The Base Amount (Three-Year Average) in the Kansas R&D Tax Credit: Calculation, Compliance, and Strategic Value

I. Executive Summary: Defining the Kansas Base Amount

The Base Amount (Three-Year Average) is the calculated threshold of historical research spending that a Kansas taxpayer must exceed in the current year to generate an income tax credit. Mechanically, it is determined by totaling the taxpayer’s Kansas Qualified Research Expenditures (QREs) incurred during the current taxable year and the two immediately preceding taxable years, and dividing that sum by three.1

This calculated Base Amount serves as the non-creditable floor, ensuring that the Kansas R&D credit (K.S.A. 79-32,182b) operates exclusively as an incentive for incremental increases in R&D investment conducted within the state. For tax years commencing after December 31, 2022, the state offers a credit equal to 10% of the amount by which current year QREs surpass this calculated Base Amount.2

II. Legislative Mandate and the Incremental Credit Structure

The Kansas R&D tax credit provides a crucial mechanism to foster technological innovation and economic growth within the state. A thorough understanding of the Base Amount starts with the statutory requirements and the definition of eligible expenditures.

A. Statutory Authority and Credit Rate Enhancement

The current statutory basis for the credit is K.S.A. 79-32,182b, which governs all taxable years commencing after December 31, 2022.2 Prior iterations of the law provided a credit of 6.5%.5 However, the current legislation significantly enhanced the incentive:

• The Post-2022 Rate: Taxpayers are now allowed a credit equal to 10% of the difference between the current year’s QREs and the taxpayer’s average of the actual expenditures made during the current taxable year and the two preceding taxable years.2
• The Incremental Principle: The inherent structure of the Kansas R&D credit, like its federal counterpart, is incremental.7 This design choice signals a legislative goal to reward companies for expanding their investment in research activities, rather than simply subsidizing baseline operating expenses. By forcing taxpayers to surpass a historical average (the Base Amount), the statute ensures that state resources are exclusively focused on stimulating growth in R&D spending.

B. Defining Qualified Research Expenditures (QREs)

The Base Amount calculation relies entirely on accurate determination of Qualified Research Expenditures (QREs) over the three-year lookback period.

The state law aligns closely with federal standards, requiring that expenditures must be “treated as expenses allowable for deduction under the provisions of the federal internal revenue code of 1986, as amended”.2 This primarily references IRC §41, meaning Kansas QREs generally include:

• Employee wages paid for performing, directly supervising, or supporting qualified research.8
• Costs of supplies consumed during the research process.8
• A percentage (65%) of amounts paid for contract research conducted on behalf of the taxpayer.8

A critical Kansas-specific requirement is the geographic limitation: the research and development activities must be conducted within this state.2 Therefore, while federal documentation for QREs provides the foundational basis, taxpayers must ensure that all expenditures used in the three-year Base Amount calculation—for the current year and the two preceding years—are correctly apportioned to Kansas activity only. This step is essential for compliance and ensuring the integrity of the Base Amount calculation.

C. Credit Administration and Liquidity

The administration of the Kansas R&D credit offers flexibility that significantly enhances its strategic value, especially for startups or non-taxable entities.

• Annual Utilization Limit and Carryforward: In any single taxable year, the amount of the credit claimed is restricted to 25% of the total generated credit amount, plus any applicable carryforward amount.2 Any portion of the credit exceeding the tax liability in that year, or the annual 25% limitation, may be carried forward indefinitely until the total credit is fully utilized.2
• Transferability: A major benefit introduced for tax years 2023 and thereafter is the ability of the credit to be transferred. If a taxpayer has no current tax liability, the entire generated credit can be transferred one time to any other person to be claimed against the transferee’s Kansas income tax liability.1 This process requires the filing of Form K-260 with the Kansas Department of Revenue (KDOR).1

The introduction of transferability provides immediate financial liquidity for early-stage or rapidly scaling companies that may otherwise carry Net Operating Losses (NOLs) for years. For such entities, the Base Amount calculation becomes central to capital planning, as the total credit generated dictates the transferable asset’s value. The precise determination of the Base Amount directly translates into the marketable value of the tax asset.

III. The Base Amount (Three-Year Average) in Detail

The Base Amount is formally calculated using Part A of Schedule K-53, the KDOR form utilized to claim the credit. The instructions for this schedule provide the explicit framework for the three-year average calculation.

A. The Formula: Statutory Interpretation and Mechanics

The Base Amount is calculated by summing the QREs for the three most recent years and dividing that sum by three. This formula mathematically captures the requirement stipulated in K.S.A. 79-32,182b.4

The detailed steps, corresponding to Schedule K-53 lines, are as follows:

1. Current Year Expenditures (Line 1): Enter the Kansas QREs for the current taxable year.
2. First Preceding Year Expenditures (Line 2a): Enter the QREs for the immediate prior tax year (Year -1).
3. Second Preceding Year Expenditures (Line 2b): Enter the QREs for the tax year two years prior (Year -2).1
4. Total Expenditures (Line 3): Sum Lines 1, 2a, and 2b.
5. Average (Line 4): Divide the amount on Line 3 by three (3).1

The mathematical representation of the Kansas Base Amount is:

$$Base~Amount (Line~4) = \frac{QRE_{Current} + QRE_{Year-1} + QRE_{Year-2}}{3}$$

B. Treatment of New Businesses and Fluctuating Expenditures

A crucial administrative detail concerns businesses with limited operating history. For entities that have been in existence or have conducted QREs for less than three years, the formula requires continuity:

• Missing Years: If QREs were zero or non-existent in the preceding one or two years, a value of zero ($0$) must be used for Line 2a and/or Line 2b.3
• Constant Divisor: Regardless of the number of years with positive QREs, the divisor in the formula remains three (3).1

This constant divisor establishes a mandatory initial reduction mechanism for new or rapidly expanding companies. For a startup in its first year of QREs, the Base Amount is one-third of the current year’s QREs. This structure ensures that the credit incentivizes growth above a statistically defined baseline, rather than providing a subsidy for the company’s first dollar of research expenditure. This built-in reduction requires that QREs grow rapidly beyond the initial investment to maximize credit generation.

IV. Comparison to Federal R&D Tax Credit Methodology

Understanding the Kansas Base Amount is clarified by contrasting it with the significantly more intricate methodology employed by the federal R&D tax credit (IRC §41). The Kansas calculation stands out due to its relative simplicity.

The federal credit calculation often employs the Traditional Method, which requires a complex look-back period to establish a Fixed-Base Percentage (FBP).10

Table Title

The primary advantage of the Kansas model is the substantial reduction in the compliance burden. Taxpayers are not required to track or substantiate historical gross receipts or compute a Fixed-Base Percentage stretching back decades, which is frequently necessary under the federal traditional method.10 By focusing exclusively on a rolling, recent three-year QRE average, the Kansas structure makes the credit more predictable and administratively simpler for growing companies.

V. Detailed Example: Calculating the Base Amount and Credit Generation

This section demonstrates the calculation of the Base Amount and the resulting credit for an established Kansas taxpayer over a standard fiscal period, illustrating the relationship between investment growth and credit generation.

A. Scenario Setup: Innovate KS Corp.

Innovate KS Corp., operating in Kansas, documents the following Kansas Qualified Research Expenditures (QREs) over three successive tax years:

The goal is to calculate the credit for TY 3, assuming the new 10% rate applies.

B. Step 1: Calculating the Base Amount (Three-Year Average)

The calculation aggregates the QREs for the three years and divides by three:

1. Current Year QREs (Line 1): $1,800,000
2. Preceding Year QREs (Line 2a): $1,400,000
3. Second Preceding Year QREs (Line 2b): $1,000,000
4. Total QREs (Line 3): $1,800,000 + $1,400,000 + $1,000,000 = $4,200,000
5. Base Amount (Line 4): $4,200,000 / 3 = $1,400,000

The Base Amount for TY 3 is $1,400,000. This figure represents the expenditure threshold that Innovate KS Corp. must exceed to earn the credit.

C. Step 2: Calculating Excess QREs and Generated Credit

The credit is calculated on the amount of QREs exceeding the Base Amount:

1. Excess QREs (Line 5):
   $1,800,000 (Current QREs) – $1,400,000 (Base Amount) = $400,000 (Excess QREs)
2. Generated Credit (10% Rate):
   $400,000 $\times$ 10% = $40,000 (Total Generated Credit for TY 3)

D. Step 3: Applying the Annual Utilization Limitation

If Innovate KS Corp. has a sufficient income tax liability, the annual use of the credit is limited to 25% of the total generated amount:

1. Annual Utilization Limit: $40,000 $\times$ 25% = $10,000 (Maximum credit usable in TY 3).
2. Carryforward Amount: $40,000 – $10,000 = $30,000 (Carried forward indefinitely).

This analysis demonstrates that the management of the Base Amount is a critical financial metric. Companies must project R&D spending to consistently exceed this rolling average threshold to generate a meaningful credit. If R&D expenditures decline, the current year’s QREs may fall below the Base Amount, resulting in zero credit generation for the year and subsequently lowering the Base Amount for the following year, highlighting the penalty for inconsistent or cyclical R&D investment.

VI. Operational Guidance and Administrative Best Practices (KDOR Compliance)

Effective claiming of the Kansas R&D credit requires strict adherence to administrative guidance provided by the Kansas Department of Revenue (KDOR).

A. Official Guidance on QRE Substantiation

KDOR explicitly requires detailed record-keeping that supports the QREs entered into the Base Amount calculation. Taxpayers must “keep an itemized schedule of expenditures for amounts claimed on lines 1, 2a and 2b” of Schedule K-53.1

Compliance mandates that this documentation must not only meet the technical requirements of IRC §41 (e.g., qualifying wages, supplies) but must also verify that the activities generating these costs took place within Kansas for all three years included in the average. KDOR reserves the right to request this information as necessary during an examination.1 Robust, contemporaneous documentation for the historical base years is therefore just as vital as for the current credit year to successfully defend the calculated credit amount.

B. Claiming Procedures and Transfer Requirements

The credit is claimed by completing and submitting Schedule K-53 with the corresponding Kansas income tax return.11

For taxpayers without a current tax liability who opt to transfer the credit, the full credit amount must be transferred to a single transferee, and the transfer can only occur once.1 The transfer must be documented by filing Form K-260 with the KDOR. The transferee may claim the credit against their own Kansas income tax liability and is subject to the same carryforward limitations and requirements that were in place when the credit was originally earned.1

C. Public Disclosure Requirements

Taxpayers should note that the use of this credit is subject to public disclosure requirements aimed at increasing transparency regarding state incentives. K.S.A. 74-50,227 requires the Kansas Department of Commerce to publish certain incentive information, including the recipient’s name and address, and the annual amount of the incentive claimed.1

VII. Conclusion

The Base Amount (Three-Year Average) is the essential component of the Kansas R&D tax credit framework, serving as the financial yardstick against which current R&D investment is measured. By defining the base as the average of QREs over the current and two preceding years, K.S.A. 79-32,182b establishes an incremental incentive that is administratively simpler than the federal model, making it highly accessible to businesses of all sizes, particularly those focused on growth.

The current 10% credit rate and the transferability option for non-liable taxpayers significantly boost the strategic value of the credit, turning R&D investment into a potentially liquid asset. However, realizing this benefit depends entirely on rigorous compliance, necessitating that taxpayers maintain meticulous, location-specific documentation for QREs across the entire three-year Base Amount period to satisfy KDOR audit requirements. Strategic financial management focused on sustained, incremental QRE growth above this rolling average is key to maximizing the incentive.

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