Kansas City earnings tax?

Question

If I have a LLC and use a property management company for my rentals am I subject to the 1% earnings tax?  Or is that considered a “hands off” activity and not taxable?  Thanks!

Milton Chamberlain · Answer

My Dad is a CPA, so I hit him up on your behalf. Here is his 2 cents:

"If you manage the properties yourself, then yes, it is subject to KC income tax. If you have a management company, then my next question would be how much do you spend dealing with the properties? If not much time at all, then no, the rental income is not subject to KC income tax.
The IRS defines active participation in an activity of 250 hours or more a year, material participation as 750 hours or more. Rental income is by definition passive, so it is subject to passive activity loss (PAL) rules. I'd say if they spend under 250 hours per year on the properties then no they don't need to pay KC income tax on it. (250 hours is quite a bit if you think about it.)
The other thing you might look to to answer this question is how you are treating the income on your federal tax returns. If you are treating the rental income as subject to the net investment income tax (NIIT) on your federal return then it is definitely NOT subject to KC income tax.
If they are treating the rental income as a qualified trade or business for purposes of the qualified business income deduction (QBID) on your federal return then it definitely IS subject to the KC income tax."

Here's KC's FAQ's on the subject:

https://www.kcmo.gov/city-hall...

Let me know if I can be of any further help!

Ernst S Coriolan · Answer

In both Kansas City, Kansas and Missouri, there is a 1% earnings tax that is put on individuals and businesses that earn income in the city. The earnings tax applies to both residents and non-residents who work or operate a business in the city.

If your LLC is generating income from rental properties located in Kansas City and you are considered to be conducting business activities in the city, then it is likely that your LLC would be subject to the earnings tax.

I would still consult a tax professional or a lawyer who is more familiar with these laws.

Warren Qi · Answer

Hi @John Fairchild,

my fourplex is under my LLC registered in Delaware, not in MO. I am not a resident of KCMO (and actually never stepped a foot there). My fourplex is fully managed by a full-services local property manager, so I am 100% passive.

Business License department did confirm that I do NOT need a business license because my property is fully managed by a local property manager. Their website also said so clearly (even they initially said I need to, but corrected after I pointed out that their website said I do not need to). https://www.kcmo.gov/city-hall/departments/finance/tax-home/tax-guide-for-rental-businesses#:~:text=A%20business%20license%20is%20required,license%20%2D%20not%20the%20property%20owner.  (under Business License tab)They said I need to pay the KCMO profit tax initially, however, after my telling them that I am not a resident, and my long term rental is fully managed by a property manager, therefore my LLC or myself is fully passive in this regard, now they (KCMO revenue department) become silent on  whether I should pay KCMO profit tax.  I think many staff in the revenue department are not clear on the tax law . I am not sure whoI could get the official answer from on whether I should file this tax or not. really a pain in the ass.

Greatly appreciate if someone in similar situation or have knowledge on this to shine some light on what might be the right approach to deal with this.

thanks

Warren

John Fairchild · Answer

Hey Warren,Do you have the fourplex in a LLC?  I think that's what bit us.  If you have a LLC operating in the city/state they'll want you to have a business license and then pay appropriate taxes.

Warren Qi · Answer

@Milton Chamberlain, in case you and your CPA dad could shine more light on my questions above. thanks very much!

Warren Qi · Answer

Hi @John Fairchild, all other KCMO long term rental property owners here:

Do you eventually figure out the business license requirements or the need to pay KCMO city tax?

I am not a resident in Kansas City. I have a fourplex long term rental in Kansas City, MO that is fully managed by a local property manager. Therefore, I am 100% passive, not a resident there either.

I was asked by my property manager to apply for a business license, and business license department seems to incorrectly told me that I do need to apply for a business license. However, I believe I do not really need to according to the rules defined here:

https://www.kcmo.gov/city-hall/departments/finance/tax-home/...

(business license tab)

A business license is required in instances where the owner is active in the management of the rental property. If the owner employs a management company, then the management company is required to obtain the business license - not the property owner.according to the tab (Profits Tax) on the same page above, I should NOT file form RD-108 either to pay KCMO city earnings tax, because I am a passive investor, and not actively involved in the management of my property.

The problem is that, I did submitted my business license application a few weeks ago (still in the process) before I checked the KCMO web side. Because of my business license, KCMO created a revenue account for me, and asked me to pay back KCMO city earnings tax for the past two years.

I believe I was incorrectly asked to apply for a business license and also incorrectly asked to pay KCMO city tax.   I did pay MO state tax since owning the property.

Any advice and experience you guys could share?

thanks very much!

Warren

John Fairchild · Answer

@Milton Chamberlain

Thanks for the replys!  That is how I understand it as well.  We have a PM for all our properties and the only time we interact is to approve MX items over $400 or have a question about a statement.  Otherwise we're completely hands off.  The LLC was formed for strictly asset protection for whatever that's worth.  Thanks again!

Kansas City earnings tax?

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