Kansas Tax Update Presented by: Steffani Shelton, CPA Shane Beavers, CPA CBIZ MHM, LLC

CIRCULAR 230 DISCLOSURE   To ensure compliance with requirements imposed by the IRS, we inform you that – unless specifically indicated otherwise – any tax advice in this communication (and any attachments) is intended only for the addressee, and is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. We remain committed to providing our clients with the highest level of professional tax expertise.  Neither Circular 230 nor our policy changes this commitment, nor does it reduce the high degree of care and attention we give to our clients and all communications we have with them.  We are simply adding the above "legend" to our written communications in order to comply with these new rules.

Governor’s Tax Initiative Lower individual rates and move from 3 brackets to 2 2012 3.50 - 6.45 2013 3.00 - 4.90 2014 2.70 - 4.80 2015 2.70 - 4.60 2016 2.40 - 4.60 2017 2.30 - 4.60 2018 2.30 - 3.90

Contiguous State Comparison Colorado 4.63 4.63 Oklahoma 5.25 5.25 Missouri* 6.00 6.00 Kansas 6.45 4.90/3.90 Nebraska 6.84 6.84 * The Missouri 2013 legislature passed a tax initiative to lower rates and exempt a portion of non-wage business income to be phased in over the next ten years. Governor Nixon vetoed the legislation and the legislature failed to override the veto.

Governor’s Tax Initiative Eliminate itemized deductions Itemized deductions, with the exception of charitable contributions, will be phased down on the following schedule 2013 30% 2014 35% 2015 40% 2016 45% 2017 and thereafter 50% ***Gaming losses phased out 100% in 2014 Double the standard deduction for head-of-household filers

Governor’s Tax Initiative Eliminate individual income tax on non-wage business income Non-wage business income is defined as: Net profit from business reported on Schedule C Net income from rental activities, royalties, partnerships, S corporations, trusts and net farm rental reported on Schedule E Net farm profit reported on Schedule F

Non-wage Business Loss Exclusion Section 12(b)(xix) of HB 2117 provides that: There shall be added to federal adjusted gross income: Loss from business as reported on Schedule C Loss from rental activities, royalties, partnerships, S corporations, estates, trusts and net farm rentals as reported on Schedule E Farm loss as reported on Schedule F

Self-employed Spouse Business Losses Losses incurred by a self-employed person claimed on Schedule C are not deductible on the Kansas income tax return Wage income earned by spouse is taxable on the Kansas income tax return No offset of business loss against wage income

Statutory Employees Statutory employees receive a Form W-2 Statutory employees report their “wages” on Schedule C Statutory employees deduct their expenses incurred in connection with their trade or business on Schedule C Kansas Notice 12-11 specifically provides that statutory employees are self-employed for purposes of HB 2117 Net schedule C income is excluded from Kansas AGI Net schedule C loss is excluded from Kansas AGI

Governor’s Tax Initiative Leave corporate income tax rates unchanged Hold the sales tax steady at 6.3%

Subchapter S Matters Discuss possible adjustments to wages Reasonable compensation Health insurance premiums for 2% shareholders

Reasonable Compensation HB 2117 exempts non-wage business income while taxing wage income Salary paid to shareholder employees of S corporations must be reasonable Criteria for reasonable compensation Size, complexity and financial condition of business Employee’s position, time spent working and nature of services performed Pay for comparable services and prevailing economic conditions Employee’s responsibilities and qualifications Salary paid in prior years Distribution to shareholders

Health Insurance Premiums Health insurance premiums paid on behalf of 2% shareholder-employees must be included in W-2 for the employer to deduct the premium and for the employee to deduct the insurance premium above-the-line on form 1040 Self-employed health insurance premium is not deductible on the Kansas income tax return HB 2059 did not modify this rule

Subchapter S matters Rent adjustment for those that rent a self-owned building to their business

Partnership Matters Basis in Partnership interest Guaranteed payments As with S-corporations, ordinary income from sale of business assets that flow to page 1 of 1065 will not be subject to Kansas tax

Basis in Partnership Interest HB 2117 §37(a) provided that the only adjustment to basis of partnership interest was as provided for in IRC §733 SB 79 revokes HB 2117 §37(a) Basis in partnership interests for Kansas purposes will be equal to the federal tax basis

Guaranteed Payments Guaranteed payments are deductible to the partnership and taxable to the recipient partner Guaranteed payments are reportable by recipient partner on Schedule E and exempt from Kansas income tax Health insurance premiums paid by partnership on behalf of partner are includible as guaranteed payments

Sole proprietorships File Schedule C on federal return – exempt from Kansas tax starting in 2013 Losses not deductible to Kansas When business assets are sold with ordinary recapture, that is subject to Kansas tax Inconsistent with partnership & S-corporation

C Corporation Matters Neither HB 2117 nor the successor bills modify the taxation of corporations taxed pursuant to subchapter C of the Internal Revenue Code Should subchapter S be elected? Net operating loss Built-in-gains tax Should the corporation be liquidated? Professional corporations Valuation considerations

Other issues Net operating losses reported by a subchapter S corporation to its shareholder-employees are not deductible on the Kansas income tax return Salary earned by shareholder-employee is taxable

Other issues Independent contractor vs. employee IRS provides guidance when determining status Consider: Who set hours, right of control Where work is performed Business furnishes tools and materials Does worker make services available to the general public? Rental income on Schedule E is exempt from Kansas tax When rental property is sold, it is subject to Kansas tax (reported on Schedule D)

Any questions? Thank you!!