State & Local Tax Alert

Transcription

1 State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Kansas Repeals Exemption for Non-Wage Business Income; Increases Individual Income Tax Rates On June 6, 2017, the Kansas legislature, overriding a veto by Governor Sam Brownback, enacted legislation that will increase individual income tax rates and repeal the exemption for non-wage business income. The legislation, which takes effect July 1, 2017, represents the end of the Kansas Experiment that attempted to generate significant in-state economic growth through broad-based tax cuts. 1 Subtraction Modifications for Non-Wage Business Income In 2012, Kansas enacted legislation that, for taxable years beginning after December 31, 2012, exempted from individual income tax non-wage business income from S corporations, partnerships and limited liability companies (LLCs) pursuant to three related subtraction modifications, to the extent such items were included in the taxpayer s federal adjusted gross income. 2 In addition, a series of addition modifications were enacted that prevented individuals from claiming losses or deductions associated with these categories of income. 3 S.B. 30 repeals this exemption for non-wage business income. Specifically, the following subtraction modifications made to federal adjusted gross income to arrive at Kansas adjusted gross income are limited to taxable years ending before January 1, 2017: net profit of a business as determined under the Internal Revenue Code (IRC) and reported from Schedule C and on line 12 of the taxpayer s Form 1040, U.S. Individual Income Tax Return (Schedule C net profits); the net income from rental real estate, royalties, partnerships, S corporations, estates, trusts, residual interest in real estate mortgage investment conduits, and net farm rental as determined under the federal IRC and reported from Schedule E and on line 17 of the taxpayer s Form 1040 (Schedule E net income); and the net farm profit as determined under the IRC and reported from Schedule F and on line 18 of the taxpayer s Form 1040 (Schedule F net farm profit). 4 Release date June 16, 2017 States Kansas Issue/Topic Individual Income Tax Contact details Tim Hartley Wichita T E tim.hartley@us.gt.com Bob Gershon Kansas City T E bob.gershon@us.gt.com Jamie C. Yesnowitz Washington, DC T E jamie.yesnowitz@us.gt.com Chuck Jones Chicago T E chuck.jones@us.gt.com Lori Stolly Cincinnati T E lori.stolly@us.gt.com Priya D. Nair Washington, DC T E priya.nair@us.gt.com 1 S.B. 30, Laws 2017, overriding governor veto on June 6, Ch. 135 (H.B. 2117), Laws 2012, enacting KAN. STAT. ANN ,117(c)(xx). 3 KAN. STAT. ANN ,117(b)(xix). 4 KAN. STAT. ANN ,117(c)(xx)..

2 Grant Thornton LLP - 2 Related addition modifications for loss items reflected on schedules C, E and F are also limited to taxable years ending before January 1, Additional Individual Income Tax Modifications The legislation also repeals several addition and subtraction modifications applicable to the individual income tax. 6 Specifically, the following addition modifications made to federal adjusted gross income to arrive at Kansas adjusted gross income are limited to taxable years ending before January 1, 2017: the amount of any deduction for self-employment taxes under IRC Sec. 164(f) to the extent the deduction is attributable to income reported on Schedule C, E or F and on line 12, 17 or 18 of the taxpayer s Form 1040; 7 the amount of any deduction for pension, profit sharing, and annuity plans of selfemployed individuals under IRC Sec. 62(a)(6); 8 the amount of any deduction for health insurance under IRC Sec. 162(l); 9 and the amount of any deduction for domestic production activities under IRC Sec. 199; 10 For tax years beginning on or after January 1, 2017, the addition for the federal net operating loss deduction to an individual s federal adjusted gross income will no longer be required. 11 The following subtraction modifications are also limited to taxable years ending before January 1, 2017: certain net gains from the sale of cattle and horses held for draft, breeding, dairy or sporting purposes and other livestock held for draft, breeding, dairy or sporting purposes; 12 and certain net gains from the sale of Christmas trees grown in Kansas. 13 The legislation also provides for a grace period under which no taxpayer will be assessed penalties and interest from the underpayment of taxes due to these changes, which will become law on July 1, 2017, if the underpayment is corrected on or before April 17, KAN. STAT. ANN ,117(b)(xix). 6 S.B. 30, Laws 2017, 5. 7 KAN. STAT. ANN ,117(b)(xx). 8 KAN. STAT. ANN ,117(b)(xxi). 9 KAN. STAT. ANN ,117(b)(xxii). 10 KAN. STAT. ANN ,117(b)(xxiii). 11 KAN. STAT. ANN ,117(b)(iii). 12 KAN. STAT. ANN ,117(c)(xxii). 13 KAN. STAT. ANN ,117(c)(xxiv). 14 KAN. STAT. ANN ,117(f).

3 Grant Thornton LLP - 3 Individual Income Tax Rates Increased; New Tax Bracket Created Prior to the enactment of S.B. 30, taxpayers were subject to a two-bracket system with a maximum tax rate of 4.6 percent for individuals with taxable income over $15,000 ($30,000 for married individuals filing joint returns) in effect for the 2015, 2016 and 2017 tax years. 15 Under the legislation, taxpayers will see increased tax rates and a new threebracket system beginning with the 2017 tax year. The maximum tax rate for the 2017 tax year will be 5.2 percent for individuals with taxable income over $30,000 ($60,000 for married individuals filing joint returns). 16 For the 2018 tax year and beyond, the maximum tax rate for these individuals will rise from 5.2 percent to 5.7 percent. 17 The legislation also lowers the thresholds under which certain lower-income taxpayers are not subject to the Kansas individual income tax. 18 Finally, the legislation eliminates the provision that allowed for income tax rate reductions if certain state general fund receipts thresholds were met. 19 The legislation also creates a penalty and interest grace period to allow taxpayers to adjust to these changes. Taxpayers will not be assessed penalties and interest for any underpayment of taxes due to the rate changes, which will become law on July 1, 2017, as long as the underpayment is corrected on or before April 17, Itemized Deductions Kansas allows taxpayers that itemize deductions on their federal income tax return to elect to itemize deductions for Kansas individual income tax purposes. 21 However, Kansas provides certain limitations on the itemized deduction allowable for purposes of the Kansas individual income tax. 22 For tax years beginning in , Kansas allows an itemized deduction for 50 percent of real and personal property taxes under IRC Sec. 164(a) and 50 percent of the amount of qualified residence interest under IRC Sec. 163(h) claimed as itemized deductions for federal income tax purposes. 23 This percentage is increased to 75 percent for both deductions for tax years beginning in 2019, and 100 percent for tax years beginning in 2020 and thereafter. 24 In addition, Kansas will phase in an itemized deduction for expenses for medical care allowable as deductions under IRC Sec. 213 that were claimed by a taxpayer as a federal itemized deduction. For tax years beginning in 2018, the allowable 15 KAN. STAT. ANN ,110(a)(1)(D), (a)(2)(d). 16 KAN. STAT. ANN ,110(a)(1)(E), (a)(2)(e). 17 KAN. STAT. ANN ,110(a)(1)(F), (a)(2)(f). 18 KAN. STAT. ANN ,110(e). 19 Former KAN. STAT. ANN ,110(e). 20 KAN. STAT. ANN ,110(f). 21 KAN. STAT. ANN , KAN. STAT. ANN ,120(a). 23 KAN. STAT. ANN ,120(a)(4), (5). 24 KAN. STAT. ANN ,120(a)(6), (7).

4 Grant Thornton LLP - 4 amount of this deduction is 50 percent, with an increase to 75 percent for tax years beginning in 2019, and 100 percent for tax years beginning in 2020 and thereafter. 25 Household and Dependent Care Credit S.B. 30 provides a credit against a resident individual s income tax liability for child and dependent care expenses that will be based on a percentage of the amount of the federal credit allowed. 26 This percentage is set at 12.5 percent for the 2018 tax year, percent for the 2019 tax year and 25 percent for the 2020 tax year and beyond. 27 The Kansas credit will be for the same taxable year in which the credit was claimed against the taxpayer s federal income tax liability. 28 Furthermore, the credit may not exceed the taxpayer s Kansas individual income tax, less the sum of any other credits. 29 Commentary In 2012, Kansas set in motion a long-term strategy to reduce the state s overall individual income tax burden. The state accomplished this, in part, by enacting tax legislation that created an exemption for non-wage business income, reduced personal income tax rates, established a modified tax bracket system and increased the standard deductions for individuals. Some of these changes were amended and scaled back in The Republican-controlled Kansas legislature, however, has become weary of the state s precarious financial position that followed in the wake of the changes. 31 This is unsurprising given that Kansas currently faces a $900 million budget shortfall. 32 The enactment of S.B. 30, which has been called the largest tax increase in state history and is expected to raise $1.2 billion over the course of two years, highlights the ongoing battle between the legislature and the Governor over the direction the state will take. 33 Taxpayers should closely monitor the effect the repeal of the exemption for non-wage business income may have. After Kansas created the exemption for non-wage business income in 2012, the state enacted subsequent legislation that repealed a statute requiring flow-through entities to withhold income from nonresidents. 34 The legislation was designed to address the effect of the Schedule E net income subtraction modification with respect to individual owners of pass-through entities by repealing nonresident withholding requirements for S corporations, partnerships and LLCs. These flow-through entities were previously required to deduct and withhold tax from a nonresident s share of the flowthrough entity s Kansas taxable income, whether distributed or undistributed, and pay the withheld amount to the Kansas Department of Revenue. The legislature did not reinstate 25 KAN. STAT. ANN ,120(a)(5)-(7). 26 S.B. 30, Laws 2017, U.S.C. 21 provides a credit against a taxpayer s federal income tax liability for child and dependent care expenses. 27 S.B. 30, Laws 2017, 1(a). 28 Id. 29 S.B. 30, Laws 2017, 1(b). 30 H.B. 2059, Laws Maria Koklanaris, Kansas Lawmakers Override Veto, Enact Rollback of Governor s Tax Agenda, TAX ANALYSTS STATE TAX TODAY, June 7, Id. 33 Id. 34 S.B. 265, Laws 2014, repealing KAN. STAT. ANN ,100e.

5 Grant Thornton LLP - 5 or require nonresident withholding as part of S.B. 30. However, taxpayers should monitor future policy directives or actual legislation that could impose withholding requirements in the wake of S.B. 30. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.