New Kansas Laws Include Expensing Provision, Incentive Repeal
Author: Larisa Trikhacheva
Kansas Senate Bills 10, 193 and 196, which take effect July 1, 2011, provide new state income tax deductions for businesses. The laws also modify the High Performance Incentive Program (HPIP) and the Promoting Employment Across Kansas (PEAK) program and eliminate some popular tax incentives. In addition, the three-year statute of limitations for sales tax refund request claims has been reinstated.
Senate Bill 196 provides a new state income tax deduction, “expensing,” for the cost of machinery and equipment depreciation under Internal Revenue Code (IRC) Section 168 and certain canned software under IRC Section 197 placed into service beginning in tax year 2012. The deduction—applied after the taxpayer’s income has been apportioned to the state—amounts to a 100 percent deduction against income tax for the depreciation of the investment during the first year, rather than smaller deductions over several years. Excess amounts are treated as a net operating loss for state income tax purposes.
The property must be located in the state; any property sold or relocated outside the state during the applicable recovery period could have a portion of its expense deduction recaptured.
A member of a unitary group filing combined reports may take the expense deduction made by another member of the group.
Expensing taxpayers are prohibited from also claiming some existing tax incentives that would otherwise apply. Such credits include the HPIP, research and development, alternatively fueled vehicles, swine facility, historic preservation, carbon dioxide capture, film production, refineries, oil or gas pipelines and certain energy and gasification plant credits.
Generally, HPIP-qualified entities cannot share or transfer the credit among a unitary group. In response to inquiries, the department has informally stated that companies participating in HPIP as part of a unitary group with members using the expensing deduction will still be able to use HPIP credits for the entity that earned the HPIP credit, but only if the entity using the HPIP credit does not participate in expensing. The entity would have to submit documentation supporting the filing position.
The Kansas Department of Revenue has released guidance on the expense deduction: A Technical Primer on Expensing Provision in House Substitute for Senate Bill 196. The guide is available at the department website.
HPIP provides a 10 percent income tax credit on an investment in a qualified business facility. For tax years beginning on or after January 1, 2012, the current HPIP minimum investment threshold of $50,000 is increased to $1 million for Douglas, Johnson, Sedgwick, Shawnee and Wyandotte counties. However, the $50,000 threshold should still apply to any taxpayer filing a certificate of intent for a qualified business facility located in the above counties prior to December 31, 2011, and commencing investments in a qualified business prior to December 31, 2013. The threshold will remain at $50,000 for all other Kansas counties.
The 10-year limitation on the carryforward of HPIP investment credits is extended to 16 years. All unused credits expired prior to tax year 2011 are not revived.
Senate Bill 193 expands PEAK, which allows qualified businesses to retain 95 percent of the payroll withholding tax of qualified jobs over a period of five or more years. Currently, only for-profit companies relocating jobs from outside of Kansas or new businesses locating jobs in the state can qualify for the program.
Beginning January 1, 2012, existing Kansas businesses expanding and creating new jobs approved by the Kansas Secretary of Commerce are eligible to receive benefits. PEAK also is expanded from January 1, 2013, through December 31, 2014, to include “retained jobs,” generally meaning jobs that would otherwise be lost but for employer participation in PEAK. The job retention benefits sunset in tax year 2015. Also under the new law, not-for-profit corporations can enter the PEAK program, and qualified companies can employ or contract with all third-party employers; currently, qualified companies only can contract with or employ unrelated third-party employers.
Repeal of Some Tax Incentives
Beginning in 2012, income tax credits are no longer available under the Kansas Enterprise Zone Act and the Job Expansion and Investment Credit Act of 1976 for the business and job development credit. Previously earned credits can be carried forward. No project sales tax exemption may be requested under the above acts, although the enterprise zone sales tax exemption will continue to apply for HPIP-qualified projects.
Also, the refundable business machinery and equipment tax credit for property tax will be repealed beginning in 2012. Equipment placed into service prior to July 1, 2006, will still be eligible for a 25 percent refundable tax credit for personal property tax paid on business machinery and equipment.
Three-Year Statute of Limitations Re-Established
Senate Bill 10 re-establishes a three-year statute of limitations for taxpayers to claim sales tax exemption on refund or credit claims filed after July 1, 2011. Currently, refunds are limited to one year.
If your business is considering expanding in Kansas, or if you need more information on how these changes affect your business, contact your BKD advisor or Bob Johnson Jr. at email@example.com.