The Kansas Senate Bill 15 creates a new deduction for tax returns beginning in 2023. Specifically, the bill allows financial institutions to take privilege tax deductions on loans they’ve issued for agricultural real estate and single-family residences – providing a permanent tax savings for lending to ag clients and rural Kansas residents.
Definitions, calculations and how to prepare
The bill adds new definitions for several terms including interest, net interest income, qualified agricultural real estate, and single-family residence. It also creates a method for calculating net interest income to deduct from the privilege tax income.
Pinion’s Financial Institution team addresses these definitions and calculations in an in-depth webinar below. Watch the full webinar for definitions, calculations and what you’ll need to do to prepare for the deduction:
Does the interest earned on an agriculture real estate loan to a Kansas non-resident or on a loan to a Kansas resident with agriculture real estate outside of Kansas qualify for the qualified real estate loan deduction?
Yes. All ag loans that are attributed to Kansas are included. The department included a definition of what “attributed to Kansas” means. It includes:
- Loans located in Kansas, regardless of whether the borrower is a resident of Kansas.
- Loans made to Kansas residents for agricultural real estate located outside of Kansas.
Is the deduction only available for interest earned on loans originated after December 31, 2022, or does interest earned on loans originated prior to December 31, 2022, also qualify for the deduction?
The deduction is available for interest earned on loans that qualify whether they originated before or after December 31, 2022; however, the deduction is only available for interest earned after December 31, 2022.
Do origination fees charged on the qualified loans constitute interest income?
Yes, loan origination fees are considered interest income, and so they will be part of that deduction. Under GAAP, loan origination fees are supposed to be capitalized into the carrying value of the loan and amortized over the life of the loan as interest income.
Can a home equity line of credit qualify for the Single-Family Resident deduction?
Yes, if the loan proceeds are used to improve the property, the loan should qualify for the deduction.
If the bank files its tax return on the cash method of accounting, should the interest income also be on a cash basis?
Yes, interest income, net income and taxable income should all be on the cash basis.
Contact the Pinion Financial Institutions team for any questions regarding this new deduction or the applicability of Bill 15 for your institution.