OVERLAND PARK — A flaw in the massive tax cutting bill Gov. Sam Brownback signed into law earlier this year will make many business owners pay more taxes when they pay themselves back for investments they made in their businesses, Gary Allerheiligen, a Wichita accountant, told hundreds of business leaders Tuesday.
The legislature needs to quickly fix the inadvertent error as soon as possible once they convene in Topeka for the 2013 session, he said.
When business owners invest in their business, they can pay themselves back using their profits without paying taxes on it. But under the new law, business owners will have to essentially pay capital gains tax on that money.
“That was not the intent of the legislature,” said Allerheiligen who consulted with Brownback about tax policy during the session earlier this year.
Asked whether the legislature would act quickly, Brownback said he couldn’t provide a reliable answer.
“My sense would be that would be something people would try to clear through early,” he said.
When asked how big of a problem the flaw is, Brownback told a reporter he’s not sure yet.
The flaw is part of a complex part of the tax code that deals with business owners’ base investment in their business. When someone starts a business with a $1,000 investment, that becomes their basis and they are only taxed on income beyond that amount. If they profit and keep that extra money in their business, that becomes the new basis. Under the new law, the basis is frozen and the only change to the basis that can be made is a decrease when a business owners pay themselves back for the initial investment.
“The rationale behind this provision was that if undistributed partnership net profit income is going to be exempt from Kansas income tax for the partners, then that income should not increase the partner’s basis, for Kansas income tax purposes,” a memo from the Department of Revenue says.