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Kansas enacts significant corporate income tax changes

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May 2021

In brief

Enacted on May 3, 2021, pursuant to a legislative override of the governor’s veto, S.B. 50 provides the following changes applicable for tax years beginning after December 31, 2020:

  • 100% subtraction modification for GILTI and 163(j) disallowed interest,
  • Decoupling from IRC Section 118 capital contribution changes enacted by the 2017 tax reform act (the 2017 Act), and 
  • Modifying business meal expense deductions

Additionally, for net operating losses incurred in tax years beginning after December 31, 2017, Kansas replaces its 10-year NOL carryforward with an unlimited carryforward. 

Finally, Kansas extends the filing deadline for 2020 corporate income tax returns to be one month following the federal deadline. 

S.B. 50 also implements sales tax collection and remittance duties on marketplace facilitators. We will summarize the marketplace facilitator changes in a later Insight.

For consideration. Kansas taxpayers are being provided some immediate compliance relief with the additional month extension to file their 2020 corporate income tax returns. Taxpayers calculating their 2021 Kansas liability should also benefit from the state’s new subtraction modifications for GILTI and Section 163(j) provisions. In addition, while the legislation also provides that NOLs for tax years after December 31, 2017 will have an unlimited carryforward, net operating losses incurred before 2017 will continue to have a 10-year carryforward along with Kansas’ NOL carryback for unexhausted NOL carryforwards.

In detail

GILTI

For tax years beginning after December 31, 2020, S.B. 50 provides (1) a 100% subtraction modification for Section 951A income, before the GILTI Section 250 deduction and (2) an addition modification for the GILTI Section 250 deduction.

Section 163(j)

For tax years beginning after December 31, 2020, Kansas provides a subtraction modification for the amount disallowed as a deduction under Section 163(j) as in effect on January 1, 2018 (i.e., under the 2017 Act).

Observation: S.B. 50 is silent regarding how corporate taxpayers account for federal 163(j) carryforwards that are applied to reduce federal taxable income in future years, but which were deducted previously for Kansas.

Section 118 capital contributions - Federal taxable income modification

Prior to the 2017 Act, IRC Section 118 provided that the gross income of a corporation generally does not include contributions to capital. The 2017 Act modified IRC Section 118 to provide that “contributions to capital” do not include contributions by any government entity.

For tax years beginning after December 31, 2020, Kansas taxable income is defined as a taxpayer’s federal taxable income except that Section 118 “shall be applied as in effect on December 21, 2017.” (i.e., prior to the 2017 Act).

Observation: The 2017 tax reform act change to IRC Section 118 may result in many state incentive payments to be subject to federal and state corporate income tax. S.B. 50 provides that Section 118 would apply as it existed prior to the 2017 Act.

Business meal expenses

For tax years beginning after December 31, 2020, S.B. 50 provides that the amount disallowed as a deduction under Section 274 for meal expenditures is allowed to the extent such expense was deductible and allowed as of December 31, 2017 (i.e., prior to the 2017 Act).

Net operating loss carryforward extension

For net operating losses incurred in taxable years beginning after December 31, 2017, S.B. 50 amends Ks. Stat. Sec. 79-32,143(a)(1) to provide that net operating loss deductions are “allowed in the same manner that is allowed under the federal internal revenue code, except that such net operating loss deduction may only be carried forward.”  This results in an unlimited NOL carryforward and no carryback. 

For net operating losses incurred in taxable years prior to January 1, 2018, NOLs may be carried forward for 10 years with a special carryback for unutilized NOLs. 

Observation: Taxpayers may need to separately track NOL utilization for NOLs incurred before their 2018 tax year because they remain subject to the state’s 10 year carryforward provision. To the extent such NOLs are not utilized at the end of those 10 years, taxpayers may request a refund equal to the refund that would have been allowable in the taxable year the loss incurred by utilizing a special three year NOL carry back.

Observation: The change does not impact how NOL carryovers are applied on a post-apportioned basis. The change contained in Ks. Stat. Sec. 79-32,143(a)(1) modifies similar language regarding how the Kansas NOL is “allowed.”  Both before and after S.B. 50, Ks. Stat. Sec. 79-32,143(b) provides that the amount of a loss carried forward “will be the federal net operating loss after . . . apportionment as to source in the case of corporations.”

Corporation income tax return filing deadline extended starting with 2020 tax year

For tax years beginning after December 31, 2019, the deadline for filing original and extended Kansas corporate income tax returns is one month following the respective federal original or extended due dates.

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Peter Michalowski

State and Local Tax Leader, PwC US

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