Can a Kansas partner offset the guaranteed-payments add-back with SE tax, retirement, or health deductions?

Plain-English summary

A tax preparer reviewing a new client's 2015 return asked whether Kansas would allow deductions for self-employment tax, retirement-plan contributions, and self-employed health insurance to offset the guaranteed payments the client had to pick up as income. The mechanics: Kansas Schedule S adds those items back (lines A8–A12) and subtracts Schedule E income including guaranteed payments (line A25). For the client, guaranteed payments of $159,882 plus ordinary partnership income of $3,972 produced a net addition of about $67,190, which the preparer felt was unfair.

The Department's answer: no. Kansas law did not permit those deductions. The result came from legislation the Kansas Legislature had enacted over the prior several years, and the Department could not say when the areas would next be addressed or what future Legislatures might do.

What this means for you

Partners receiving guaranteed payments (as of 2016)

Under the law in effect at the time, you could not use self-employment tax, retirement contributions, or self-employed health insurance to reduce the Kansas add-back of guaranteed payments — the net addition on Schedule S stood.

Tax preparers

This ruling reflects the 2012–2017 Kansas pass-through/Schedule S regime, which the Department flagged as subject to legislative change. Kansas has since amended how it treats pass-through business income, so do not carry this result forward without checking the current Schedule S instructions and statute.

Common questions

Q: Could a Kansas partner deduct SE tax, retirement contributions, or health insurance against guaranteed payments?
A: No. The Department said Kansas law did not permit those deductions to offset the guaranteed-payments add-back.

Q: Why was the net addition so large?
A: Schedule S added back the disallowed items and only subtracted the Schedule E income, so most of the guaranteed payments remained in Kansas income (about $67,190 in the example).

Q: Is this still the law?
A: The Department noted the area was subject to repeated legislative change, and Kansas has since amended its pass-through income treatment — confirm the current law.

Q: Does this ruling apply to me?
A: A Kansas private letter ruling addresses only the requesting taxpayer and cannot be relied on as precedent by others, especially given the later law changes.

Citations and references

• The Department's response relies on Kansas Schedule S mechanics (add-back lines A8–A12; subtraction line A25 for Schedule E income including guaranteed payments) and on Kansas legislation enacted over the preceding years, rather than citing a single statute section. It concluded that self-employment tax, retirement-plan contributions, and self-employed health insurance were not deductible against the guaranteed-payments add-back.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2016-003

Original ruling text

Private Letter Ruling

Body:

July 19, 2016

XXXXXXXXXX
XXXXXXXXXX

Re: Kansas Income Tax

Dear XXXXX:

Your correspondence of July 7, 2016, addressed to Mr. Bob Clelland has been referred to me for response. Thank you for your inquiry.

By your e-mail you have requested our advice regarding Kansas income tax. Specifically, your e-mail states:

Can I please ask for your assistance again. Is the dept. allowing some of the self- employment tax, plan contributions and self-employed health insurance as a deduction since you’re making the taxpayer pick up the guaranteed payments as income? The Schedule S form has on lines A8-12 the addback of all the above items and the subtraction on line A25 of all the Schedule E income which includes guaranteed payments. I picked up a new client and was reviewing the 2015 return he filed via TurboTax. He had Guaranteed Payments of $159,882 and Ordinary Partnership Income of $3,972. So he had a net addition of $67,190 which doesn’t seem fair.

In response to your inquiry, please be advised the short answer to your question is “no” because Kansas law does not permit the deductions you mentioned. As you are aware, over the past several years the Kansas Legislature has enacted legislation that affects all of these areas, and the net result is that noted in your e-mail. At this time we don’t know when these areas will next be addressed, or what approach will be adopted by future Legislatures.

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

JW:jw

NOTE: This opinion letter is based solely on the facts provided in your request for advice. If material facts or information were not disclosed this letter is null and void. This letter will be revoked without further action by the Department if the statutes, administrative regulations, published revenue rulings, or court decisions that materially affect this opinion are changed.

Date Composed: 09/16/2016 Date Modified: 09/16/2016

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