   For tax years 2021 and beyond, Kansas has now decoupled from the federal code and allows

a deduction for current year's interest expense in its entirety – rather than the amount allowed
under the Tax Cuts and Jobs Act. K.S.A. 79-32,117(c)(xxvi) provides a subtraction modification
for the amount disallowed as a deduction pursuant to section 163(j) of the federal internal revenue
code. The companion provision, found in K.S.A. 79-32,117(b)(xxvii), requires an addition
modification for any amount deducted by reason of a carry forward of disallowed business interest
pursuant to section 163(j) of the federal internal revenue code.

   For tax years 2021 and beyond, the amended language in K.S.A. 79-32,117(b)(xxvii) and

79-32,117(c)(xxvi)(1), along with new language in (c)(xxvi)(2), clarifies that the amount
disallowed refers to interest expense derived from the current year only and not carryforward of
disallowed expenses from prior years. Kansas taxpayers will need to examine their business
interest deduction on the federal return with the portion of the federal deduction attributable to
prior year carryforward qualifying for an addition modification on the Kansas return. Any current
year interest disallowed on the federal return would qualify for a subtraction modification on the
Kansas return.

   In addition to the subtraction modification allowed in the paragraph above for tax years 2021

and beyond, new language in K.S.A. 79-32,117(c)(xxvi)(3) also allows a taxpayer to amend their
2021 return to adjust the amount of interest deduction for that year, and in one sum receive the
amount they would have received if the current-year provisions had been operating in 2018, 2019,
and 2020. This interest deduction will be an amount equal to the sum of any interest expenses
paid or accrued in tax years 2018, 2019, and 2020 less the sum of amounts previously allowed on
the federal return as a deduction pursuant to section 163(j) of the federal internal revenue code in
tax years 2018, 2019 and 2020. Taxpayers will need to amend their tax year 2021 Kansas return
to claim this deduction for tax years 2018, 2019, and 2020. There is a three-year statute of
limitations.

 Effective July 1, 2024, the amended provisions will provide:

        (b)(xxvii) For all taxable years commencing after December 31, 2020, the amount
 of any interest expense paid or accrued in a previous taxable year but allowed as a
 deduction pursuant to section 163 of the federal internal revenue code in the current
 taxable year by reason of the carryforward of disallowed business interest pursuant to
 section 163(j) of the federal internal revenue code. For purposes of this paragraph, an
 interest expense is considered paid or accrued only in the first taxable year the deduction
 would have been allowable pursuant to section 163 of the federal internal revenue code
 if the limitation pursuant to section 163(j) of the federal internal revenue code did not
 exist.

       (c)(xxvi)(1) For all taxable years commencing after December 31, 2020, the amount
 of any interest expense paid or accrued in the current taxable year and disallowed as a
 deduction pursuant to section 163(j) of the federal internal revenue code.
       (2) For purposes of this paragraph, an interest expense is considered paid or accrued
 only in the first taxable year the deduction would have been allowable pursuant to section
 163 of the federal internal revenue code if the limitation pursuant to section 163(j) of the
 federal internal revenue code did not exist.
       (3) For tax year 2021, an amount equal to the sum of any interest expenses paid or
 accrued in tax years 2018, 2019 and 2020 less the sum of amounts allowed as a deduction
 pursuant to section 163 of the federal internal revenue code in tax years 2018, 2019 and
 2020.

  When filing an amended 2021 tax return, please include with the amended return a copy of

the federal Form 8990 for each of tax years 2018, 2019, 2020, and 2021. In addition, please include
a worksheet that shows how you computed the amount of interest expense being claimed for each
of tax years 2018, 2019, 2020, and 2021, and reference the corresponding line numbers on federal
Form 8890.

                                 TAXPAYER ASSISTANCE

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

www.ksrevenue.gov. If you have questions about this Notice, please contact:

                              Taxpayer Assistance Center
                            Kansas Department of Revenue
                           Scott Office Building, 1st Floor
                                   120 SE 10th Ave
                                   P. O. Box 3506
                               Topeka, KS 66601-3506
                                 Phone: 785-368-8222
                         Hearing Impaired TTY: 785-296-6461
                                  Fax: 785-291-3614