Kansas R&D Tax Credit: Fueling Innovation in the Sunflower State

What is the Kansas Research and Development Tax Credit (R&D Tax Credit), and how can companies based in the state maximize this tax benefit? We’ll discuss the basics, including eligibility criteria, the latest regulation changes, and how to calculate tax credits. It’ll give businesses in Kansas a better idea of how they can utilize this benefit in the future.

What are the Kansas R&D Tax Credits?

Kansas R&D Tax Credits are tax benefits that enable taxpayers who make expenditures on qualified research expenditures in the state to claim an income tax credit.

For taxable years starting December 31, 2022, Kansas opened the credit to all eligible taxpayers, even personal income taxpayers. Before, this tax credit was exclusively available to corporations subject to the Kansas corporate income tax.

Before, the tax credit equaled only 6.5% of the difference between the actual qualified R&D expenses and the average expenditures made between the year and the previous two years. This has been increased to 10% since 2022.

Like most states, Kansas follows provisions of Internal Revenue Code Section 41. These provisions define qualified R&D expenses as activities that aim to discover information that eliminates uncertainty concerning developing or improving an invention, formula, technique, process, or product.

Does Kansas have an R&D credit?

Yes, Kansas offers taxpayers R&D tax credit. Since 2022, this credit equals 10% of the difference between qualified research expenses and the average R&D expenses made within the year and two prior tax years.

Changes introduced by House Bill 2239

House Bill 2239 introduced several changes to this tax credit, which expanded the credit’s appeal to businesses.

Impact of House Bill 2239 on Businesses

House Bill 2239 empowered more taxpayers to conduct research and development activities in the state to claim the credit. This credit was once exclusively for C-corporations. The R&D tax credit is now available to all Kansas income taxpayers.

Increased Credit Percentage

Before, the tax credit was limited to 6.5% only. House Bill 2239 increased the credit to 10%.

Introduction of Credit Transferability

This bill allows individuals and businesses without tax liability to transfer the credit to other parties. However, only the full credit can be transferred, and it can only be transferred once. The transferred tax credit is non-refundable.

Considerations for Businesses Planning Their R&D Strategies

While House Bill 2239 has expanded the bill’s coverage and percentage, taxpayers must do more to claim this credit. Before claiming the credit, taxpayers must accomplish and submit form K-204, the Research and Development Credit Application. They must consider this as they plan their R&D activities in Kansas.

Eligibility Criteria for Kansas Businesses

Before House Bill 2239 was passed, only C-corporations were allowed to claim this credit. Now, it is available to all Kansas income taxpayers, including limited liability companies, S corporations, partnerships, individuals, and other pass-through entities.

Four-Part Test for Qualifying Activities

Companies that intend to file this credit for the next tax year must identify qualified activities. Generally, activities need to pass the following 4-part test to be considered an R&D activity:

1. Technological in nature

Activities must rely on principles related to physical or biological science, engineering, or computer science. This makes sure that anything new discovered through the activity utilizes a scientific and approved process.

2. Permitted purpose

The activities must have been performed to improve the functionality, quality, performance, or reliability of an existing or new business component. This component may be a formula, process, product, or software internally used or offered commercially.

3. Eliminate uncertainty

The activities must intend to discover information that could eliminate uncertainty concerning the improvement or development of a product, process, or software.

4. Experimentation

The activities must include an experimentation process for testing, modeling, simulating, and systematic trial and error. The process must also have evaluated alternatives.

Calculating the Kansas R&D Tax Credit

In Kansas, this tax credit is calculated by determining 10% of the difference between the actual qualified R&D expenses and the average expenditures within the year and the two prior tax years. Credit utilization is limited to 25% of the credit in that tax year. Any remaining unused credit can be carried forward in 25% increments until the whole credit is used.

Moreover, taxpayers without a tax liability can transfer their R&D credits to another taxpayer in Kansas once and for the entire amount.

Selling or Transferring the Kansas R&D Tax Credit

Thanks to House Bill 2239, the R&D tax credit can be transferred to other taxpayers. However, this can only be done once, for the whole amount. The transferred tax credit is non-refundable.

Kansas Qualifying Research Expenditures

In general, qualifying research expenditures are divided into in-house and contract expenses. In-house expenses cover wages and supplies that directly concern the research activities, while contract expenses involve third parties tapped for qualified research and development activities.

Generally, three types of research expenses can be included in an R&D tax credit claim: wages, supplies, and research. Wages refer to team members’ salaries directly involved in or supervising qualified research activities. Supplies pertain to tangible materials purchased for these activities. Research refers to third-party contracts that aid the research.

Non-Qualifying Activities and Expenditures

Market and consumer research isn’t considered an R&D activity for this credit. Moreover, wages earned by people not directly involved in the activities don’t count.

How to Claim Kansas R&D Tax Credits?

For tax claims before 2022, companies used the form K-53. Since House Bill 2239 was passed, taxpayers must complete and submit form K-204, the Research and Development Credit Application, with their income tax return. The K-204 form details how much the company has spent on qualifying research and development activities.

Companies and individuals must present supporting documents that justify the amounts indicated in the forms. That’s why taxpayers must be vigilant while submitting their requirements.

Because miscalculations and errors in submitting the application can be costly, it’s recommended that businesses confer with R&D tax experts. They can provide sound advice on how to maximize this tax credit.

Next Steps

Companies in Kansas that intend to maximize this tax credit must follow the regulations and avoid any errors in their application. The updates to this tax benefit have opened many opportunities, and they should take advantage of these new perks.

Fortunately, tax experts can help guide them through this process. While calculating this credit may be daunting, with proper guidance, taxpayers can file this claim with confidence.

FAQs

What is the new law for the Kansas R&D tax credit?

House Bill 2399 expands the coverage and eligibility of the Kansas R&D tax credit within the state.

Can you claim ERC and R&D credit?

Claiming both ERC and R&D tax credits can be permitted, but any salaries considered when determining the ERC credit won’t apply to the R&D tax credit.

What is the Kansas Tax Rebate 2023?

Kansas Tax Rebate 2023 is a one-time rebate of $450 for single people and $900 for married couples.