Back in 2012, the Kansas legislature started an experiment/folly. They decided to stop taxing, on the state level, non-wage business income beginning with 2013 tax returns. In a nutshell, if the income was on the Schedules, C, E or F on the 1040, Kansas was not going to tax that income. The idea was that businesses would take what they saved in Kansas income tax and use it to hire more employees and spend it in Kansas. This would help the state’s economy.
It wasn’t quite that straight forward. If the taxpayer had a federal business loss, it was added back on the K-40. Also Kansas added back some special business deductions. This included the deduction for half the self-employment tax among others. Bottom line, Kansas taxed as if there was no business involved.
It didn’t work. The loss in tax revenue on non-wage business income was never made up through increased hiring and spending. Kansas saw major budget shortfalls. In 2017, the legislature went back to taxing business income and allowing business losses. Beginning with 2017 tax year returns, Kansas will make no non-wage business income modifications to the K-40. That income will be treated just like any other income.
When the experiment/folly began, Kansas also changed how it treated Net Operating Losses (NOL). Long ago, prior to 2013, we would add in the federal NOL and subtract the Kansas NOL. The Kansas NOL was calculated differently using the CRF form. While the loss of the Kansas NOL hurt clients no one missed having to prepare the CRF.
Kansas has also changed the rules on NOLs beginning with 2017 returns. They will take the federal NOL as is. There will be no state modifications. Kansas will take the FAGI. No CRF, carry forwards or carry backs.
I’m glad to see these changes because I always thought they were not something that would help the state’s finances. As a tax preparer, my life just got a little easier since I don’t have to worry about those complicated rules and I love that the CRF is not coming back. However, as a taxpayer I really hate having to pay Kansas income tax again.