Corporate income tax modernization
For tax years beginning after Dec. 31, 2026, House Bill 2231 adopts market-based sourcing for sales other than sales of tangible personal property for purposes of the corporate income tax sales factor. Specifically, the law provides that sales other than tangible personal property are sourced to Kansas if the taxpayer’s market for the sale is in Kansas. Following closely to Article IV of the Multistate Tax Compact, the bill provides a description of when various receipts from services, intangibles, and items of other income, such as interest from loans and payments of dividends, have a market for the sale within the state. Certain communications service providers may continue to source sales, other than sales of tangible personal property, under a costs-of-performance methodology.
House Bill 2231 also replaces the state’s current three-factor apportionment formula with a single sales factor formula beginning in tax year 2027 for most taxpayers. Financial institutions will use a single receipts factor and alcohol manufacturers will continue to use the three-factor apportionment formula. Notably, these changes bring Kansas in line with the majority of states that use market-based sourcing and a single sales factor apportionment method.
With the amended corporate income sourcing and apportionment provisions, some corporations may experience increased tax liability. To mitigate this, the legislation introduced a new deferred tax impact deduction for publicly traded companies that follow Generally Accepted Accounting Principles (GAAP) as of July 1, 2025. Eligible corporations and their affiliates must assess whether the change to single sales factor apportionment results in:
- An aggregate increase in a net deferred tax liability (DTL),
- An aggregate decrease in net deferred tax assets (DTA), or
- A conversion from a net DTA to a net DTL.
If any of these conditions are met by a qualified corporation, the taxpayer may submit an application to the Kansas Secretary of Revenue by July 1, 2027 to claim the deduction. The deferred tax impact deduction is taken incrementally over a 10-year period beginning with tax years on or after Jan. 1, 2035. Companies should consult with their state and local tax advisors for assistance in calculating the deduction.
The bill also provides for contingent corporate income tax rate reductions if state revenue exceeds the prior year’s revenue. The secretary will publish any new rates by Oct. 1, 2028, with the revised rates taking effect for tax years beginning after Dec. 31, 2028. Further rate reductions may occur in subsequent years, contingent upon the state meeting revenue thresholds.
Targeted individual income tax relief
The legislation introduces new personal income tax deductions that are intended to provide targeted relief to certain taxpayers. Taxpayers filing as head of household are allowed an additional personal exemption of $2,320 for tax year 2024. The current exemption for certain honorably discharged disabled military veterans is increased to the same amount for tax year 2025 and after.
Ad valorem (property) tax changes
House Bill 2231 creates a new ad valorem tax exemption for various classifications of property, effective Jan. 1, 2026. Property eligible for exemption includes certain off-road vehicles, motorized bicycles, personal-use trailers weighing less than 15,000 pounds, watercraft and marine equipment ad defined under the law. To claim the exemption, taxpayers are required to submit an exemption request with the county appraiser who will determine if the property qualifies for exemption.
Takeaways
The Kansas tax reform legislation represents a significant shift in the state’s corporate income tax structure and provides expanded exemptions for individuals. The changes align with a national 15-year trend of adopting single sales factor apportionment, market-based sourcing and, more recently, lower corporate income tax rates. Taxpayers should consult with their tax adviser to understand how the new corporate income tax provisions impact their tax liability and compliance.
