kansas small business forum

Kansas Small Business Forum

Tax Policy to Grow the KansasEconomy

What the Governor Asked For

A FIELD OF DREAMS

Build it and they will come

States With No Income Tax

Total Exemption

– Alaska– Florida– Nevada– South Dakota– Texas– Washington– Wyoming

Tax Dividends and Interest

– New Hampshire– Tennessee

Joint Tax Committee Testimony

• Testified on Governor’s initiative on January 12, 2012

• My closing statement was:– “The governor’s plan is bold and innovative. It

deserves serious consideration.”

Overview of Governor’s Initiative

• Comparison of state top rates before and after

– Colorado 4.63 4.63 – Oklahoma 5.25 5.25– Missouri 6.00 6.00

–Kansas 6.45 4.95– Nebraska 6.84 6.84

Federal Consequences

NONE

Provisions of HB 2117

– Effective for tax year 2013 and thereafter

Provisions of HB 2117

– Lowers income tax brackets for married filing joint returns• Not over $30,000 3%• Over $30,000 $900 plus 4.9% of excess

Provisions of HB 2117

– Lowers income tax brackets for all other non-corporate taxpayers• Not over $15,000 3%• Over $15,000 $450 Plus 4.9% of excess

Provisions of HB 2117

– Standard deduction shall be• Single $3,000• Married, joint $9,000• Head of household $9,000

Provisions of HB 2117

Exemption of non-wage business income from Kansas taxation

Non-wage Business Income

• Net profit from business reported on Schedule C• Net income from rental real estate, royalties,

partnerships, S corporations, estates, trusts and net farm rental reported on Schedule E• Net farm profit reported on Schedule F

Non-deductible Expenditures

• Self-employment taxes• Contributions to pension and profit sharing plans• Self-employed health insurance• Domestic production activity deduction

Provisions of HB 2117

– A net operating loss shall only be available to corporations

Subchapter C Corporations

• Impact of the bill– No changes made to C corporations or Kansas

privilege tax on banks and savings institutions• Computation of taxable income• Rates• Availability of credits• LLC business income flowing to a C corporation

continues to be subject to taxation

Subchapter C Corporations

– Retain C corporation status– Elect subchapter S status– Liquidate and reform as an LLC

Subchapter S Corporations

• Impact of bill– Net profit reported on Schedule E is exempt from

taxation• Net losses reported on Schedule E are not

deductible• Salary received from an S corporation is taxable

Subchapter S Corporations

• Separately stated income and deductions retain their character for federal and Kansas purposes and will be taxable for Kansas purposes – Dividends– Interest– Capital Gains– 1231 Gains

LLC’s / Partnerships

• Impact of bill– Net profit reported on Schedule E is exempt from

taxation• Net losses reported on Schedule E are not

deductible

LLC’s / Partnerships

• Separately stated income and deductions retain their character for federal and Kansas purposes and will be taxable for Kansas purposes – Dividends– Interest– Capital Gains– 1231 Gains

• Guaranteed payments are reported on Schedule E and are exempt from Kansas tax

Basis in S Corporations and LLC’s

– Basis in ownership interest is not increased by excluded income

– Distributions in excess of basis are taxable

Individuals

• Non-wage business income defined• Net profit from business reported on Schedule C• Net income from rental real estate, royalties,

partnerships, S corporations, estates, trusts and net farm rental reported on Schedule E• Net farm profit reported on Schedule F

Individuals

• Rental Properties– Taxable income is excludable from Kansas AGI– Taxable loss is non-deductible in determining

Kansas AGI– Gain/loss on disposition of business property is a

taxable event for Kansas purposes• Basis in depreciable property is the same for federal

and Kansas purposes

IndividualsTax Situs of Business

• The bill does not distinguish between businesses operated in the state of Kansas vs. a foreign state.

• Residents of Kansas exclude income and deductions of ALL non-wage business income regardless of where the business is located.

IndividualsEmployee vs. Independent Contractor

• Income from wages is NOT business income and is taxable

• Income earned by an independent contractor is business income and IS exempt from taxation

Kansas Economic Outlook

• Pay-for’s proposed by Governor Brownback that are not in the bill– .6% sales tax permitted to expire– Itemized deductions allowed in full– Section 529 plan deduction remains– Credits such as earned income credit, historic

restoration credit and community service credits remain

Kansas Economic Outlook

• To balance the post 2012 state budget the revenue lost by enactment of the bill must be covered by– Growth in the Kansas economy– Growth in state population, resulting in• Growth in sales and other tax collections (including

income tax on increased work force)– Controlled state spending

Illustration 1Salaried Employee

Old Law• Wage $50,000• Exemptions

( 9,000)• Standard deduction

( 6,000)• Taxable income $35,000• Kansas income tax $

1,362

New Law• Wage $50,000• Exemptions

( 9,000)• Standard deduction

( 9,000)• Taxable income $32,000• Kansas income tax $

998

Illustration 2Self-employed Individual

Old Law• Business income $50,000• Exemptions

( 9,000)• Standard deduction

( 6,000)• Taxable income $35,000• Kansas tax $

1,362

New Law• Business income $ -0-• Exemptions

( 9,000)• Standard deduction

( 9,000)• Taxable income (18,000)• Kansas tax -0-

Illustration 3Salaried with Rental Property Income

Old Law• Wage $50,000• Rental income

5,000• Exemptions

( 9,000)• Standard deduction

( 6,000)• Taxable income $40,000• Kansas tax $

1,675

New Law• Wage $50,000• Rental income -0-• Exemptions

( 9,000)• Standard deduction

( 9,000)• Taxable income $32,000• Kansas tax $

998

Illustration 4Salaried with Rental Property Loss

Old Law• Wage $50,000• Rental loss

( 5,000)• Exemptions

( 9,000)• Standard deduction

( 6,000)• Taxable income $30,000• Kansas tax $

1,050

New Law• Wage $50,000• Rental loss -0-• Exemptions

( 9,000)• Standard deduction

( 9,000)• Taxable income $32,000• Kansas tax $

998

Illustration 5Professional with Itemized Deductions

Old Law• Wage $200,000• Itemized deductions

( 25,000)• Exemptions

( 9,000)• Taxable income $166,000• Kansas tax $

9,762

New Law• Wage $200,000• Itemized deductions

( 25,000)• Exemptions

( 9,000)• Taxable income $166,000• Kansas tax $

7,564

Illustration 6Salaried Professional with Business

Old Law• Wage $200,000• Business loss

( 80,000)• Exemptions

( 9,000)• Itemized deductions

( 25,000)• Taxable income $ 86,000• Kansas tax $

4,602

New Law• Wage $200,000• Business loss -0-• Exemptions

( 9,000)• Itemized deductions

( 25,000)• Taxable income $166,000• Kansas tax $

7,564

Business Thought of the Day

If you conduct business in Missouri you will pay Missouri state income taxes

Business Thought of the Day

If you pay Missouri state income taxes you will have less capital

available for your business

Business Thought of the Day

If you have less capital available for your business you increase the risk of

incurring losses

Business Thought of the Day

If you incur too many losses you will go broke

Business Thought of the Day

Don’t go broke

Business Thought of the Day

Do your business in Kansas!!!

HB 2117

Q and A