The Kansas Legislature passed H.B. 2109 and S.B. 270 on June 12 to help plug an anticipated $400 million budget deficit. The new laws include increases in sales and tobacco taxes, elimination of many itemized deductions, an increase in taxation of pass-through business income, and a tax amnesty program.
Sales Tax Changes
The statewide sales tax increased from 6.15 percent to 6.5 percent beginning July 1, with no exemption for sales tax on food. The conference committee eliminated a provision that would have created a lower sales tax on food and repealed a sales tax credit allowing some filers to offset sales taxes paid on food.
Income Tax Changes
The bills modify planned income tax rate reductions for future years and will keep the current 2.7% income tax rate for the bottom bracket and 4.6% rate for the top bracket through 2017. For tax years beginning in 2018, the top rate will remain at 4.6 percent, and the bottom rate will be reduced to 2.6 percent.
Pass-through Business Income Changes
For tax years beginning after December 31, 2012, any income passed through to an individual from a partnership, S-corporation, or estate or trust was not subject to Kansas income tax. Furthermore, any income reported by an individual on Schedule C (net profit from business), Schedule F (net profit from farm), or Schedule E (net profit from rental real estate) was not subject to Kansas income tax for tax years after 2012.
For tax years beginning after 2014, however, the aforementioned exclusion does not include guaranteed payments as defined in Internal Revenue Code Section 707(c) and as reported to the taxpayer from federal Schedule K-1. Therefore, any guaranteed payments paid by a partnership will again be taxable in Kansas starting in 2015.
The bills will eliminate all itemized deductions retroactive to Jan. 1, 2015, with the exception of deductions for charitable contributions, mortgage interest, and real and personal property taxes. The deduction for mortgage interest and property taxes will, however, be reduced by 50% starting this year. Charitable contributions will remain fully deductible for Kansas taxpayers eligible for state itemization.
H.B. 2109 and S.B. 270 will increase the state’s cigarette tax from 79 cents to $1.29 per pack beginning July 1. In addition, the bills will create a new tax on the sale of electronic cigarettes, at a rate of $0.20 per millimeter of consumable material, and a proportionate tax on all lesser amounts of material.
Property Tax Changes
On or after January 1, 2018, cities and counties will not be allowed to adopt appropriations or budgets with revenue from increases in property taxes above the rate of inflation until voters have approved the increases at a regularly scheduled election.
H.B. 2109 creates a Tax Amnesty Program (“Program”) for taxes administered by the Kansas Department of Revenue, including state income, withholding, sales and use, privilege, estate, cigarette and tobacco, liquor, and mineral severance taxes.
The Program, which is available to both businesses and individuals, will be conducted from September 1, 2015 to October 15, 2015. To be eligible for the Program:
- The tax due must be from periods ending on or before December 31, 2013,
- No notice of commencement of an audit has been received or an audit is already in progress prior to September 1, 2015, and
- You need to:
- Apply for the Program,
- File a tax return for each taxable period for which amnesty is requested, and
- Pay the entire tax liability on or before October 15, 2015.
Please note that the payment of the tax under the Program constitutes an express and absolute relinquishment of all administrative and judicial rights of appeal. Furthermore, any tax remitted under the Program is not eligible for a refund or credit.
As an incentive to get individuals and businesses to utilize this Program, the Kansas Department of Revenue will waive penalties and interest on any taxes that are eligible under the Program. No penalties or interest paid prior to September 1, 2015, however, will be eligible for abatement under the amnesty program.
Please contact your MarksNelson advisor at (816) 743-7700 if you have any questions or would like more information regarding this recent tax law change.