The Transformation of Kansas R&D Tax Incentives: Analyzing the C Corporation Prior Eligibility Limitation and Its Removal

I. Executive Summary: The Kansas R&D Tax Credit Transformation

Before 2023, the Kansas research and development (R&D) tax credit was largely restricted for use only by C Corporations; this limitation has since been eliminated, opening the enhanced 10% credit to all Kansas income taxpayers.1

The 2023 legislative changes, enacted through House Bill 2239, fundamentally transformed the Kansas R&D tax credit (K.S.A. 79-32,182b). The amendments increased the credit rate from 6.5% to 10% and, crucially, expanded eligibility beyond C Corporations to include all Kansas income taxpayers, simultaneously introducing the ability to transfer unused credits.2 This transition requires specialized tax planning for entities that previously claimed the credit, particularly regarding the meticulous management of existing 6.5% carryforwards alongside newly generated 10% credits. The comprehensive guidance from the Kansas Department of Revenue (KDOR), particularly Notice 23-09, establishes the new procedural requirements for claiming and monetizing this valuable incentive.2

II. Statutory Foundation and the Historical C Corporation Limitation

2.1 Legislative Authority (K.S.A. 79-32,182b)

The Kansas R&D credit is codified under K.S.A. 79-32,182b, providing an income tax credit for taxpayers who incur expenditures on research and development activities conducted within the state.5 To qualify, the expenditures must align with and be allowable for deduction under the provisions of the federal Internal Revenue Code of 1986 (IRC), conforming to the standards typically associated with IRC §41.5 The core mechanism calculates the credit based on the incremental increase in Qualified Research Expenses (QREs).

2.2 The Pre-2023 C Corporation Requirement: Defining the “Prior Eligibility Limitation”

The term C Corporation (Prior Eligibility Limitation) refers directly to the exclusive eligibility requirement imposed by K.S.A. 79-32,182b prior to legislative changes effective for tax year 2023. For all tax years commencing before December 31, 2022, the statute imposed a restriction, effectively limiting the right to claim the credit solely to C Corporations, which are entities subject to the Kansas corporate income tax.2

During this period of restricted eligibility, the credit parameters were less robust. The credit amount was fixed at 6.5% of the difference between current-year QREs and the incremental three-year base calculation.2 Any generated credit was non-refundable and subject to the continuing limitation that the amount allowable for deduction in any one tax year could not exceed 25% of the total available credit plus carryforward amounts.3

2.3 The Disparity Created by the Prior Limitation

The historical C Corporation exclusivity created a disparity in incentive access. The limitation meant that non-C corporation structures, such as S corporations, partnerships, and Limited Liability Companies (LLCs), were unable to utilize the state R&D incentive directly, even if they were conducting substantial qualified research within Kansas.5

This policy structure limited the state R&D incentive’s influence, particularly within high-growth sectors, such as technology and early-stage manufacturing, which often utilize pass-through entity structures for federal tax benefits. By restricting eligibility solely to corporate income taxpayers, the state arguably overlooked a large segment of innovative businesses, potentially necessitating complex corporate restructuring solely to access the tax benefit or forcing innovative entities to forgo the credit entirely. The subsequent removal of this limitation recognized that the restriction was counterproductive to maximizing R&D investment across the entire spectrum of Kansas businesses.7

III. The 2023 Paradigm Shift: Universal Eligibility and Rate Enhancement

3.1 Analysis of House Bill 2239 (2022 Legislative Session)

The most significant changes to the Kansas R&D credit statute were introduced by House Bill 2239, which was passed during the 2022 Legislative Session and became effective for all taxable years commencing after December 31, 2022.1

Removal of the C-Corp Limitation

The key statutory amendment involved K.S.A. 79-32,182b(d), which was revised to remove the exclusive restriction on C Corporations.2 As a result, for tax year 2023 and all subsequent years, the credit is available to any Kansas income taxpayer.2

Universal Eligibility

The eligibility pool has expanded dramatically to include a comprehensive range of entities: individuals, partnerships, S corporations, limited liability companies, other pass-through entities, and C corporations.1 This ensures that the incentive aligns with modern business structures and maximizes the state’s investment in innovation across all sectors.

Rate Increase

Concurrently with the eligibility expansion, the credit percentage was increased from 6.5% to 10% of the calculated incremental R&D expenditures.2 This substantial rate increase significantly boosts the economic value of the credit for all new claimants.

3.2 Introduction of Credit Transferability: A Strategic Game Changer

The 2023 legislation strategically coupled the removal of the eligibility limitation with the introduction of credit transferability, fundamentally altering the credit’s function and value proposition.4

Transfer Mechanism

For tax year 2023 and thereafter, a key change allows the income tax credit to be transferred by a taxpayer who does not have a current tax liability.2 This provision is particularly beneficial for high-growth, early-stage companies, often structured as pass-through entities, that may generate substantial credits but have little or no tax liability in their early years.

Transfer Rules and Limitations

The transferability provision has specific rules:

• The credit may be transferred to any person.3
• Only the full credit amount received by the transferor may be transferred.6
• The credit may only be transferred one time.6
• The transferee claims the credit against their own Kansas income tax liability and may carry forward any unused portion, subject to the limitations in place at the time the credit was originally earned.6

The introduction of transferability transforms the credit from a non-refundable, potentially decades-long carryforward asset into a monetizable, liquid source of cash flow. By allowing liquidity, the state mitigates the negative economic impact of the 25% annual utilization cap.5 This policy decision utilizes private capital markets to fund R&D investment, increasing the immediacy and attractiveness of the incentive compared to a credit that must wait for future tax offsets.

IV. KDOR Guidance and Procedural Compliance

The Kansas Department of Revenue (KDOR) guidance, especially Notice 23-09 (issued September 6, 2023), provides the official framework for implementing the statutory changes.2

4.1 KDOR Notice 23-09 Implementation Summary

Notice 23-09 confirmed that K.S.A. 79-32,182b was amended to increase the credit rate to 10% and remove the C-Corp limitation, making the credit available to “any Kansas income taxpayer” for tax year 2023 and beyond.2 The Notice also clarified that the credit is now transferable.4

4.2 Mandatory Procedural Change: The K-204 Application

A significant procedural shift post-2022 is the mandatory requirement for taxpayers to submit an application prior to claiming the credit.

Unlike prior years, when a C Corporation simply filed Schedule K-53 with its return, taxpayers are now required to complete and submit Form K-204, Research and Development Credit Application.2 This requirement exists because the credit is now transferable, and the transfer may occur before the taxpayer files its income tax return. The pre-claim application process allows the KDOR to verify and certify the earned credit amount before it can be transferred or utilized, thereby ensuring the integrity of the tradable credit market.

4.3 Required Tax Forms

Successful compliance requires using a combination of forms managed by the KDOR:

1. Schedule K-53: This form is used by the taxpayer who earned the credit (the transferor) to compute the credit generation and utilization.6 It requires detailed documentation of Kansas R&D expenditures for the current and two preceding years.10
2. Form K-204: The mandatory application form required post-2022 for all taxpayers seeking to claim the credit.2
3. Form K-260: This form must be completed and submitted to the Department to formally document a credit transfer between the transferor and the transferee.6

The transition to transferability mandates that tax compliance planning be integrated earlier in the business cycle. Taxpayers cannot delay the finalization of the credit claim until year-end filing; they must secure K-204 certification first, particularly if the generated credit is intended for immediate sale.

V. Mechanics of the Incremental Credit Calculation

The foundational calculation methodology for the Kansas R&D credit remains based on the incremental approach, rewarding growth in qualified research investment.

5.1 Qualified Research Expenses (QREs)

QREs are defined as expenditures made for research and development purposes that are treated as expenses allowable for deduction under the federal Internal Revenue Code.3 These expenses, such as wages for qualified services, must be directly related to activities conducted exclusively within Kansas.5

5.2 Computing the Base Amount and Excess QREs

The credit is computed on the amount of current-year QREs that exceeds a three-year rolling average, known as the base amount.3

• Base Calculation: The base amount is calculated as the average of the actual QREs made during the current taxable year and the two immediate preceding tax years.3

• The formula used is:
  
  $$\text{Base Amount} = \frac{\text{QRE}_{\text{Current}} + \text{QRE}_{\text{Y}-1} + \text{QRE}_{\text{Y}-2}}{3}$$

• Excess QREs: The creditable investment is the amount by which current-year expenditures surpass the calculated base:
  
  $$\text{Excess QREs} = \text{QRE}_{\text{Current}} – \text{Base Amount}$$
• Credit Amount: The generated credit is 10% of the Excess QREs for tax years commencing after December 31, 2022.3 (The rate was 6.5% prior to 2023 11).

For a newly eligible entity, such as a pass-through entity claiming the credit for the first time in 2023, the calculation uses zero for any preceding tax years where QREs are unavailable. If a taxpayer has no prior QREs, the base amount becomes the current year’s QREs divided by three ($QRE_{\text{Current}} / 3$).5 This results in approximately two-thirds (66.67%) of the current year’s QREs being considered incremental and, therefore, creditable.

VI. Limitation and Carryforward Management: Navigating the Legacy

6.1 The 25% Annual Utilization Limit

A crucial constraint on the utilization of the credit, irrespective of the new transferability and expanded eligibility, is the annual limitation outlined in K.S.A. 79-32,182b(b).3

The limitation stipulates that in any one taxable year, the amount of credit allowable for deduction from the taxpayer’s liability cannot exceed 25% of the total available credit (i.e., the current year’s generated credit plus any applicable carryforward amount).3

Any unused credit, whether retained by the original claimant or held by a transferee, may be carried forward indefinitely, subject to continued utilization in 25% increments annually until the total credit is used.3 This utilization cap restricts the immediate benefit but ensures the long-term viability of the incentive.

6.2 Managing the C Corporation Legacy Carryforward Pool

For legacy C Corporations that generated credits before the 2023 statutory amendments, the removal of the eligibility limitation introduces complexity in managing the historical carryforward pool.

Taxpayers must maintain meticulous records to distinguish between credits generated at the historical 6.5% rate (pre-2023) and credits generated at the enhanced 10% rate (post-2022).6

The KDOR guidance confirms that carryforward credits, whether utilized by the original corporate entity or claimed by a transferee, “shall be subject to the limitations and requirements in place at the time the credit was earned”.6 This statutory adherence to the “law of earning” means that pre-2023 credits retain their original 6.5% valuation, even though they may be offset against the tax liability under the unified 25% annual utilization cap in subsequent years.

The indefinite carryforward necessitates granular accounting. Legacy C-Corps must track the specific year of generation, the applicable rate (6.5% or 10%), and the utilized proportion against the annual 25% cap. This administrative necessity ensures that financial ledgers accurately reflect the true economic value of the composite credit portfolio for compliance and potential audit defense.

VII. Case Study: Financial Impact of the Eligibility Transition

To illustrate the interplay between historical carryforwards, the rate increase, and the utilization cap, a multi-year analysis for a hypothetical entity, Corp X, is provided.

7.1 Scenario Setup: Corp X Transition

Corp X, a qualifying entity, holds a substantial legacy carryforward of $450,000 from 6.5% credits generated between 2018 and 2022. The analysis focuses on its performance under the enhanced 10% regime starting in 2023.

For continuity in the base calculation, QREs for prior years are assumed:

• QREs (2022): $1,500,000
• QREs (2021): $1,200,000

7.2 Multi-Year Calculation Example

The following table calculates the credit generation, the compounding effect of the carryforward, and the restriction imposed by the 25% annual utilization cap. The calculation assumes Corp X has sufficient Kansas income tax liability to absorb the maximum allowable utilization each year.

Illustrative Example: C-Corp Transition and Credit Utilization

Base Calculation Detail:

• 2023 Base: $(\$1,800,000 + \$1,500,000 + \$1,200,000) / 3 = \$1,500,000$
• 2024 Base: $(\$2,200,000 + \$1,800,000 + \$1,500,000) / 3 = \$1,833,333$

The example demonstrates that even with a strong performance in 2023 and 2024, resulting in a total generated credit (both current and carryforward) of $516,667, the company is only able to recover $219,167 in tax relief over the two years due to the 25% limitation.3 This restriction confirms that the R&D credit remains a non-refundable, long-term asset, underscoring the necessity of the newly introduced transferability option for companies needing faster economic returns. Based on the remaining carryforward of $297,500 at the end of 2024, Corp X would require several additional years to fully utilize the balance, even if no new credits are generated.

VIII. Strategic Recommendations for Maximizing the Enhanced Kansas R&D Credit

The policy changes effective in 2023 demand a revised strategic approach to R&D tax planning for all Kansas taxpayers.

8.1 Optimizing the Transferability Provision

The transferability provision serves as the most effective countermeasure against the deceleration inherent in the 25% annual utilization limit. This mechanism provides immediate liquidity, allowing companies to convert future tax savings into current operating capital.

Newly eligible pass-through entities (S-Corps, partnerships, LLCs) and C Corporations without a current tax liability should prioritize utilizing the transfer mechanism.2 The process requires timely completion of the Form K-204 Application and subsequent documentation of the full credit transfer via Form K-260.6

For legacy C Corporations, it is imperative to understand that the historical 6.5% credits claimed and carried forward prior to 2023 are generally non-transferable. Only the newly generated 10% credits post-2022 may be transferred, provided the transferor has no current tax liability.6 This requires precise tracking to ensure only eligible credits are offered for sale.

8.2 Integrating QRE Planning with Base Calculation

The incremental structure of the Kansas R&D credit requires strategic management of R&D investment levels. The credit incentivizes year-over-year growth in expenditures by calculating the benefit based on the amount that exceeds the rolling three-year average.5

Taxpayers should incorporate the tax credit formula into their budgeting models. Modeling future R&D budgets based on the required investment level to substantially exceed the statutory base amount will maximize credit generation. Even incremental increases in QREs can yield a disproportionately high tax credit return, especially since the base amount calculation for a first-time claimant provides a favorable starting point.

8.3 Compliance Checklist for Post-2022 Claims

Adherence to the enhanced procedural requirements introduced by KDOR Notice 23-09 is critical for minimizing audit risk and ensuring monetization or utilization of the credit. Taxpayers must execute the following steps:

1. Compliance Verification: Ensure all QREs claimed are exclusively for R&D activities conducted within Kansas and strictly comply with federal IRC §41 definitions.5
2. Pre-Claim Application: File Form K-204 (Application) with KDOR to certify the credit amount before any attempt is made to claim or transfer the credit.2
3. Credit Computation: Utilize Schedule K-53 to accurately compute the credit, applying the correct 10% rate to excess QREs for tax years starting after 2022.6
4. Transfer Documentation: If exercising the transfer option, ensure the transfer is of the full credit, is executed only once, and is fully documented using Form K-260, which must be submitted to the KDOR.6
5. Carryforward Ledger: If retaining legacy C-Corp credits, establish robust internal accounting to track and differentiate between 6.5% and 10% credit pools. While utilization is subject to the unified 25% cap, the proper classification of the credit utilized is mandatory for audit trail purposes.6

IX. Conclusion

The historical C Corporation (Prior Eligibility Limitation) defined the Kansas R&D credit as a niche incentive for large corporate taxpayers. Its removal via House Bill 2239 marks a fundamental modernization of the state’s tax policy, aligning Kansas with national efforts to incentivize innovation across all entity structures. By expanding eligibility to include all Kansas income taxpayers, increasing the credit rate to 10%, and introducing the transformative option of credit transferability, the state has significantly enhanced the economic attractiveness of its R&D program.

However, this transition is not without complexity. For legacy corporate filers, the indefinite carryforward of pre-2023 credits requires careful management of dual-rate carryforward pools, ensuring that the original 6.5% limitation attached to those credits is respected in compliance documentation. For all claimants, the enduring 25% annual utilization cap dictates that the R&D credit remains a restricted, long-term asset, making the transferability provision a critical policy tool for providing immediate financial relief and liquidity to innovating businesses. Successful navigation of this enhanced tax environment requires rigorous adherence to KDOR guidance, precise QRE tracking, and strategic modeling of credit monetization pathways.

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/