Senate Bill 410 (SB 410), signed into law by Governor Laura Kelly on April 24, 2024, makes various changes to the Kansas income tax laws. Retroactively applicable law changes have been made to income modifications related to the business interest deduction limitation, federal expenses disallowed under IRC 280C, the employee retention credit (ERC), and net operating loss (NOLs). In addition, the legislation amends elective pass-through entity tax (PTET) provisions¹.

Corporate and individual income tax changes² in SB 410 do the following:

IRC Section 163(j)

The law clarifies the modifications related to the business interest deduction limitation under IRC Section 163(j). For tax years beginning after December 31, 2020, corporate taxpayers must add to federal taxable income (FTI) "the amount of any interest expense paid or accrued in a previous taxable year but allowed as a deduction [under IRC Section 163] in the current taxable year by reason of the carryforward of disallowed business interest" under IRC Section 163(j). Taxpayers must subtract "any interest expense paid or accrued in the current taxable year and disallowed as a deduction" under IRC Section 163(j).³ (Italics added to show new text.)

For tax year 2021, taxpayers under newly enacted K.S.A. 79-32,117(c)(xxvi)(3) are allowed to subtract "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 [under IRC Section 163] in tax years 2018, 2019, and 2020."

For purposes of these provisions, interest is considered paid or accrued only in the first tax year the deduction would have been allowed under IRC Section 163, as if the IRC Section 163(j) limitation did not exist.

IRC Section 280C

For tax years beginning after December 31, 2021, taxpayers must subtract from FTI any federal credit disallowed under IRC Section 280C(a). The subtraction was previously limited to only disallowed expenses related to the federal tentative jobs tax credit.

Employee Retention Credit (ERC)

For tax years beginning after December 31, 2019 and ending before January 1, 2022, taxpayers may subtract from FTI, 50% of any disallowed federal ERC. Taxpayers must prove for the applicable years that they filed a Kansas income return and paid Kansas income tax on the disallowed amount. Refund claims and amended returns related to this change must be filed by April 15, 2025.

Net operating losses (NOLs)

For tax years beginning after December 31, 2017, individuals who carried back federal NOLs arising in a tax year beginning after December 31, 2017 and before January 1, 2021, under IRC Section 172(b)(1) as modified by the federal CARES Act, must subtract the federal NOL carryback for each applicable year.

Federal NOL carrybacks that exceed Kansas taxable income may be carried forward up to 20 tax years. The law gives taxpayers until April 15, 2025, to claim a refund or file an amended return related to this change for tax years 2018, 2019 or 2020.

Pass-through entity tax (PTET)

The law makes various changes to the tax imposed on a pass-through entity (PTE) that elects to be taxed as a entity-level PTET (electing PTEs). The PTET rate, which was a static statutory 5.7%, now corresponds to the highest rate imposed on resident individuals under K.S.A. 79-32,110(a), which currently is also 5.7%. Such change allows the PTET rate to be synced with individual rates if those rates change in the future.

Further, the law changes the PTET calculation to the tax rate for the applicable income tax year, multiplied by the sum of (1) each nonresident electing PTE owner's pro rata or distributive share of an electing PTE's income attributable to Kansas; and (2) each resident electing PTE owner's pro rata or distributive share of either (a) all the electing PTE's income or (b) the portion of its income attributable to Kansas. (All resident owners must use the same method of calculation.)

Further, credits attributable to the electing PTE will now be passed through to and claimed by the PTE owners. Previously, these credits could not be passed through to, or claimed by, the owner.

Modification to FTI under K.S.A. Sections 79-32,117 or 79-32,138 and any expensing deductions allowed under K.S.A. Section 79-32,143a that are attributable to an electing PTE's activities must be claimed on the electing PTE's return and each electing PTE owner's individual income tax return.

These changes apply to tax years beginning on or after January 1, 2022.

Implications

Taxpayers filing Kansas corporate and individual income tax returns as well as electing PTEs and their owners should review these retroactive changes and determine if they may be entitled to a refund or need to file an amended return. Taxpayers should consider applicable statute of limitation provisions as well as the specific April 15, 2025 due dates to file certain refund claims and amended returns related to the ERC and NOL changes.