Can I subtract wages that federal law disallowed when I claimed a federal jobs credit on my Kansas return?

Plain-English summary

Kansas Notice 24-18 explains a new income tax subtraction created by 2024 Senate Bill 410 (Section 18), which amended K.S.A. 79-32,117. When a business claims certain federal employment (jobs) tax credits, federal law -- 26 U.S.C. Section 280C(a) -- makes it give up an equal amount of its federal deduction for wages and salaries. Kansas now lets the taxpayer subtract that disallowed wage amount when figuring Kansas adjusted gross income, so the wages are not effectively taxed twice.

Two rules were added:

• New K.S.A. 79-32,117(c)(x)(1) -- for tax years beginning after December 31, 2021, subtract the amount of any federal credit disallowance under 26 U.S.C. Section 280C(a). The federal credits covered include the Indian employment credit, the employer wage credit for employees who are active-duty members of the uniformed services, the employer credit for paid family and medical leave, the work opportunity credit, and the empowerment zone employment credit.
• New K.S.A. 79-32,117(c)(x)(2) -- subtract 50% of the federal employee retention credit (ERC) disallowance under rules similar to Section 280C(a), for tax years after December 31, 2019 and before January 1, 2022. The taxpayer must prove it previously filed Kansas returns and paid Kansas tax on the disallowed amount.

The (c)(x)(1) subtraction applies retroactively to tax years beginning after December 31, 2021.

What this means for you

Businesses that claimed federal employment credits

• If you claimed one of the covered federal jobs credits and had to reduce your federal wage deduction under Section 280C(a), you can subtract that reduced amount on your Kansas return for 2022 and later.
• If you claimed the federal ERC for 2020 or 2021, you can subtract 50% of the disallowed wage amount, if you can show you already filed Kansas returns and paid Kansas tax on it.
• To claim the retroactive subtraction you may either request a written review (if the only change the Department made to your original return was disallowing this subtraction) or file an amended return with copies of your federal return and the federal credit forms. Amended returns must be filed within the statute of limitations in K.S.A. 79-3230.
• For 2020 or 2021 ERC subtractions, include original and amended federal Form 941s, any IRS adjustments, amended federal income tax returns, and a signed statement certifying the wages paid and that the deduction was reduced by the ERC on both the federal and Kansas returns.

Watch the deadline

Any refund claim or amended return under K.S.A. 79-32,117(c)(x) had to be filed on or before April 15, 2025. After that date, no claim or amended return under these provisions is allowed.

Common questions

Which federal credits does this cover? The Indian employment credit, the employer wage credit for active-duty uniformed-services employees, the employer credit for paid family and medical leave, the work opportunity credit, the empowerment zone employment credit, and (at 50%) the employee retention credit.

What years does the main subtraction apply to? Tax years beginning after December 31, 2021.

How much of the ERC disallowance can I subtract? 50%, for tax years after December 31, 2019 and before January 1, 2022.

Is there a deadline? Yes -- refund claims and amended returns under these provisions had to be filed on or before April 15, 2025.

Citations and references

• Senate Bill 410 (2024) -- Section 18 added the subtraction modification for federal jobs tax credits.
• K.S.A. 79-32,117 -- Kansas addition and subtraction modifications to federal adjusted gross income.
• K.S.A. 79-32,117(c)(x) -- the new subtraction for federal employment-credit and ERC wage disallowances, and its April 15, 2025 filing deadline.
• 26 U.S.C. § 280C(a) -- the federal rule disallowing the wage/salary deduction equal to certain employment credits.
• K.S.A. 79-3230 -- Kansas income tax statute of limitations governing amended returns.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 24-18

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

                                        NOTICE 24-18

                    MODIFICATIONS FOR FEDERAL JOBS TAX CREDITS

                                     (AUGUST 13, 2024)

  During the 2024 Legislative Session Senate Bill 410 was passed and signed into law. Section

18 of the Bill amends K.S.A. 79-32,117, which requires or permits addition and subtraction
modifications to federal adjusted gross income when calculating Kansas adjusted gross income.

   As amended, K.S.A. 79-32,117(c)(x) new subparagraph (1) provides that for taxable years

beginning after December 31, 2021, any federal credit disallowance under the provisions of 26
U.S.C. § 280C(a) may be claimed as a subtraction modification. 26 U.S.C. § 280C(a) provides
that no deduction shall be allowed for wage and salary expenses that are equal to the amount of
the credit determined for the taxable year. 26 U.S.C. § 280C(a) also establishes the federal rule
for certain federal employment credits, including the Indian employment credit, the employer
wage credit for employees who are active-duty members of the uniformed services, the employer
credit for paid family and medical leave, the work opportunity credit, and the empowerment zone
employment credit.

   In addition, K.S.A. 79-32,117(c)(x) new subparagraph (2) provides a subtraction

modification for 50% of the federal employee retention credit disallowance under rules similar to
the rules of 26 U.S.C. § 280C(a) for taxable years beginning after December 31, 2019, and ending
before January 1, 2022. Certain proofs of prior filing and payment of Kansas tax are required.
Amended filings and claims of refund under this provision shall be allowed for returns filed on or
before April 15, 2025.

   Effective July 1, 2024, the amended provisions will provide:

         (c)(x) (1) For taxable years beginning after December 31, 2021, the amount of
   any federal credit disallowance under the provisions of 26 U.S.C. § 280C(a).
         (2) For taxable years beginning after December 31, 2019, and ending before
   January 1, 2022, 50% of the amount of the federal employee retention credit
   disallowance under rules similar to the rules of 26 U.S.C. § 280C(a). The taxpayer
   shall be required to prove that such taxpayer previously filed Kansas income tax returns
   and paid Kansas income tax on the disallowed amount. Notwithstanding any other
   provision of law to the contrary, any claim for refund or amended return relating to this
   subparagraph shall be allowed to be filed on or before April 15, 2025, and no claim for
   refund or amended return shall be allowed or filed after April 15, 2025.

  The amendments to the law found in new subparagraph (c)(x)(1) apply retroactively to

taxable years beginning after December 31, 2021. A subtraction modification under this provision
may be claimed retroactively in one of two ways, depending upon how the original tax return(s)
were filed and processed. First, if only an original Kansas income tax return was filed, and the
only adjustment made to the original return by the Department was the disallowance of the
subtraction modification, a review of the disallowance may be requested, in writing, without the
need to file an amended return. Second, if the Department adjusted the original return for a reason
not associated with the modification, or if an amended return has already been filed for a reason
not associated with the modification, file an amended return to claim the subtraction modification,
and attach a copy of the federal income tax return and copies of the federal credit forms to
substantiate the claimed modification. The amended return(s) needs to be filed prior to the
expiration of the statute of limitation according to K.S.A. 79-3230.

  When filing a new or amended return for 2020 or 2021 that claims a subtraction modification

for an Employee Retention Tax Credit, as provided in new subparagraph (c)(x)(2), please include
copies of original and amended federal Form 941 Employer's Quarterly Federal Tax Returns, IRS
adjustments to the federal Form 941, copies of amended federal income tax returns (if applicable),
and an explanation of changes made on any amended returns. Also include a signed statement by
which you certify the amount of salary and wages actually paid and affirm the deduction for salary
and wages was reduced by the amount of the Employee Retention Tax Credit on both the
federal and state income tax returns. The amended return needs to be filed on or before April
15, 2025 as provided in K.S.A. 79-32,117(c)(x).

                                 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