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Is Kansas retroactively taxing a partner’s guaranteed payments?

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On June 16, 2015, Kansas Governor Sam Brownback signed House Bill 2109. For Kansas income tax purposes, HB 2109 taxes partnership guaranteed payments. Prior to the passage of HB 2109, partnership guaranteed payments were not included in arriving at Kansas taxable income.

The pertinent portion of HB 2109 (emphasis added) reads:

“(c) There shall be subtracted from federal adjusted gross income: …

(xx) For all taxable years beginning after December 31, 2012, the amount of any: (1) … ; (2) net income, not including guaranteed payments as defined in section 707(c) of the federal internal revenue code and as reported to the taxpayer from federal schedule K-1, (form 1065-B) in box 9, code F or as reported to the taxpayer from federal schedule K-1, (form 1065) in box 4, from rental real estate, royalties, partnerships, S corporations, estates, trusts …”

The plain language of the new law makes the change effective to tax years beginning after Dec. 31, 2012. This would result in the retroactive taxation of partnership guaranteed payments. However, HB 2109 (Sec. 36) identifies a different effective date – from and after its publication in the statute book. In Kansas, this date is presumed to be July 1, 2015. Based on standard rules regarding income tax law changes, the new law would therefore take effect on January 1, 2016. Additionally, the Kansas Department of Revenue (DOR) has announced that it will apply the new change effective Jan. 1, 2015, by way of a Notice.

The new law has practitioners scratching their heads: Is the effective date Jan. 1, 2013, Jan. 1, 2016 or Jan. 1, 2015? Do taxpayers have to amend their 2013 and 2014 returns? Does a different date apply?

Some believe that the DOR may only further confuse the matter by issuing a Notice. The inquiry becomes how the DOR can arbitrarily select Jan. 1, 2015, as an effective date since it precedes the general effective date and is different than the specific date mentioned in the legislation. Barring technical amendment by the legislature, logic would dictate that Jan. 1, 2016, is the real effective date (the calendar tax year beginning after the published effective date).

Questions?

For more information about this new Kansas tax law and how it could affect your business or personal tax liabilities, please contact Jerry Capps, AGH senior vice president of state and local tax services using the information below.

Gerald Capps, JD

Senior Vice President
State and Local Tax

Jerry Capps and his State and Local Tax (SALT) team provide sophisticated state and local tax planning, strategic advice and advocacy to numerous mid-market, Fortune 100 and industry-leading companies. The team has returned many millions of dollars in one-time and recurring tax savings to companies.

In addition to planning and compliance, the SALT practice includes legislation and policy, litigation, and controversy matters involving income, franchise, sales and use and property taxes. His work involves critical questions on nexus, apportionment, the Multistate Tax Compact, and the equal protection, due process, and commerce clauses of the United States Constitution. Capps is also a respected advocate on issues of tax policy. He represents clients in all phases of state and local tax controversy, including audit assistance and administrative hearings, and he provides counsel on state and local income and transactional costs for mergers, acquisitions and corporate reorganizations. He has been engaged as a keynote speaker for organizations including the Institute for Professionals in Taxation, state and local CPA societies, university and professional accounting conferences, and chambers of commerce.

Capps is a member of the Institute for Professionals in Taxation, the Kansas Society of Certified Public Accountants, the American Bar Association, and the Kansas Bar Association.