How does HB 2117 keep S corporation bank shareholders from claiming two subtraction modifications for the same income?

Plain-English summary

Kansas Notice 12-12 explains how 2012 House Bill 2117 coordinates two subtraction modifications so that shareholders of S corporation banks, savings and loans, or federal savings associations do not subtract the same income twice. (For the broader modification changes, the notice points to Notice 12-11.)

The two modifications (both in K.S.A. 79-32,117(c)).

• New (c)(xx)(2) -- lets S corporation stockholders subtract income properly reported on federal Schedule E and line 17 of Form 1040, whether distributed or undistributed.
• Existing (c)(xiv) -- lets stockholders of S corporation banks, savings and loans, or federal savings associations subtract the institution's undistributed income.

The new limiting language. Section 12 amends (c)(xiv) to add that, for tax years beginning after December 31, 2012, the modification excludes the portion of income or loss reported on Schedule E and included on line 17. This prevents claiming both (c)(xiv) and (c)(xx) for the same income -- in other words, a stockholder of an S corporation bank, savings and loan, or federal savings association cannot subtract the same undistributed income under both subsections.

Date note. The notice bears no printed issue date; it is dated to mid-2012 by its position in the 2012 notice sequence (after Notice 12-01, June 11, 2012, and before Notice 12-15, July 19, 2012).

What this means for you

Shareholders of S corporation banks, savings and loans, or federal savings associations

• You may subtract qualifying S corporation income, but not twice: income reported on Schedule E and line 17 is subtracted under (c)(xx), and (c)(xiv) now excludes that same income.
• Review which subtraction applies to which income to avoid a double subtraction.

Tax preparers

• For tax years after 2012, apply the (c)(xiv) exclusion for Schedule E / line 17 income so the same amount is not subtracted under both modifications.

Common questions

What problem does Notice 12-12 address? It prevents S corporation bank shareholders from subtracting the same income under both K.S.A. 79-32,117(c)(xiv) and (c)(xx).

What income does (c)(xx) let a stockholder subtract? Income properly reported on Schedule E and line 17 of Form 1040, distributed or undistributed.

What changed in (c)(xiv)? For tax years after 2012 it excludes the portion of income or loss reported on Schedule E and included on line 17.

Where are the broader modification changes explained? Notice 12-11.

Citations and references

• K.S.A. 79-32,117(c)(xx) -- lets S corporation stockholders subtract Schedule E / line 17 income (Section 12).
• K.S.A. 79-32,117(c)(xiv) -- undistributed S corporation bank/savings-and-loan income subtraction; amended to exclude Schedule E / line 17 income after 2012, preventing a double subtraction.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 12-12

Original ruling text

Policy & Research Phone: 785-296-3081
915 SW Harrison St FAX: 785-296-7928
Topeka KS 66612-1588 www.ksrevenue.org
Nick Jordan, Secretary Department of Revenue Sam Brownback, Governor
Richard Cram, Director

                                      NOTICE 12-12

                S CORPORATIONS OWNING BANKS, SAVINGS AND LOANS,
                       OR FEDERAL SAVINGS ASSOCIATIONS

Generally

  The calculation of an individual's Kansas income tax starts with federal adjusted gross

income. Certain modifications, either additions or subtractions, required by K.S.A. 79-32,117
are then made to arrive at Kansas adjusted gross income.

  During the 2012 Legislative Session House Bill 2117 was passed and signed into law.

Provisions in Section 12 of the Bill add five new addition modifications and one new subtraction
modification to K.S.A. 79-32,117. The overall effect of these new provisions is to exempt
certain categories of income from Kansas income tax. For additional information about addition
modifications for losses and deductions and subtraction modifications for income, please see
Notice 12-11.

Subtraction Modifications Affecting Income From A Bank, Savings and Loan, or Federal
Savings Association

  Section 12 of the Bill amends K.S.A. 79-32,117 to add language to the subtraction

modification found in paragraph (c)(xiv), and to add a new subtraction modification in paragraph
(c)(xx). The italicized language below indicates the changes made and new language:

        (c) There shall be subtracted from federal adjusted gross income:

       (xiv) For all taxable years commencing after December 31, 1996, that portion of
 any income of a bank organized under the laws of this state or any other state, a
 national banking association organized under the laws of the United States, an
 association organized under the savings and loan code of this state or any other state,
 or a federal savings association organized under the laws of the United States, for
 which an election as an S corporation under subchapter S of the federal internal
 revenue code is in effect, which accrues to the taxpayer who is a stockholder of such
 corporation and which is not distributed to the stockholders as dividends of the
 corporation. For all taxable years beginning after December 31, 2012, the amount of
 modification under this subsection shall exclude the portion of income or loss
 reported on schedule E and included on line 17 of the taxpayer's form 1040 federal
 individual income tax return.

       (xx) For all taxable years beginning after December 31, 2012, the amount of
 any: (1) Net profit from business as determined under the federal internal revenue
 code and reported from schedule C and on line 12 of the taxpayer's form 1040
 federal individual income tax return; (2) net income from rental real estate, royalties,
 partnerships, S corporations, estates, trusts, residual interest in real estate mortgage
 investment conduits and net farm rental as determined under the federal internal
 revenue code and reported from schedule E and on line 17 of the taxpayer's form
 1040 federal individual income tax return; and (3) net farm profit as determined
 under the federal internal revenue code and reported from schedule F and on line 18
 of the taxpayer's form 1040 federal income tax return; all to the extent included in
 the taxpayer's federal adjusted gross income. For purposes of this subsection,
 references to the federal form 1040 and federal schedule C, schedule E, and schedule
 F, shall be to such form and schedules as they existed for tax year 2011 and as
 revised thereafter by the internal revenue service.

  The new subtraction modification at K.S.A. 79-32,117(c)(xx), specifically (c)(xx)(2),

allows taxpayers who are stockholders of S corporations to subtract income properly reported on
federal Schedule E and on line 17 of the federal Form 1040 in computing their Kansas adjusted
gross income. This applies to both distributed and undistributed income.

  The subtraction modification at K.S.A. 79-32,117(c)(xiv) allows taxpayers who are

stockholders of S corporation banks, savings and loans, or federal savings associations to
subtract any undistributed S corporation bank, savings and loan, or federal savings association
income in computing their Kansas adjusted gross income. The new language found in K.S.A.
79-32,117(c)(xiv) provides that the subtraction modification found in this paragraph cannot
include income or loss properly reported on federal Schedule E and on line 17 of the federal
Form 1040. This limiting language prevents a taxpayer from claiming two subtraction
modifications for the same income. In other words, taxpayers who are stockholders of S
corporation banks, savings and loans, or federal savings associations cannot subtract
undistributed S corporation bank, savings and loan, or federal savings association income under
the provisions of both K.S.A. 79-32,117(c)(xiv) and (c)(xx).

                                 Taxpayer Assistance

Additional copies of this notice, forms or publications are available from our web site,
www.ksrevenue.org. If you have questions about income tax, please contact:

                             Taxpayer Assistance Center
                            Kansas Department of Revenue
                            915 SW Harrison St., 1st Floor
                               Topeka, KS 66612-1588
                                 Phone: 785-368-8222
                                  Fax: 785-291-3614