Kansas DOR

[DaveO]

One of my clients in Kansas just sent me a mailer from the DOR. It seems Kansas will now exempt from taxation the distributive share of LLC, S-Corp and sole proprietorships. Only W-2 wages will be taxed. I would have a hard time coming up with a more pro-business tax incentive if I was told the sky is the limit.

[Roland Slugg]

When I read this post, I was so shocked that I thought, "Surely that can't be true!" So I went to the Kansas DOR web site and read for myself. It is true! In fact it's ever better than reported, because in addition to exempting from Kansas personal income tax income from sole proprietorships (Schedule C), LLCs and S-Corps, income from partnerships, estates, trusts and rents will also be exempt ... all beginning in 2013. As I read the legislative changes I kept expecting to come to a section that limited the exclusions to taxpayers with Kansas AGI below $xxx,xxx (or $xx,xxx, or even $x,xxx), but there doesn't appear to be any such income limitation.

Read about it yourself here: http://www.ksrevenue.org/pdf/2012LegislativeChanges.pdf This is a 61 page report, and the relevant part begins on page 37. This is a truly astonishing development in a state's tax policy.

[Golden Rocket]

Beyond your Wildest Dreams

While it may be astonishingly beneficial, this sounds like legislation that was rushed through as a knee-jerk reaction to someone's latest fantasy that managed to get proposed.

In addition to being a tax reduction, it also opens a golden opportunity to allow taxpayers to migrate their income from taxable to non-taxable.

I would expect a "technical correction" from Kansas soon. If we have members who are Kansas residents, please keep us updated if anything changes.

An example of this occurred once here in Tennessee during the infancy of the LLC craze. The TN courts had ruled that LLC profits were "personal" income, and since TN has no personal income tax, they were tax free.

You may have heard of a couple TN corporations from Memphis - Holiday Inn and Federal Express. After the court ruling, both of them applied to the Secretary of State to rescind their corporate charter and replace it with LLCs. These two entities pay millions in TN corporate tax annually.

After the news broke, Tennessee's legislature met late one night for fifteen minutes and changed the law such that all LLCs in Tennessee are to be taxed as a corporation. Amazing.

[veritas]

We are

Heading to Kansas, Toto!

[Nashville]

Expect a Rescission

it also opens a golden opportunity to allow taxpayers to migrate their income from taxable to non-taxable.

I read the R Slugg link, and this was quite a comprehensive overhaul. The portion that deals with pass-through entities and the above-described reclassification strategy will create shortfalls that the legislature, in their typical stupidity, failed to realize was going to happen.

Sorry to insult your politicians, Kansas folks. Looks like yours are just like they are everywhere else.

[DaveO]

There are many other changes to the code that mitigate the impact of exempting the income from small business and rental activities from income.
Just a few;
NOL’s cannot be deducted and a Federal NOL is added back.
Losses from small business, farms s-corps etc are added back.
DPAD, pensions and health insurance are added back.
Sec 179 is not allowed for other than C-Corps.

This represents a fundamental change in the mix of deductions, credits and rates for state taxation. It will be very interesting to see how it plays out for the state.

[JohnH]

Could present some interesting planning possibilities for coming up with reasons to divide an operating company into an S-corp and a C-corp, depending on how the state regards common control issues.

[veritas]

After reading some

it seems they cut indvidual rates too by eliminating deductions and credits.

Also they cut spending.

What novel ideas.