What is the Kansas SALT Parity Act and how does the pass-through entity tax election work?

Plain-English summary

Kansas Notice 22-16 explains the SALT Parity Act, created by 2022 House Bill 2239 (New Sections 1-6), effective for tax year 2022 and after. The Act gives certain pass-through entities the option to pay Kansas income tax at the entity level rather than having the tax flow through to the individual owners' returns -- a workaround to the federal $10,000 cap on the state and local tax (SALT) deduction. Sections 38 and 39 amend K.S.A. 79-3220 (filing requirements) and K.S.A. 79-32,111 (credit for taxes paid to another state) to recognize the Act.

Who can elect (Sections 2-3). An "electing pass-through entity" is an S corporation or partnership that makes the election. The election is made annually by filing the entity's return (Form K-120S), and it is binding on all owners. An "electing pass-through entity owner" is an S corporation shareholder or a partner (but a partner does not include a C corporation).

The entity tax (Section 4). An electing entity is taxed at 5.7% on the sum of each resident owner's distributive share of the entity's income and each nonresident owner's share attributable to Kansas. The entity is treated as a corporation for estimated tax purposes (Form K-120ES), except there is no underpayment penalty for tax year 2022; in later years estimated payments must be made.

Credits (Section 4(c)). Credits attributable to the entity's activities (other than credits for taxes paid to other states) must be claimed by the entity, not passed through, in any year an election is made. Excess credits, net operating losses, or modifications may be carried forward on the entity's return. If, in a later period, an election is not made or allowed, existing excess credits may transfer to the owners in the same proportion as without the election.

Owner treatment (Section 5). Individual owners are not separately liable for the entity tax and are entitled to a credit against their individual income tax for their direct share of the tax paid by the electing entity.

Filing and other-state credit (Sections 38-39). A nonresident individual or fiduciary whose only Kansas-source income is from an electing pass-through entity is not required to file a Kansas return. And entity-level income tax an electing entity pays to another state, on income in a resident individual's Kansas adjusted gross income, counts as taxes paid to the other state for the resident's credit for taxes paid to other states.

For more, see the Department's SALT Parity Act -- Frequently Asked Questions.

What this means for you

S corporations and partnerships

• You can elect to pay Kansas income tax at the entity level at 5.7%, potentially preserving a federal deduction that the SALT cap would otherwise limit for your owners.
• The election is annual, made on Form K-120S, and binds all owners -- so coordinate before filing.
• For 2022 there's no estimated-tax underpayment penalty, but plan to make estimated payments (Form K-120ES) in later years.

Owners of electing entities

• You are not separately liable for the entity tax and get a credit against your individual Kansas income tax for your share of it.
• A nonresident whose only Kansas income is from an electing entity does not have to file a Kansas return.
• For resident owners, entity tax paid to another state counts toward your credit for taxes paid to other states.

Common questions

Who can make the election? An S corporation or partnership (its owners being shareholders or partners, but not a C corporation partner).

What is the entity tax rate? 5.7% on resident owners' distributive shares plus nonresident owners' Kansas-source shares.

How is the election made? Annually, by filing Form K-120S; it binds all owners.

Do owners still pay tax on the income? They are not separately liable for the entity tax and receive a credit against their individual income tax for their share.

When did it take effect? Tax year 2022 and all years after.

Citations and references

• House Bill 2239 (2022), New Sections 1-6 -- created the SALT Parity Act.
• K.S.A. 79-3220 -- filing requirements; a nonresident whose only Kansas income is from an electing entity need not file.
• K.S.A. 79-32,111 -- credit for taxes paid to another state; entity tax paid to another state counts for a resident owner's credit.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 22-16

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.gov
Mark A. Burghart, Secretary Laura Kelly, Governor

                                         NOTICE 22-16

                                     SALT PARITY ACT

                                    (DECEMBER 13, 2022)

   During the 2022 Legislative Session House Bill 2239 was passed and signed into law. New

Sections 1 - 6 of the Bill create the SALT Parity Act which provides certain pass-through entities
with the option of paying state income taxes at the entity level rather than the tax being paid by
the individual owners of the pass-through entities on their individual income tax returns. Sections
38 and 39 of the Bill amend existing provisions of K.S.A. 79-3220 (filing requirements) and K.S.A.
79-32,111 (credit for taxes paid to another state) to recognize the new Act. The Act applies for
tax year 2022 and all tax years thereafter.

    To file an income tax return at the entity level, the entity must be an "electing pass-through

entity". New Section 2(c) defines the term by stating: "'Electing pass-through entity' means, with
respect to a taxable period, an S corporation or partnership that has made the election under section
3, and amendments thereto, with respect to the taxable period." As provided in New Section 3,
the election to be subject to tax at the entity level is made annually by the entity, on the return (the
K-120S) it files for the tax year. The filing of the return, and therefore the election, is binding on
all electing pass-through entity owners. New Section 2(d) provides, "'Electing pass-through entity
owner' means, with respect to an S corporation, a shareholder of the S corporation and, with
respect to a partnership, a partner in the partnership, except that a partner does not include a C
corporation."

   New Section 4(a) provides electing pass-through entities are subject to income tax at the rate

of 5.7% on the sum of each resident owner's distributive share of the entity's income and each
nonresident owner's distributive share of the entity's income attributable to Kansas.

   New Section 4(b) provides electing pass-through entities that elect to be subject to the tax

are to be treated as corporations for purposes of estimated tax payments (made by filing the K-
120ES), except they are not subject to penalties for underpayment of estimated tax during tax year
2022. While not required in 2022, in subsequent years, the estimated payments will need to be
made, or else the pass-though could be subject to the under payment of tax penalty.

  New Section 4(c) provides any credit that is attributable to the activities of an entity, other

than credits for taxes paid to other states, must be claimed by the electing pass-through entity.
Credits are not passed through to pass-through entity owners in any year for which an election is
made.

  New Section 4(c) also provides any excess income tax credit, net operating loss, or other

modification may be carried forward on the electing pass-through entity's return. Any limitation
specified in the specific statutory section for an income tax credit, net operating loss, or
modification applies to the pass-through entity. And, such credit, loss, or modification may only
be utilized in a subsequent tax year when an election is made. If, in a taxable period following a
period when an election was made, an election is not allowed or not made by an entity, any excess
income tax credits that already exist may be transferred to the electing pass-through entities
owners. Any excess income tax credits shall be available to each owner in the same proportion
and manner as would have applied without the election for the taxable period in which each credit
was generated. All other rights and obligations pertaining to the credits shall also be transferred
to the electing pass-through entity's owners. Once such credit is distributed to the owner, it will
not be used by the pass-through entity again.

  New Section 5 provides individual owners of electing pass-through entities are not separately

or individually liable for entity tax. It also provides owners are entitled to a credit against their
individual income for their direct share of the tax imposed on the electing pass-through entity.

  Section 38 of the Bill amends K.S.A. 79-3220 to provide, in new subsection (a)(3), that a

nonresident individual or fiduciary whose only source of income from Kansas is from an electing
pass-through entity under the SALT parity act is not required to file a Kansas income tax return.

  Section 39 of the Bill amends K.S.A. 79-32,111 to provide, in new subsection (c), that the

amount of income tax paid to another state by an electing pass-through entity on income that is
included in the Kansas adjusted gross income of a resident individual taxpayer are to be considered
taxes paid to the other state by the resident individual taxpayer for purposes of the credit for taxes
paid to other states.

 For additional information, please see: SALT Parity Act – Frequently Asked Questions

which is available through our website at: www.ksrevenue.gov.

                                  TAXPAYER ASSISTANCE

 Additional copies of this notice, forms or publications are available from our web site,

www.ksrevenue.gov. 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