Kansas Small Business Forum

1. Kansas Small Business Forum Tax Policy to Grow the Kansas Economy

2. What the Governor Asked For A FIELD OF DREAMS Build it and they will come

3. States With No Income Tax Total Exemption Tax Dividends and Interest New Hampshire Tennessee • Alaska • Florida • Nevada • South Dakota • Texas • Washington • Wyoming

4. Joint Tax Committee Testimony • Testified on Governor’s initiative on January 12, 2012 • My closing statement was: • “The governor’s plan is bold and innovative. It deserves serious consideration.”

5. Overview of Governor’s Initiative • Comparison of state top rates before and after • Colorado 4.63 4.63 • Oklahoma 5.25 5.25 • Missouri 6.00 6.00 • Kansas 6.45 4.95 • Nebraska 6.84 6.84

6. Federal Consequences NONE

7. Provisions of HB 2117 • Effective for tax year 2013 and thereafter

8. Provisions of HB 2117 • Lowers income tax brackets for married filing joint returns • Not over $30,000 3% • Over $30,000 $900 plus 4.9% of excess

9. Provisions of HB 2117 • Lowers income tax brackets for all other non-corporate taxpayers • Not over $15,000 3% • Over $15,000 $450 Plus 4.9% of excess

10. Provisions of HB 2117 • Standard deduction shall be • Single $3,000 • Married, joint $9,000 • Head of household $9,000

11. Provisions of HB 2117 Exemption of non-wage business income from Kansas taxation

12. Non-wage Business Income • Net profit from business reported on Schedule C • Net income from rental real estate, royalties, partnerships, S corporations, estates, trusts and net farm rental reported on Schedule E • Net farm profit reported on Schedule F

13. Non-deductible Expenditures • Self-employment taxes • Contributions to pension and profit sharing plans • Self-employed health insurance • Domestic production activity deduction

14. Provisions of HB 2117 • A net operating loss shall only be available to corporations

15. Subchapter C Corporations • Impact of the bill • No changes made to C corporations or Kansas privilege tax on banks and savings institutions • Computation of taxable income • Rates • Availability of credits • LLC business income flowing to a C corporation continues to be subject to taxation

16. Subchapter C Corporations • Retain C corporation status • Elect subchapter S status • Liquidate and reform as an LLC

17. Subchapter S Corporations • Impact of bill • Net profit reported on Schedule E is exempt from taxation • Net losses reported on Schedule E are not deductible • Salary received from an S corporation is taxable

18. Subchapter S Corporations • Separately stated income and deductions retain their character for federal and Kansas purposes and will be taxable for Kansas purposes • Dividends • Interest • Capital Gains • 1231 Gains

19. LLC’s / Partnerships • Impact of bill • Net profit reported on Schedule E is exempt from taxation • Net losses reported on Schedule E are not deductible

20. LLC’s / Partnerships • Separately stated income and deductions retain their character for federal and Kansas purposes and will be taxable for Kansas purposes • Dividends • Interest • Capital Gains • 1231 Gains • Guaranteed payments are reported on Schedule E and are exempt from Kansas tax

21. Basis in S Corporations and LLC’s • Basis in ownership interest is not increased by excluded income • Distributions in excess of basis are taxable

22. Individuals • Non-wage business income defined • Net profit from business reported on Schedule C • Net income from rental real estate, royalties, partnerships, S corporations, estates, trusts and net farm rental reported on Schedule E • Net farm profit reported on Schedule F

23. Individuals • Rental Properties • Taxable income is excludable from Kansas AGI • Taxable loss is non-deductible in determining Kansas AGI • Gain/loss on disposition of business property is a taxable event for Kansas purposes • Basis in depreciable property is the same for federal and Kansas purposes

24. IndividualsTax Situs of Business • The bill does not distinguish between businesses operated in the state of Kansas vs. a foreign state. • Residents of Kansas exclude income and deductions of ALL non-wage business income regardless of where the business is located.

25. IndividualsEmployee vs. Independent Contractor • Income from wages is NOT business income and is taxable • Income earned by an independent contractor is business income and IS exempt from taxation

26. Kansas Economic Outlook • Pay-for’s proposed by Governor Brownback that are not in the bill • .6% sales tax permitted to expire • Itemized deductions allowed in full • Section 529 plan deduction remains • Credits such as earned income credit, historic restoration credit and community service credits remain

27. Kansas Economic Outlook • To balance the post 2012 state budget the revenue lost by enactment of the bill must be covered by • Growth in the Kansas economy • Growth in state population, resulting in • Growth in sales and other tax collections (including income tax on increased work force) • Controlled state spending

28. Illustration 1Salaried Employee Old Law New Law Wage $50,000 Exemptions ( 9,000) Standard deduction ( 9,000) Taxable income $32,000 Kansas income tax $ 998 • Wage $50,000 • Exemptions ( 9,000) • Standard deduction ( 6,000) • Taxable income $35,000 • Kansas income tax $ 1,362

29. Illustration 2Self-employed Individual Old Law New Law Business income $ -0- Exemptions ( 9,000) Standard deduction ( 9,000) Taxable income (18,000) Kansas tax -0- • Business income $50,000 • Exemptions ( 9,000) • Standard deduction ( 6,000) • Taxable income $35,000 • Kansas tax $ 1,362

30. Illustration 3Salaried with Rental Property Income Old Law New Law Wage $50,000 Rental income -0- Exemptions ( 9,000) Standard deduction ( 9,000) Taxable income $32,000 Kansas tax $ 998 • Wage $50,000 • Rental income 5,000 • Exemptions ( 9,000) • Standard deduction ( 6,000) • Taxable income $40,000 • Kansas tax $ 1,675

31. Illustration 4Salaried with Rental Property Loss Old Law New Law Wage $50,000 Rental loss -0- Exemptions ( 9,000) Standard deduction ( 9,000) Taxable income $32,000 Kansas tax $ 998 • Wage $50,000 • Rental loss ( 5,000) • Exemptions ( 9,000) • Standard deduction ( 6,000) • Taxable income $30,000 • Kansas tax $ 1,050

32. Illustration 5Professional with Itemized Deductions Old Law New Law Wage $200,000 Itemized deductions ( 25,000) Exemptions ( 9,000) Taxable income $166,000 Kansas tax $ 7,564 • Wage $200,000 • Itemized deductions ( 25,000) • Exemptions ( 9,000) • Taxable income $166,000 • Kansas tax $ 9,762

33. Illustration 6Salaried Professional with Business Old Law New Law Wage $200,000 Business loss -0- Exemptions ( 9,000) Itemized deductions ( 25,000) Taxable income $166,000 Kansas tax $ 7,564 • Wage $200,000 • Business loss ( 80,000) • Exemptions ( 9,000) • Itemized deductions ( 25,000) • Taxable income $ 86,000 • Kansas tax $ 4,602

34. Business Thought of the Day If you conduct business in Missouri you will pay Missouri state income taxes

35. Business Thought of the Day If you pay Missouri state income taxes you will have less capital available for your business

36. Business Thought of the Day If you have less capital available for your business you increase the risk of incurring losses

37. Business Thought of the Day If you incur too many losses you will go broke

38. Business Thought of the Day Don’t go broke

39. Business Thought of the Day Do your business in Kansas!!!

40. HB 2117 Q and A