In February, Governor Kelly signed Kansas Senate Bill 15, which allows privilege tax deductions on interest from agricultural real estate and single-family residence loans.
Under Kansas Senate Bill 15, for tax years beginning after December 31, 2022, national banking associations, state banks, trust companies, and savings and loan associations are allowed to deduct the net interest income derived from qualified agricultural real estate loans and certain single-family residence loans from their taxable income subject to Kansas privilege tax.
Banks should evaluate their loan portfolios now to determine the reporting requirements for this new deduction and how best to position themselves to take advantage going forward.
Senate Bill 15 adds new definitions to the Kansas statutes for interest, qualified agricultural real estate loans, and single-family residence, as well as outlines the method of calculating the deduction.
Definitions
Interest — Eligible interest as defined for this new privilege tax deduction is interest on indebtedness attributed to Kansas for qualified agricultural real estate loans or single-family residence loans.
Qualified Agricultural Real Estate Loans — Agricultural loans for this purpose are defined as loans made on real property that is substantially used for the production of one or more agricultural product. In addition, the loans must:
- Have maturities of between 5 and 40 years.
- Be secured by first lien interest in real estate. Loans may be secured by a second lien interest if the institution also holds the first lien.
- Have an outstanding loan balance when made that is less than 85% of the appraised value of the real estate. A loan for which private mortgage insurance is obtained may exceed 85% of the appraised value to the extent the loan amount in excess of 85% is covered by PMI.
Single-Family Residence Loans — A single-family residence is defined under the new law as a residence that is the principal residence of its occupant. In addition, the residence must be located in Kansas in a rural area as defined by the United States Department of Agriculture. This rural area cannot be within a metropolitan statistical area, and it must have a population of 2,500 or less, as defined by the most recent census available. A loan under this provision is one for which the proceeds were utilized to purchase or improve a residence defined above.
Calculating the deduction
The new deduction is calculated by taking the ratio of eligible interest income from each of the categories of loans to total interest income, multiplied by taxable income.
For example, consider a Kansas financial institution subject to Kansas privilege tax with the following facts:
- Interest income from qualified agricultural real estate loans of $1.5 million
- Interest income from single-family residence loans of $750,000
- Total interest income of $26 million
- Taxable income (before this deduction) of $11 million
The deduction for interest income from qualified agricultural real estate loans is as follows:
| Interest from qualified agricultural loans |
1,500,000.00 |
| Total interest income |
26,000,000.00 |
| Percent of income from qualified agricultural loans |
5.77% |
| Taxable income |
11,000,000.00 |
| Deduction under SB 15 |
634,615.38 |
| Privilege tax rate |
4.375% |
| Privilege tax savings |
$27,764.42 |
The deduction for interest income from single-family residence loans is as follows:
| Interest from single-family residence loans |
750,000.00 |
| Total interest income |
26,000,000.00 |
| Percent of income from single-family residence loans |
2.88% |
| Taxable income |
11,000,000.00 |
| Deduction under SB 15 |
317,307.69 |
| Privilege tax rate |
4.375% |
| Privilege tax savings |
$13,882.21 |