On June 6, 2017, both houses of the GOP-controlled Kansas legislature voted to override Governor Sam Brownback's veto of SB 30, which repeals many of the individual income tax changes enacted in 2012. Key changes in SB 30 reinstate the income tax on certain non-wage business income from pass-through entities, allow taxpayers to claim certain non-wage business income losses, increase individual income tax rates, and add a new individual income tax bracket. These changes apply retroactively to January 1, 2017, unless otherwise noted.

Non-wage income

Starting in 2017, non-wage business income of individuals reported by partnerships, LLCs, Subchapter S corporations, and sole proprietorships on lines 12, 17, and 18 of federal Form 1040 is no longer exempt from the Kansas individual income tax. The now repealed pass-through entity income tax exemption only applies to tax years beginning after December 31, 2012 and ending before January 1, 2017.

The new law rolls back certain adjustment modifications enacted by the 2012 tax law changes by adding a sunset date after which these adjustments are no longer required. Add-back of the following items to federal adjusted gross income (FAGI) in determining Kansas taxable income is only required for tax years beginning after December 31, 2012 and ending before January 1, 2017:

— Federal Schedule C, Form 1040 business losses

— Federal Schedule E, Form 1040 losses from rental real estate, royalties, partnerships, S corporations, estates, trusts, residual interest in real estate mortgage investment conduits (REMICs) and net farm rental

— Federal Schedule F, Form 1040 farm losses

— Any deduction for self-employment taxes; pension, profit sharing, and annuity plans of self-employed individuals; health insurance; and domestic production activities

Similarly, a subtraction modification under the new law is also only required for tax years beginning after December 31, 2012 and ending before January 1, 2017:

— Net profit from business from federal Schedule C, Form 1040

— Net income from rental real estate, royalties, partnerships, S corporations, estates, trusts, residual interest in REMIC and net farm rental, from federal Schedule E, Form 1040

— Net farm profit from federal Schedule F, Form 1040

Net operating loss (NOL)

Effective for tax years beginning after December 31, 2016, the federal NOL deduction no longer has to be added back to FAGI in determining Kansas taxable income for individual income tax purposes. The federal NOL deduction, however, still must be added back to FAGI for corporate income tax purposes.

Individual income tax rate changes

SB 30 eliminates the individual income tax rate cuts that were scheduled to take effect in Kansas beginning in 2018. Instead, the new law increases individual income tax rates (currently 2.7% on income not over $30,000 and 4.6% on income over $30,000) and adds a new, third income tax bracket. The new rates set forth in the following tables:

Married individuals filing joint returns

All other individuals

Itemized deductions

The new law adds items that can be taken as itemized deductions and increases the amount that can be claimed with full allowance by 2020. The charitable deduction is, and remains, 100%. The mortgage interest and property tax paid deductions are currently set at 50%. The amount of these deductions remains at 50% in 2018 and increases to 75% in 2019 and 100% in 2020. Starting in 2018, a 50% deduction is allowed for medical care expenses, with the deductible amount increased to 75% in 2019 and 100% in 2020.

STAR bond financing

Provisions of SB 30 also extend the sunset date of the Sales Tax Revenue (STAR) Bond Financing Authority to July 1, 2020 (from July 1, 2017), and prohibit the establishment of new STAR bond project districts from July 1, 2017 (the effective date of SB 30) through July 1, 2018. Cities and counties with preexisting STAR bond projects are not subject to this moratorium and may continue to develop these projects, utilizing all provisions of the STAR bond financing act.

Implications

The Kansas individual income tax rate changes and amendments to the adjustment provisions apply retroactively for all of 2017. Thus, taxpayers will need to take these changes into consideration for withholding and estimated tax payment purposes. The new law provides penalty and interest relief such that taxpayers will not be subject to assessed penalty and interest on any underpayments of estimated or withheld tax due to the rate changes or income tax adjustments that become law on July 1, 2017, as long as the underpayment is resolved on or before April 17, 2018.

It is anticipated that the Kansas Department of Revenue will issue guidance on these changes.

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