Frequently Asked Questions
Franchise Tax
These questions and answers apply to the 2008 tax year.
Who Must File the Kansas Franchise Tax Return
Is a sole proprietorship required to file a Kansas franchise tax
return?
No. A sole proprietorship is not subject to the Kansas franchise
tax and is therefore not required to file a franchise tax return.
If an entity that is subject to the Kansas franchise tax has net
worth of less than $1,000,000 is it required to file a franchise
tax return?
No. Beginning with the tax year 2008 entities that are subject to the Kansas franchise tax but which
have a net worth of less than $1,000,000 are not required to file
a franchise tax return.
Time period the franchise tax return covers
Is franchise tax paid in the same manner as privilege tax? In
other words, is the tax paid in advance for the privilege of doing
business in Kansas?
No. Franchise tax is paid in the same manner as income tax. It
is not an advance payment.
When a corporation files their
franchise tax return in 2009, are they filing for the 2008 tax
year or the 2009 tax year?
Like income tax, franchise tax return is filed at the end of the
tax year. So, when a corporation files its franchise tax return
in 2009 it is filing for the 2008 tax year.
If an LLC starts in 2008, will it owe the franchise
tax? According to the instructions, the franchise tax is based on
the prior year capital. Is there any exception for a new LLC?
If an LLC starts in 2008 it will be responsible for filing a franchise
tax return in 2009 and paying the franchise tax for tax year 2008
(if the other filing requirements are met). To determine the franchise
tax liability for the initial year of formation, the LLC should
use its balance sheet for that year.
Time periods used in calculating the franchise tax
K.S.A. 79-5401(a)(2) states in part, “. . . any foreign
or domestic limited liability company, foreign or domestic limited
partnership or foreign or domestic limited liability partnership
duly registered and authorized to do business in Kansas by the
secretary of state and which has net capital accounts located or
used in this state at the end of the preceding taxable year as
required to be reported on the federal partnership return of income
of $1,000,000 or more . . .“ What is meant by the phrase “preceding
taxable year”? What year is used to calculate the franchise
tax?
The phrase “preceding taxable year” refers to the tax
year for which the franchise tax return is being filed. It refers
to tax year 2008 for franchise tax returns filed in 2009.
What is meant by the wording in
the definitions found in K.S.A. 79-5401(f) that refers to property,
sales and
payroll information
from the “next preceding tax period”?
The phrase “next preceding tax period” refers to the
tax year for which the franchise tax return is being filed. It refers
to tax year 2008 for franchise tax returns filed in 2009.
“Zero rule” in K.S.A. 17-7501 for purposes of the franchise tax
Does the “zero rule” in
the last sentence of K.S.A. 17-7501(e) apply for purposes of
the Kansas
franchise tax?
No. The provisions of K.S.A. 17-7501 do not apply to the Kansas
franchise tax for tax years commencing after December 31, 2003.
Changes in filing periods
Does an entity have to file two franchise tax returns if they
file two short year income tax returns due to a change in the filing
periods?
No. Because it is the same entity only one franchise tax return
will be filed.
Changes in the type of business entity
A partnership has a year ending September 30,
2007. On May 1, 2008 one of the partners separates from the partnership
and forms an S corporation with a year ending December 31, 2008.
How many franchise tax returns must be filed and when are they due?
The partnership and the S corporation are separate legal entities.
The partnership must file a franchise tax return for its tax year
ending September 30, 2007, which includes the income of the separating
partner until April 30, 2008. The S corporation must file a franchise
tax return for its year ending December 31, 2008.
Liquidation of a business entity
If an entity liquidates their business prior to the end of their
tax year do they have to file a franchise tax return, and could
they be liable for franchise tax?
Yes. The liquidated entity would be responsible for a final franchise
tax return just like it would be responsible for a final income
tax return.
Multi-layer businesses
There are three partnerships, A, B and C. Partnership A owns B,
and has $10,000,000 that was passed down to B. Partnership B owns
C, and passes the money down to C. A and B are holding partnerships
and C has the property, payroll and sales. Under this scenario,
which partnership would pay the franchise tax?
Under the scenario it appears each of the partnerships would have “net
capital accounts located or used in Kansas at the end of the preceding
taxable year as required to be reported on the federal partnership
return of income of $1,000,000 or more”. Therefore, each of
the partnerships would be required to file and pay franchise tax.
A corporation and a partnership are filing a combined return for
income tax purposes, but are required to file separate annual reports
for each entity with the Secretary of State. How should the franchise
tax be reported?
The corporation and the partnership should file separate franchise
tax returns.
Should S corporation subsidiaries fill in the EIN of the federal
consolidated parent for the entity that includes their activity,
even though they are not filing a federal corporation consolidated
return?
Yes.
If a corporation has a disregarded entity at the federal level,
is the disregarded entity required to file a franchise tax return?
The fact that an entity is disregarded for federal income tax purposes
does not mean it is disregarded for Kansas franchise tax purposes.
If otherwise required, the disregarded entity may be responsible
for filing its own franchise tax return.
Should disregarded entities fill in the EIN of the
federal consolidated parent for the entity that includes their
activity, even though
they are technically not filing a federal corporate consolidated
return?
Yes.
Completing the required balance sheet
One of the reasons for having the Department of Revenue administer
the franchise tax was that the balance sheet of the federal entity
could be compared to the franchise tax filing. How does the Department
of Revenue intend to handle the situation where the balance sheet
for the top level parent on the franchise tax return does not match
the balance sheet it files on its income tax return? This could,
for example, be due to the ownership of a disregarded entity which
may not have enough capital to be required to file a franchise
tax return, but is required to be reported for federal and Kansas
income tax purposes on a combined filing.
According to Kansas law, every entity subject to the Kansas franchise
tax shall file, “a balance sheet listing all assets and liabilities
as of the end of the tax year, as reported in the federal income
tax return on form 1120 or, if no such federal return is required
to be filed, such balance sheet information as otherwise required
by the secretary . . .”. Therefore, in the context of the
question, the balance sheet for income tax purposes and for franchise
tax purposes will be the same.
In the context of the previous question, what about a situation
involving an S corporation with subsidiaries that may or may not
be required to file franchise tax returns depending upon their
Kansas allocated capital?
As noted in the previous answer, according to Kansas law, every
entity subject to the Kansas franchise tax shall file, “a
balance sheet listing all assets and liabilities as of the end
of the tax year, as reported in the federal income tax return on
form 1120 or, if no such federal return is required to be filed,
such balance sheet information as otherwise required by the secretary
. . .”. Therefore, in the context of the question, the S
corporation and each of the subsidiaries required to file a franchise
tax return will be required to file a separate balance sheet listing
all the assets and liabilities of each separate entity.
On consolidated corporate groups there are elimination entries
that are made so that the equity in the subsidiaries is not doubled
when filing a consolidated return. Since the Kansas franchise tax
requires that each entity file separately if it meets the equity
threshold, how does the parent remove the subsidiaries from its
balance sheet so it does not pay the franchise tax twice on those
holdings? Does it eliminate only those entities that file a separate
franchise tax report or can it eliminate all subsidiary entities
whether or not they meet the threshold filing requirement for the
franchise tax? If would be unfair to leave equity in subsidiaries
on the books of the parent and require that they pay franchise
tax on that equity if on a standalone basis the entity does not
have greater than $1,000,000 of equity attributable to Kansas.
According to Kansas law, every entity subject to the Kansas franchise
tax shall file, “a balance sheet listing all assets and liabilities
as of the end of the tax year, as reported in the federal income
tax return on form 1120 or, if no such federal return is required
to be filed, such balance sheet information as otherwise required
by the secretary . . ”. The law does not make provision for
removing subsidiaries from a parent’s balance sheet for franchise
tax purposes. Therefore, all subsidiaries will be included on the
parent’s balance sheet regardless of whether the subsidiary
meets the filing threshold requirements for the franchise tax.
If an entity prepares its financial statements on a tax basis,
and uses accelerated depreciation, the tax basis equity would be
significantly lower than equity determined on the basis of General
Accepted Accounting Principles. Which approach should be used for
purposes of the Kansas franchise tax?
An entity should use financial statements prepared on a tax basis
for purposes of the Kansas franchise tax.
If a corporation has a disregarded entity at the federal level,
and the corporation and the disregarded entity have to file separate
franchise tax returns, how do they show their income since there
is only one balance sheet?
Every entity that files a franchise tax return should submit its
own balance sheet. If the entity does not prepare a separate balance
sheet for federal income tax purposes, it can use the standard
balance sheet available as part of the Kansas franchise tax return.
If a corporation files a consolidated return at the federal level
and the parent and subsidiary have to file separate franchise tax
returns, how do they show their income since there will be only
one balance sheet?
Every entity that files a franchise tax return should submit its
own balance sheet. If the entity does not prepare a separate balance
sheet for federal income tax purposes, it can use the standard
balance sheet available as part of the Kansas franchise tax return.
Bank holding companies
Is a bank holding company required to file a franchise tax return?
If so, since the balance sheet from the federal return shows the
investment in the bank and the bank is not subject to franchise
tax, what should be shown on the Kansas balance sheet?
A bank holding company is required to file a franchise tax if after
subtracting out the value of the bank’s assets, it has assets
of $1,000,000 or more of non-bank assets. The balance sheet should
show only the non-bank assets.
Section 754 Elections
For purposes of the Kansas franchise tax, is there is an adjustment
allowed to partners equity accounts where the partners capital
account has been increased as a result of a federal code Section
754 election made on the federal return? If a partnership had assets
of $1,000,000 and partners capital of $1,000,000 at the beginning of
the year and a partner passes away during the year, the use of
the 754 election would increase the partners capital accounts at
the end of the year where the only event occurring was the death
of a partner.
No, there is no adjustment. The amount shown on the balance sheet
at the end of the year would be used to determine the amount of
franchise tax.