Early this summer (2017), the Kansas Legislature overrode Governor Sam Brownback’s veto of a new tax bill that repealed the non-wage business income exemption. This exemption saved many Kansas construction companies significant state income tax dollars since its inception beginning with tax year 2013. Virtually any company and its owners (except C corporations) doing business in Kansas benefited from this exemption.
Kansas residents who own pass-through entities such as LLCs, partnerships, sole proprietorships or S corporations should plan on having a significant Kansas tax bill when their 2017 income tax returns are filed. Fortunately, Kansas will not penalize taxpayers affected by this change for underpayment of estimated tax as long as their 2017 Kansas tax liability is paid by April 16, 2018.
The extent of your Kansas tax liability depends in part on the effective date of the Kansas tax law repeal. As of this writing, there is some uncertainty of whether the effective date for the repeal of the non-wage business income exemption is January 1, 2017 or July 1, 2017. Impacted taxpayers should consult their tax advisors. If the effective date is July 1, 2017, this creates a planning opportunity with a very small window. It may be reasonable and possible to compute income for the first half of the year (assuming calendar year) and last half of the year with the first half possibly exempt from Kansas tax.
You may also want to make a Kansas estimated tax payment prior to year-end 2017 in order to receive a federal tax benefit on your 2017 federal return. However, taxpayers should be cautious of Alternative Minimum Tax when contemplating this tactic. If you and/or the owners of a non-wage business income generator are not residents of Kansas, but have some Kansas-sourced income, be aware that the Kansas tax law change may not result in a significant change to your overall state income tax liability. However, it will likely change the amount owed to the various states in which you file tax returns. Individual taxpayers generally report all of their income to their resident state regardless of its source, then their resident state gives a tax credit for taxes owed to other states. If this situation applies to you, more tax will be paid to Kansas for 2017 and less to your resident state. You may see some additional overall state tax cost if your resident state tax rates are lower than the new Kansas tax rates (Kansas’ top rate for 2017 is 5.2%). Take this into consideration when calculating remaining 2017 estimates and planning for year-end.
Taxpayers seeking to minimize any new tax liability should contact their tax professional as soon as possible to discuss potential strategies. For more information about how this legislation may affect you personally, contact your AGH tax professional or Eric Thummel using the information below.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.
Senior Vice President
Construction Industry Team Leader
Eric has more than 20 years of public accounting experience and leads the firm’s construction industry team. His experience goes well beyond providing compliance services. Eric assists closely held, family owned and private equity clients with tax saving strategies, multi-state taxation, complex income allocations, succession planning, and mergers and acquisitions.
Eric attended Wichita State University where he earned his bachelor’s in accounting and a master’s of professional accountancy. He is a certified public accountant who serves as president on the board of the Greater Wichita Area Construction Financial Management Association chapter. He’s also a member of the Agribusiness Council of Wichita, the Kansas Livestock Association, the KSCPA and the AICPA.