Corporate Close-Up: Retroactive Repeal of Pass-Through Exemption Triggers Estimated Payments in the Sunflower State


 Kansas Sunflowers

The tax-break party lasted long into the night, but owners and members of pass-through entities who have enjoyed the Kansas exemption on pass-through entity income since 2013 may be experiencing hangovers. The bad news for these taxpayers is that the retroactive repeal of this provision means tax will accrue on their income going back to the beginning of 2017. The good news is that interest or penalties will not apply as long as full payment is made by tax day 2018.

Kansas S.B. 30 retroactively imposes state income tax on pass-through income (partnerships, LLCs, S Corporations) back to Jan. 1, 2017. The legislation repeals the subtraction modification available to individuals who conduct business through S corporations, partnerships, or limited liability companies; the modification meant that these business owners did not have to pay income tax in Kansas on net profits from their businesses for taxable years beginning on or after Jan. 1, 2013, until Jan. 1, 2017.

As a result, most of the owners or members of pass-through entities are subject to Kansas income tax this year. But they probably have not been making state estimated payments to Kansas because their pass through income has not been taxed by Kansas since 2012.

Fortunately for these taxpayers, Kan. Stat. Ann. § 79-32,117(f) was added in S.B. 30 to state that no interest or penalty will be imposed on an underpayment of taxes for 2017 as long as the underpayment is remedied by April 17, 2018.

“It’s not clear if this provision was necessary because an existing provision in Kan. State Ann. § 79-32,107(b) already states that interest or penalties would not be imposed if withholding was greater than the previous year's tax burden or if the previous year's tax was less than $200,” said Jeffrey A. Wietharn, a partner with Coffman, DeFries & Nothern, P.A. in Topeka, Kan., and co-author of Bloomberg BNA’s Kansas Corporate Income Tax Navigator (subscription required). “Considering there was no taxation on the pass-through income between 2013 and 2016, arguably § 79-32,107(b) would have protected these same taxpayers from penalty or interest in 2017,” he added. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will the repeal of the Kansas exemption of pass-through enter into the federal tax reform debate? 

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