Kansas retroactively taxing guaranteed payments

Is Kansas Retroactively Taxing a Partner’s Guaranteed Payments?

Gerald Capps, JD

Is Kansas Retroactively
Taxing a Partner’s Guaranteed Payments?

By Jerry Capps
AGH Specialized Tax Solutions
July 1, 2015

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).

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 at 844.787.2121 or by email.