2013 Kansas Tax Law Changes

Recent changes to Kansas tax law will have a significant impact on many construction companies and their owners. 

Kansas House Bill 2117 eliminates state income taxes on small business and farm income claimed on individual returns and offers reductions in individual income tax rates and brackets. It also increases the standard deduction for married and head of household taxpayers and eliminates certain losses, deductions and credits for individuals. Kansas House Bill 2059 makes a number of adjustments to the income tax law to offset some cuts made in HB 2117. Let’s take a closer look at the legislation.

New Small Business Income & Farm Income Subtractions

After 2012, a Kansas subtraction deduction will be available on certain nonwage business income for small business owners—income reported by LLCs, S corporations and sole proprietorships—and farmers. These new subtraction modifications will be allowed for the following:

• Net profit from business as reported on Line 12 of Form 1040 from Federal Schedule C
• Net income from rental real estate, royalties, partnerships, S corporations, estates and trusts
• Interest in real estate mortgage investment conduits and net farm rental, as reported on Line 17 of Form 1040 from Federal Schedule E
• Net farm profit as reported on Line 18 of Form 1040 from Federal Schedule F

For example, Joe Smith is the sole owner of Smith Construction, LLC, a disregarded entity. The LLC has $500,000 of taxable income in both 2012 and 2013, and all activity is in Kansas. Joe is married and has no significant income outside of his interest in the LLC. Ignoring itemized deductions and exemptions for simplicity, Joe will owe $31,305 of Kansas income tax in 2012. In 2013, Joe will owe no Kansas tax due to the subtraction of net income from the LLC described above. Therefore, the new law saved Joe $31,305 in Kansas income tax.

Individual Income Tax Changes
In addition to the above income exclusions from Kansas taxation, all Kansas taxpayers also will benefit from lower tax rates on non-excludable Kansas income, as well as increased standard deductions for those who do not itemize.

Reduced Income Tax Rates – Starting in 2013, Kansas individual income tax rates will begin slowly decreasing for the next five years until reaching their lowest point in 2018. 

Increased Standard Deduction – Starting in 2013, the Kansas income tax standard deduction will be as follows:

• $3,000 for a single individual
• $7,500 for a couple filing jointly (was $6,000 in 2012)
• $5,500 for a head of household (was $4,500 in 2012)

All the above are positive changes for the Kansas business owner. However, there also are a number of new Kansas provisions that take away Kansas income tax savings.

Additions to Federal Adjusted Gross Income – After 2012, the following will have to be added to federal adjusted gross income (AGI) in determining Kansas taxable income:

• Federal Schedule C business losses reported on Line 12 of Form 1040
• Federal Schedule E losses from rental real estate, royalties, partnerships, S corporations, estates, trusts, residual interest in real estate mortgage investment conduits and net farm rental reported on line 15 of Form 1040
• Federal Schedule F farm losses reported on line 17 of Form 1040
• Any deduction for self-employment taxes under Internal Revenue Code (IRC) Section 164(f), as in effect January 1, 2012
• Any deduction for pension, profit sharing and annuity plans of self-employed individuals under IRC §62(a)(6), as in effect January 1, 2012
• Any deduction for health insurance under IRC §162(l), as in effect January 1, 2012
• Any deduction for domestic production activities under IRC §199, as in effect January 1, 2012

The underlying premise for the above addbacks is that Kansas is not going to allow taxpayers to benefit from business losses or special federal business deductions if Kansas is never going to tax net profits.

Reduction/Elimination of Itemized Deductions – After 2012, the following changes are made in computing itemized deductions for Kansas:

• The deduction for certain gambling losses is repealed.
• Most other itemized deductions (except the deduction for charitable contributions) are reduced by 30 percent in 2013. The reduction percentage increases five percentage points each year until reaching 50 percent in 2017.

No Kansas Net Operating Losses and Investment Expense Deductions – Starting in 2013, the state’s net operating loss and expense deductions for investment expenditures no longer will be available to individual Kansas income tax filers.

Resident’s Credit for Income Taxes Paid to Another State – Starting in 2013, this Kansas income tax credit will take into account only income taxes paid in another state on income that it included in the resident’s Kansas AGI.

As you can see, Kansas has made significant changes to its tax law, intended to create significant advantages for business owners. “The best thing we can do for individuals in this state, and particularly somebody that’s struggling, is to provide jobs and job opportunities,” Governor Sam Brownback recently told the Kansas City Star. “That’s what this does.”

For more information on how your construction or real estate organization could benefit from these changes, contact your BKD advisor.