Are partner guaranteed payments still part of the Kansas nonwage business income subtraction?

Plain-English summary

Kansas Notice 15-11 explains that Section 3 of Senate Substitute for House Bill 2109 (2015) amended K.S.A. 79-32,117(c)(xx) to reduce the nonwage business income subtraction by excluding guaranteed payments.

What changed. The subtraction modification for certain pass-through net income (from partnerships, S corporations, rental real estate, etc.) no longer includes guaranteed payments as defined in section 707(c) of the Internal Revenue Code.

Effective date. Although the subsection's text references tax years beginning after December 31, 2012, the change is effective July 1, 2015 (the act took effect on publication in the statute book). So it applies to tax year 2015 and later and is not retroactive -- amended 2013 or 2014 returns are not needed for guaranteed payments.

How to report. Show the full subtraction modification on the K-40, then add the guaranteed payment amount back as an addition modification on Schedule S. Include the federal Schedule K-1 with the Kansas return.

What this means for you

Partners receiving guaranteed payments

• Beginning with 2015, guaranteed payments no longer reduce your Kansas income through the nonwage business income subtraction; report the full subtraction on the K-40 but add the guaranteed payments back on Schedule S.

Common questions

What was excluded from the subtraction? Guaranteed payments as defined in IRC section 707(c).

When did the change take effect? July 1, 2015 -- applying to tax year 2015 and later, not retroactively.

Do I need to amend 2013 or 2014? No -- amended returns are not needed for guaranteed payments.

How is it reported? Full subtraction on the K-40, then add guaranteed payments back as an addition modification on Schedule S, with the federal K-1 attached.

Citations and references

• Senate Substitute for House Bill 2109 (2015), Section 3 -- amended K.S.A. 79-32,117(c)(xx) to exclude IRC section 707(c) guaranteed payments from the nonwage business income subtraction, effective July 1, 2015 (tax year 2015 and later).

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 15-11

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 15-11

   SUBTRACTION MODIFICATION CHANGED TO EXCLUDE GUARANTEED PAYMENTS
                             (JULY 1, 2015)

 During the 2015 Legislative Session Senate Substitute for House Bill 2109 was passed and

signed into law. Section 3 of the Bill amends K.S.A. 79-32,117, which relates to modifications
made in computing Kansas adjusted gross income.

  The calculation of Kansas income tax begins with federal adjusted gross income. Certain

addition and subtraction modifications are then made in order to determine Kansas adjusted
gross income. The amendment to K.S.A. 79-32,117 reduces the amount of the subtraction
modification which can be claimed for net profit from business reported on federal Schedule C
and on line 12 of the taxpayer's federal Form 1040.

 The amended language, found in subsection (c)(xx) of K.S.A. 79-32,117, provides:

       (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, 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, 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.

Effective Date

 Section 36 of Senate Substitute for House Bill 2109 provides, "This act shall take effect

and be in force from and after its publication in the statute book." As a result, although the
language of K.S.A. 79-32,117(c)(xx) indicates the subsection applies for all taxable years
beginning after December 31, 2012, the changes made by Section 3 of Senate Substitute for
House Bill 2109 are effective July 1, 2015. This means the changes are effective for tax year

2015 and later years, and are not retroactive. Amended returns for tax years 2013 and/or 2014
do not need to be filed regarding guaranteed payments.

Reporting on the K-40 Kansas Income Tax Return

 The amendment made to K.S.A. 79-32,117(c)(xx) reduces the amount of the subtraction

modification. However, for reporting purposes, the full amount of the subtraction modification
should be shown on the K-40 Kansas individual income tax return. Then the amount of the
guaranteed payment(s) will be included as an addition modification on Schedule S. The
taxpayer's federal Schedule K-1 must be included when filing the Kansas return.

                                Taxpayer Assistance

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