Frequently Asked Questions About Franchise Tax

These questions and answers apply to the 2010 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 million 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 million 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 2011, are they filing for the 2010 tax year or the 2011 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 2011 it is filing for the 2010 tax year.

If an LLC starts in 2010, 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 2010 it will be responsible for filing a franchise tax return in 2011 and paying the franchise tax for tax year 2010 (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 million 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 2010 for franchise tax returns filed in 2011.

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 2010 for franchise tax returns filed in 2011.

“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 afterDec. 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 Sept. 30, 2009. On May 1, 2010 one of the partners separates from the partnership and forms an S corporation with a year ending Dec. 31, 2010. 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 Sept. 30, 2009, which includes the income of the separating partner until April 30, 2010. The S corporation must file a franchise tax return for its year ending Dec. 31, 2010.

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 million 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 million 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 million 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 million 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 million and partners capital of $1 million 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.

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