What privilege tax deduction did Kansas add for interest on agricultural and single-family residence loans?

Plain-English summary

Kansas Notice 21-18 explains a new privilege tax deduction for interest income that financial institutions earn on certain agricultural and rural home loans.

The law. Section 10 of 2021 Senate Bill 15 amended K.S.A. 79-1109 to add a new deduction from net income for privilege tax purposes. The deduction is available for all tax years commencing after December 31, 2022. It is available to national banking associations, state banks, trust companies, and savings and loan associations, and is claimed on Form K-130.

What is deductible. Under new subsection (c), the deduction is for the net interest income received from qualified agricultural real estate loans attributed to Kansas and the net interest income received from single family residence loans attributed to Kansas, to the extent that interest is included in the corporation's Kansas taxable income.

Key definitions (new subsections (c)(1)-(5)).

• "Interest" -- interest on indebtedness attributed to Kansas incurred in the ordinary course of business, and interest on indebtedness secured by a single family residence.
• "Qualified agricultural real estate loans" -- loans on real property substantially used to produce agricultural products that have maturities of not less than 5 and not more than 40 years, are secured by a first lien (or a second lien if the institution also holds the first), and have an outstanding balance when made of less than 85% of the appraised value (with a private-mortgage-insurance exception for the excess).
• "Single family residence" -- a residence that is the principal residence of its occupant, is located in a rural Kansas area (as defined by the U.S. Department of Agriculture, not within a metropolitan statistical area, with a population of 2,500 or less), and is purchased or improved with the loan proceeds.
• The "net interest income . . . attributed to Kansas" figures are each computed as the ratio of interest earned on the qualifying loans to total interest earned, applied to the institution's net income (determined without the deduction).

Who it affects. The notice stresses this deduction only affects taxpayers filing Kansas privilege tax returns -- that is, banks and similar financial institutions, not general corporate or individual income taxpayers.

What this means for you

Banks, trust companies, and savings and loans

• For tax years beginning after December 31, 2022, you can deduct, on Form K-130, the net Kansas interest income from qualified agricultural real estate loans and rural single-family residence loans.
• Track which loans meet the definitions -- for farm loans, 5-to-40-year maturities, a first-lien position, and generally under 85% loan-to-value; for homes, a principal residence in a rural Kansas area of 2,500 or fewer people.

Agricultural and rural borrowers

• The deduction is an incentive for lenders to make qualifying farm and rural home loans; it does not change your own tax, but may affect credit availability.

Other taxpayers

• This is a privilege tax provision only -- it does not affect general corporate income tax or individual income tax filers.

Common questions

Who can claim the deduction? National banking associations, state banks, trust companies, and savings and loan associations that file Kansas privilege tax returns, on Form K-130.

When is it available? For all tax years commencing after December 31, 2022.

What interest qualifies? Net interest income attributed to Kansas from qualified agricultural real estate loans and from single family residence loans, to the extent included in Kansas taxable income.

What makes an agricultural loan "qualified"? A loan on farm real estate with a 5-to-40-year maturity, secured by a first lien, and generally under 85% loan-to-value when made (with a PMI exception).

What is a "single family residence" for this deduction? An owner's principal residence in a rural Kansas area (not in a metropolitan statistical area, population 2,500 or less) purchased or improved with the loan proceeds.

Citations and references

• Senate Bill 15 (2021), Section 10 -- amended K.S.A. 79-1109 to add the privilege tax deduction, effective for tax years after December 31, 2022.
• K.S.A. 79-1109 -- the privilege tax net-income statute; new subsection (c) creates the deduction and defines the qualifying loans.
• Form K-130 -- the Kansas privilege tax return on which the deduction is claimed.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 21-18

Original ruling text

Policy and Research
109 SW 9th Street Phone: 785-368-8222
PO Box 3506 Fax: 785-296-1279
Topeka KS 66601-3506 www.ksrevenue.org
Mark A. Burghart, Secretary Laura Kelly, Governor

                                         NOTICE 21-18

                               PRIVILEGE TAX
                 Deduction for Interest Income from Certain
                 QUALIFIED AGRICULTURAL REAL ESTATE LOANS
                                    AND
                       SINGLE FAMILY RESIDENCE LOANS

                                        (JULY 13, 2021)

  During the 2021 Legislative Session Senate Bill 15 was passed and signed into law. Section

10 amends K.S.A. 79-1109 to add a new deduction from net income for privilege tax purposes.
The deduction will be available for all tax years commencing after December 31, 2022.

   The new deduction is available to national banking associations, state banks, trust companies,

and savings and loan associations, and will be claimed on form K-130. As set forth in new section
(c) of the statute, the deduction is for:

   . . . .net interest income received from qualified agricultural real estate loans attributed
   to Kansas and the net interest income received from single family residence loans
   attributed to Kansas to the extent such interest is included in the Kansas taxable income
   of a corporation. . . . .

  New subsections (c)(1), (2), (3), (4), and (5) define the terms "interest", "qualified agriculture

real estate loans", "single family residence", "net interest income received from qualified
agricultural real estate loans attributable to Kansas", and "net interest income received from single
family residence loans attributable to Kansas". These subsections provide:

         (1) "Interest" means interest on indebtedness attributed to Kansas and incurred in
   the ordinary course of the active conduct of any business and interest on indebtedness
   incurred that is secured by a single family residence;
         (2) "qualified agricultural real estate loans" means loans made on real property
   that is substantially used for the production of one or more agricultural products and
   that:
         (A) Have maturities of not less than five years and not more than 40 years;
         (B) are secured by a first lien interest in real estate, except that the loans may be
   secured by a second lien interest if the institution also holds the first lien on the
   property; and
         (C) have an outstanding loan balance when made that is less than 85% of the
   appraised value of the real estate, except that a loan for which private mortgage

 insurance is obtained may exceed 85% of the appraised value of the real estate to the
 extent the loan amount in excess of 85% is covered by such insurance;
       (3) "single family residence" means a residence that:
       (A) Is the principal residence of its occupant;
       (B) is located in Kansas, in a rural area as defined by the United States department
 of agriculture that is not within a metropolitan statistical area and has a population of
 2,500 or less as determined by the most recent census for which data is available; and
       (C) is purchased or improved with the proceeds of the loan;
       (4) "net interest income received from qualified agricultural real estate loans
 attributed to Kansas" means the product of the ratio of the interest income earned on
 qualified agricultural real estate loans over total interest income earned, in relation to
 the net income of the national banking association, state bank, trust company or savings
 and loan association without regard to this deduction; and
       (5) "net interest income received from single family residence loans attributed to
 Kansas" means the product of the ratio of the interest income earned on single family
 residence loans over total interest income earned, in relation to the net income of the
 national banking association, state bank, trust company or savings and loan association
 without regard to this deduction.

  It is important to note this deduction will only affect those taxpayers that are filing Kansas

privilege tax returns.

                                 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
                             Scott Office Building, 1st Floor
                                    120 SE 10th Ave
                                     P. O. Box 3506
                                Topeka, KS 66601-3506
                                  Phone: 785-368-8222
                                   Fax: 785-291-3614