Kansas has made a change to how they treat a net operating loss (NOL).
According to IRS’s Pub. 536, “If your deductions for the year are more than your income for the year, you may have a net operating loss (NOL). An NOL year is the year in which an NOL occurs. You can use an NOL by deducting it from your income in another year or years.” For individuals, if your line 41 is a negative number, you might have a NOL. Basically, you need to have a business loss that is large enough to offset any other income. On the Federal level, the loss could be carried back or forward to offset income in other years. (A very simplified explanation.) Kansas has always required a separate calculation and will only allow the NOL to be carried forward for up to 10 years. The Federal NOL is added to the AGI from the taxpayer’s Federal return and the Kansas NOL is subtracted to create the Kansas Adjusted Gross Income.
Beginning with 2013, Kansas will no longer have NOLs for individuals. In a way it makes sense since Kansas will no longer be taxing business income. Qualified Federal business income will be subtracted from the Federal Adjusted Gross Income to create the Kansas Adjusted Gross Income. A business loss is added back to KAGI.("Business" could be from Sch C, Sch F or Sch E.)
What about NOLs from prior years? They’re gone too. A taxpayer carrying forward a NOL from 2011 will lose any deduction that is not used in 2012. The Federal NOL will still have to be added back to figure Kansas income.
Part of me is happy with the decision because the separate calculation and tracking of the Kansas NOL is a pain but that means that lots of taxpayers lost a major deduction and will be getting a surprise in 2013.
FYI - Corporations can still have KS NOLs.