The Kansas Department of Revenue published Notice 24-16, on 7 August 2024, providing guidance on business interest deductions for tax years 2021 and beyond.
For tax years 2018, 2019, and 2020, Kansas was coupled with the federal code and only recognised the business interest deduction allowed under the Internal Revenue Code (IRC) section 163(j).
However, for tax years 2021 and beyond, Kansas has now decoupled from the federal code and allows a deduction for the current year’s interest expense in its entirety – rather than the amount permitted under the Tax Cuts and Jobs Act.
As outlined in the notice, for tax years 2021 and later, taxpayers can only deduct the current year’s interest expense on their Kansas return. Any interest expense from prior years, which might have been carried forward and deducted under federal rules, must be added back on the Kansas return.
As a result, corporate taxpayers must add the amount deducted on their state returns due to a carryforward of disallowed business interest under IRC section 163(j).
Kansas taxpayers will need to examine their business interest deduction on the federal return with the portion of the federal deduction attributable to the prior year carryforward qualifying for an additional modification on the Kansas return. Any current year interest disallowed on the federal return would qualify for a subtraction modification on the Kansas return.
For tax year 2021, an amount equal to the sum of any interest expenses paid or accrued in tax years 2018, 2019, and 2020 less the sum of amounts allowed as a deduction pursuant to section 163 of the federal Internal Revenue Code in tax years 2018, 2019 and 2020.
The notice stated when filing an amended 2021 tax return, taxpayers must include the following:
- The amended return copy of the federal Form 8990 for each of the tax years 2018, 2019, 2020, and 2021;
- A worksheet that shows how you computed the amount of interest expense being claimed for each of tax years 2018, 2019, 2020, and 2021, and;
- The reference of the corresponding line numbers on federal Form 8890.
