Expert Report on the Carry Forward Increment of the Kansas Research and Development Tax Credit

I. Executive Summary: The Pacing Mechanism of the Kansas R&D Credit

1.1 Simple Definition

The Carry Forward Increment, defined as 25% of the credit, establishes the maximum portion of the Kansas Research and Development (R&D) Tax Credit that a taxpayer may utilize in any single tax year.1

Any unused credit amounts are non-refundable but may be carried forward indefinitely, realized annually in subsequent 25% increments of the original generated amount until the total credit is exhausted.2

1.2 Strategic Overview and Contextual Importance

The Kansas R&D Tax Credit, codified under K.S.A. §79-32,182b, is a significant incentive designed to promote investment in qualified research activities within the state. While the credit rate is competitive (10% of excess Qualified Research Expenses or QREs, post-2022), the key constraint governing its economic realization is the utilization cap stipulated in subsection (b).2 This provision limits the annual allowance to 25% of the total generated credit amount for the current year, plus 25% of the original credit amount for all applicable prior-year carry forwards.1

This 25% utilization cap is fundamentally a state fiscal policy tool. It is not an arbitrary limitation but a strategic mechanism designed to pace the budgetary impact of the incentive, ensuring that state revenue erosion is gradual and predictable.2 By limiting utilization to one-quarter of the generated credit per year, the law ensures that a credit, even if fully utilized against tax liability, will take a minimum of four years (100% divided by 25%) to be fully realized.2 This mandate dictates the cash flow realization timeline of the R&D benefit, requiring businesses to calculate the credit’s true economic value using a discounted cash flow (DCF) model that reflects this phased realization schedule.

The pairing of this strict annual utilization constraint with an indefinite carry forward period demonstrates a deliberate strategy by the Kansas Legislature. The 25% limit provides the necessary fiscal control and budgetary stability by restraining immediate revenue loss. Conversely, the indefinite carry forward guarantees that the R&D investment benefit is certain to be fully realized over time, as the credit cannot expire. This dual structure encourages long-term R&D commitment by providing high certainty of eventual benefit realization, even if that realization is necessarily slow.

II. Statutory and Regulatory Foundation (K.S.A. 79-32,182b)

2.1 Legislative Context and Recent Amendments

The statutory framework for the Kansas R&D credit has seen significant enhancements, magnifying the financial implications of the 25% utilization rule. For all taxable years commencing after December 31, 2022, the credit rate was increased from 6.5% to 10% of the amount by which QREs exceed the average of QREs incurred during the current and the preceding two taxable years.1

Simultaneously, effective for tax year 2023 and thereafter, eligibility for the credit was expanded. Previously limited solely to corporations subject to the Kansas corporate income tax, the credit is now available to any Kansas income taxpayer, including individuals, C-corporations, and various flow-through entities.5 The combination of the higher 10% credit rate—driving substantial increases in the total credit generated—and the expanded eligibility—increasing the population of taxpayers—intensifies the need for careful compliance with the multi-year tracking and utilization requirements imposed by the 25% limitation rule.

2.2 The Law: Defining the 25% Annual Limit

The definitive constraint on the use of the R&D credit is established by K.S.A. 79-32,182b(b). This statute clearly states: “In any one taxable year, the amount of such credit allowable for deduction from the taxpayer’s tax liability shall not exceed 25% of the total amount of such credit plus any applicable carry forward amount”.1

A crucial interpretation of this language is that the 25% limit applies directly to the total amount generated in a particular tax year (the “vintage” credit), rather than applying to the diminishing remaining carry forward balance. This structural detail is critical for compliance and forecasting. If the 25% limit were applied to the declining balance, the credit utilization would be front-loaded, absorbed rapidly in initial years, and then drop off sharply later. By applying the 25% limit to the original total credit, the state mandates a consistent, predictable utilization schedule, simplifying financial modeling but ensuring that the tax benefit is realized gradually over a set period.

2.3 Indefinite Carry Forward Provision

While utilization is tightly constrained, the longevity of the credit is assured by the statutory provisions governing carry forward. K.S.A. 79-32,182b(b) further stipulates: “The amount by which that portion of the credit allowed by subsections (a) and (b) to be claimed in any one taxable year exceeds the taxpayer’s tax liability in such year may be carried forward until the total amount of the credit is used”.1

This clause establishes an indefinite carry forward period, distinguishing the Kansas R&D credit from many other tax incentives, both state and federal, which often expire after a fixed number of years. The absence of an expiration date provides a high degree of certainty for long-term investors in Kansas, guaranteeing that the tax benefit, once earned, will not be lost due to insufficient tax liability or the passage of time. The credit is non-refundable, meaning the state will not issue a cash payment for the credit, but the indefinite carry forward mechanism acts as a permanent, albeit paced, offset against future Kansas income tax liabilities.2

III. The Mechanism of Carry Forward Increment (The 25% Rule in Practice)

3.1 Distinction: Credit Generation vs. Credit Utilization

It is essential to distinguish between the two phases of the Kansas R&D credit: generation and utilization. The 10% calculation dictates the size of the credit pool generated annually, based on the calculation of excess QREs.3 The 25% rule, conversely, pertains strictly to the utilization of that credit against the actual income tax liability.2

For every dollar of R&D credit generated in a given year, a maximum of 25 cents is immediately available for use (subject to the taxpayer’s liability), while a minimum of 75 cents is automatically carried forward to be claimed in future tax periods.2

3.2 Calculating the Annual Maximum Availability

The utilization constraint requires the calculation of an annual maximum available credit pool, which is the sum of the allowable utilization from the current year’s credit and the allowable utilization from all prior years’ carry forward balances.

1. Current Year Limit: The newly calculated credit is immediately subject to the 25% ceiling. This initial 25% limit establishes the maximum amount of that credit vintage that can be used in the current year.
2. Prior Year Limit: The rules confirm that for credits carried forward from prior tax years, the utilization in the current year is still capped at 25% of the original total credit amount generated in that specific prior year.6 The statute permits the carry forward to be realized “in 25 percent increments” until the total is used.3

The Total Available Credit for any single tax year is the cumulative sum of the current year’s allowable 25% portion and the allowable 25% portion of each separate prior year’s carry forward balance. This necessitates that businesses maintain administrative tracking systems that organize credits by their vintage year, rather than simply tracking a single cumulative credit pool.

3.3 Strategic Rationale: State Revenue Stabilization

The imposition of the 25% utilization cap serves as the primary fiscal control lever for the Kansas Department of Revenue (KDOR). Although Kansas provides an aggressive incentive—a 10% rate and indefinite carry forward—the pacing mechanism prevents substantial, sudden shortfalls in state revenue collections.2

The legal requirement for vintage tracking, reinforced by KDOR forms, ensures that the state maintains predictability in its budget forecasts. Taxpayers are compelled to be long-term investors in Kansas, realizing their tax benefit gradually over a defined timeframe. This structure ensures that the financial incentive is spread out, minimizing volatility in state financial planning while ensuring that the full intended benefit is ultimately provided to the businesses that invest in the state.

IV. Kansas Department of Revenue (KDOR) Compliance and Guidance

4.1 Required Documentation: Schedule K-53

Compliance with the 25% limitation and the tracking of multi-year carry forwards is managed exclusively through Schedule K-53, Kansas Research and Development Credit. Taxpayers claiming the credit must complete and submit this schedule with their annual income tax return, whether it is Form K-40 (Individual), Form K-41 (Fiduciary), or Form K-120 (Corporate).3

The structure of the K-53 form mechanizes the 25% limit, requiring explicit calculations to determine the allowable utilization for both current year and prior year credits.

4.2 Schedule K-53 Analysis: Calculating Current Year Limits (Part A & B)

Parts A and B of Schedule K-53 calculate the new credit generated for the current tax year and apply the immediate 25% utilization cap. The required steps confirm the immediate and strict application of the constraint:

• Line 6 (Total research and development credit): This line represents the 10% calculated credit amount generated by the taxpayer’s QREs that exceed the base period.6
• Line 7 (Maximum allowable credit in any one year): This is the fixed annual utilization ceiling for the current year’s credit vintage. It is calculated by multiplying the total credit (Line 6) by 25% (or 0.25).6
• Line 9 (Amount of credit allowable as a result of expenditures made this tax year): This is the lesser of the current year’s 25% maximum cap (Line 7) or the taxpayer’s current year tax liability (Line 8, after all other credits).6 This is the portion of the new credit utilized.
• Line 10 (Amount of carry forward allowed): This line determines the large, remaining portion—typically 75% or more—that must be carried forward indefinitely (Line 6 minus Line 9).6

4.3 Schedule K-53 Analysis: Managing Prior Year Carry Forwards (Part D)

Part D of Schedule K-53 is dedicated entirely to tracking and limiting the use of credits earned in prior years, ensuring compliance with the “25% increment” rule for carry forwards. This section requires taxpayers to treat each prior year’s generated credit (or vintage) as a separate pool, tracked in individual columns (A, B, C, D).6

The mechanical tracking implemented here confirms that compliance mandates tracking credits by their vintage year, rather than as one lump-sum pool. This requirement is necessary because a taxpayer could potentially lose track of the fixed 25% annual ceiling for each specific year.

• Line 15 (Carry forward remaining): Represents the unused balance from the originating year.
• Line 16 (Maximum credit allowable in any one year from original K-53 for the year shown on line 11): This line is crucial, as it requires the taxpayer to reference and enter the original 25% cap amount (the Line 7 value from the original K-53 filed for that year).6 This is the explicit mechanical enforcement of the fixed 25% limitation based on the original credit size.
• Line 17 (Amount of carry forward available to this return): This line determines the utilized amount by entering the lesser of the remaining balance (Line 15) or the original 25% annual cap (Line 16).6

This process ensures that even if a taxpayer had low tax liability in a previous year and only used a fraction of their 25% allowance, they cannot “catch up” that unused allowance in a later year; the maximum utilization in the current year remains bound by the original 25% ceiling for that vintage credit.

Table 1: Key KDOR Schedule K-53 Lines Enforcing the 25% Rule

V. Numerical Case Study: Applying the Carry Forward Increment

The following example demonstrates how a technology firm generating consistent R&D credits must pace its utilization over multiple years, stacking the fixed 25% increments from each credit vintage to maximize its annual offset against tax liability.

5.1 Setup and Assumptions

5.2 Year-by-Year Calculation Walkthrough

Year 2023 Analysis (New Credit Vintage)

1. Credit Generated (A): $100,000.
2. Maximum Allowable Utilization (A x 25%): $25,000 (K-53 Line 7).
3. Credit Claimed: $25,000 (Lesser of $25,000 cap or $50,000 liability).
4. Carry Forward Balance to 2024: $100,000 – $25,000 = $75,000 (K-53 Line 10).

• Note: This $75,000 balance is permanently limited to an annual utilization of $25,000 in future years.

Year 2024 Analysis (Stacking two vintages)

1. New Credit Generated (B): $120,000.
2. Max Utilization of New Credit (B x 25%): $30,000.
3. Max Utilization of 2023 Carry Forward: $25,000 (This is 25% of the original $100,000, as enforced by K-53 Line 16).
4. Total Maximum Available Credit: $30,000 (New) + $25,000 (2023 CF) = $55,000.
5. Credit Claimed: $55,000 (Lesser of $55,000 cap or $60,000 liability).
6. Carry Forward Balances to 2025:

• 2024 CF: $120,000 – $30,000 = $90,000.
• 2023 CF: $75,000 – $25,000 = $50,000.
• Total Carry Forward: $140,000.

Year 2025 Analysis (Stacking three vintages)

1. New Credit Generated (C): $80,000.
2. Max Utilization of New Credit (C x 25%): $20,000.
3. Max Utilization of 2024 Carry Forward: $30,000 (25% of original $120,000).
4. Max Utilization of 2023 Carry Forward: $25,000 (25% of original $100,000).
5. Total Maximum Available Credit: $20,000 + $30,000 + $25,000 = $75,000.
6. Credit Claimed: $70,000 (Limited by Tax Liability).

• Allocation Note: Since the amount claimed ($70,000) is less than the maximum available ($75,000), the claimed credit is typically applied against the credit vintages in a sequence that maximizes future utilization, often oldest credit first.

1. Remaining Credit to Carry Forward: $145,000. (The $5,000 unused portion remains in the 2023 carry forward pool).

Year 2026 Analysis (Stacking four vintages)

1. New Credit Generated (D): $90,000.
2. Max Utilization of New Credit (D x 25%): $22,500.
3. Max Utilization of 2025 Carry Forward: $20,000 (25% of original $80,000).
4. Max Utilization of 2024 Carry Forward: $30,000 (25% of original $120,000).
5. Max Utilization of 2023 Carry Forward: $25,000 (25% of original $100,000).
6. Total Maximum Available Credit: $22,500 + $20,000 + $30,000 + $25,000 = $97,500.
7. Credit Claimed: $97,500 (Limited by the credit cap, not liability).
8. Total Carry Forward Balance: $137,500. (This balance represents the unutilized portions of the 2023, 2024, and 2025 credits, which will continue to be realized in fixed 25% increments in perpetuity).

Table 2: Multi-Year Kansas R&D Credit Utilization and Carry Forward Modeling

VI. Strategic Financial and Legal Implications

6.1 Cash Flow Planning and Delayed Realization

The indefinite carry forward provision offers a tremendous advantage by eliminating the risk of credit expiration, yet the mandatory 25% utilization pacing introduces time value risk. The financial benefit of the credit is heavily influenced by the speed of realization. Because the statute forces a minimum four-year absorption period for any single year’s credit, regardless of the taxpayer’s immediate tax liability, businesses must account for this delayed benefit realization when planning R&D investments.2

Accurate financial modeling requires the use of a Discounted Cash Flow (DCF) approach to correctly evaluate the present value of the R&D credit. Companies must forecast future profitability and tax liability to ensure that the indefinite carry forward does not effectively become a perpetual asset whose realized value is significantly eroded by discounting over multiple years. For companies with consistently high tax liability, the strategic focus shifts to continuously generating new credits, thereby maximizing the total annual available pool by stacking the 25% portions from all eligible vintages.

6.2 The Critical Interplay with Transferability (Form K-260)

Since 2023, Kansas R&D tax credits have been transferable, provided the original taxpayer (transferor) has no current Kansas income tax liability.2 This transfer must involve the full credit amount and can only occur one time, documented using Form K-260, Tax Credit Transfer Notification Form, submitted to the KDOR.7

The transferability feature is particularly beneficial for startups or growing R&D companies that generate substantial credits but have little or no current tax liability, allowing them to monetize the credit immediately.

However, the legal framework explicitly connects the transferred credit back to the 25% limitation. The law mandates that the credit claimed by the transferee “shall be subject to the limitations and requirements in place at the time the credit was earned”.1 This means the transferee (buyer) inherits the obligation to track the credit vintage and is strictly bound by the original 25% annual utilization ceiling, even if the buyer has sufficient tax liability to use the entire credit immediately.2

For example, if a $1,000,000 credit is transferred, the buyer can only claim $250,000 in the year of transfer and $250,000 in each of the subsequent three years. This legal constraint profoundly affects the market valuation of transferred Kansas R&D credits. Buyers must discount the purchase price significantly to compensate for the fact that they are purchasing a four-year installment plan, irrespective of their financial capacity. The coordination and submission of both Schedule K-53 (by the transferor, documenting the earned credit) and Form K-260 (by both parties) are non-negotiable compliance requirements for documenting the transfer to the Department of Revenue.3

VII. Conclusion: Maximizing Long-Term R&D Credit Value

The Kansas R&D Tax Credit, governed by K.S.A. 79-32,182b, represents a powerful state economic incentive, particularly given the increased 10% rate and broadened taxpayer eligibility post-2022. However, the mechanism of its realization is tightly controlled by the 25% annual utilization limit, which acts as a fundamental pacing constraint on the benefit.

This constraint ensures that the realization of the tax savings is structured, predictable, and gradual, taking a minimum of four years to fully absorb any single vintage of credit. For businesses, this necessitates maintaining granular accounting systems that track credit balances according to their original generation year, as strictly required by Part D of KDOR Schedule K-53 (Line 16, Maximum credit allowable).

Strategic optimization involves continuous, eligible R&D investment to ensure new credits are generated annually. This “stacking” of multiple 25% annual increments—one for each outstanding credit vintage—maximizes the total tax offset available in any given year. For entities without current liability, the option to transfer the full credit provides a critical means of immediate monetization, provided all parties understand that the 25% annual utilization limitation is transferred along with the credit balance, directly impacting its market value. Ultimately, maximizing the economic value of the Kansas R&D credit relies on sophisticated financial forecasting, meticulous multi-year compliance, and a recognition that the credit is designed as a long-term, sustained commitment by the state to its research economy.

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