The Technical Gatekeeper: Defining and Documenting Elimination of Uncertainty for the Kansas R&D Tax Credit

The concept of Elimination of Uncertainty (EOU) is foundational to claiming the Kansas Research and Development (R&D) Tax Credit. It requires that an activity must seek information to resolve technical unknowns regarding the capability, design, or method of developing or improving a business component.1 EOU acts as the primary technical requirement, ensuring that only genuine investigative research, and not routine engineering or commercial development, qualifies for tax incentives.

This report provides an expert analysis of the EOU criterion, its statutory context within Kansas law (K.S.A. §79-32,182b), the administrative guidance from the Kansas Department of Revenue (KDOR), and the stringent documentation standards necessary for successful compliance.

I. Introduction: The Core of Qualified Research Eligibility

The Kansas R&D Tax Credit incentivizes businesses making qualified expenditures within the state.3 To successfully claim this credit, taxpayers must prove that their research activities satisfy the highly rigorous standards established by federal law, specifically the requirements of the four-part test, with EOU as its cornerstone.

A. The Federal Mandate: IRC §41 Nexus

The State of Kansas grants its R&D credit benefit by strictly adopting federal definitions for qualified expenditures. K.S.A. §79-32,182b explicitly states that expenditures made for research and development activities must be “allowable for deduction under the provisions of the federal internal revenue code of 1986, as amended”.3 This direct statutory link means that the technical eligibility of every expense claimed in Kansas—including the successful demonstration of EOU—must conform precisely to the standards set forth in Internal Revenue Code (IRC) Section 41 and the associated Treasury Regulations (Treas. Reg. §1.41-4).3 Therefore, state-level compliance begins with an exhaustive federal-level technical analysis.

II. Deconstructing Elimination of Uncertainty (EOU)

EOU is the investigative trigger that drives qualified research. It is designed to filter out activities where the outcome is predictable or the solution is known, thereby subsidizing only technically challenging and exploratory work.

A. Detailed Regulatory Definition

Treasury Regulations define research as qualified only if it is intended to discover information that would eliminate uncertainty concerning the appropriate design or the capability or method of developing or improving the business component.1 Uncertainty exists when the information available to the taxpayer does not establish how the desired result can be achieved.

The focus of uncertainty is strictly technical and can be categorized into three specific areas of technical unknowns:

1. Uncertainty of Capability: This involves the fundamental question of whether the development or improvement of the business component can be achieved at all. For example, uncertainty regarding whether a new material can handle extreme temperature stress while maintaining flexibility.
2. Uncertainty of Design: If the capability is established, uncertainty remains regarding the physical configuration, specific specifications, or appropriate form required to achieve the desired functionality. This requires systematic testing of various structural or functional designs.
3. Uncertainty of Method: The process, technique, or sequence of steps necessary for successful development or improvement is unclear. This often applies to manufacturing or industrial processes where standard procedures are insufficient to achieve the desired result.

B. The EOU Requirement within the Federal Four-Part Test

EOU is not a standalone criterion but is integrated into the required Federal Four-Part Test. To be a Qualified Research Expense (QRE), an activity must satisfy all four criteria simultaneously.6

The Federal Four-Part Test establishes an explicit causal relationship between the technical unknown and the resulting activities. Technical uncertainty must precede and necessitate the process used to resolve it. If no uncertainty exists regarding capability, design, or method, then the activity fails EOU and is automatically disqualified, regardless of how innovative or technologically advanced the final product may seem.

The necessary elements of the test are summarized below:

Federal Four-Part Test Criteria for Qualified Research

This structure ensures that activities claimed for the credit are not merely the routine application of established knowledge but rather constitute an attempted acquisition of new, unknown information aimed at resolving a technological blockage.11 The documents submitted to the KDOR on Schedule K-53 must clearly reflect this intentional, investigative approach.13

III. Navigating Technical vs. Business Uncertainty: The Critical Distinction

A frequent point of contention during R&D tax credit examinations is the failure to properly differentiate technical uncertainty from routine business risk. Only uncertainty rooted in a hard science or engineering principle qualifies.

A. Identifying Technical Uncertainty (Qualifying Research)

Technical uncertainty must be intrinsic to the underlying science or technology of the business component.9 The discovery activity must fundamentally rely on principles of physical or biological science, engineering, or computer science.8

For industries central to the Kansas economy—such as agriculture, manufacturing, and aerospace 14—technical uncertainty often manifests in specific, high-stakes questions:

• Manufacturing/Aerospace Design: Developing an improved airframe or composite joining method, where the technical unknown is whether structural integrity can be maintained while using significantly less material, requiring intensive simulation and prototype testing to resolve the capability uncertainty.15
• Ag-Tech Development: Uncertainty regarding the design of an automated system that must operate reliably in adverse weather conditions, where the necessary materials, sensor configurations, and control algorithms must be determined through iterative experimentation.14
• Software Development: Modifying existing systems to improve performance or throughput, where uncertainty exists over how to restructure complex code and integration points to achieve required scalability metrics.10

B. Exclusions: Business Risk and Routine Application

Activities that do not attempt to resolve a technological uncertainty are specifically excluded from the credit. These exclusions fall into two primary categories:

1. Business and Economic Uncertainty: Uncertainty concerning market profitability, cost optimization, management methods, aesthetic considerations, or financing structures are considered commercial risks and do not qualify for the R&D credit.11
2. Routine Engineering and Adaptation: Research credit is not intended for projects where the technical solution is already known, even if the application is complex or requires significant professional effort. Activities that involve merely compiling existing information, applying well-established engineering formulas, or making minor adjustments to a product based on standard industry practice do not meet the EOU standard.11 The activity must involve an intentional investigatory effort to acquire information the taxpayer did not previously possess, moving beyond routine application and calculation. Judicial guidance confirms that a reliance on standard engineering calculations, even sophisticated ones, usually indicates a failure to meet the EOU requirement because the engineer is not attempting to discover unknown information.11

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

The KDOR administers the Kansas R&D Tax Credit (K.S.A. §79-32,182b) and has recently updated its regulations, making the credit significantly more attractive but requiring strict procedural adherence.

A. Statutory Credit Mechanics (K.S.A. §79-32,182b)

The Kansas statute dictates the calculation methodology based on the qualifying expenditures (QREs) conducted within the state.4

• Credit Rate Adjustment: For tax years commencing after December 31, 2022, the credit rate was increased from 6.5% to 10%.3 The credit is calculated on the amount by which current year QREs exceed the average of QREs for the current year and the two preceding tax years.4
• Expansion of Eligibility: For tax year 2023 and thereafter, eligibility was expanded beyond just corporations. The credit is now available to any Kansas income taxpayer, including individuals, partnerships, S corporations, and limited liability companies.16
• Utilization and Carryforward: The amount of credit allowable in any one tax year is limited to 25% of the total computed credit generated for that year, plus any applicable carry forward amount.3 Any unused portion of the credit may be carried forward indefinitely, applied in 25% increments annually.3
• Transferability: Beginning in tax year 2023, the credit is transferable by a taxpayer without a current tax liability.3 This transfer can only occur once and must be for the full credit amount.16

B. Administrative Requirements and Required Forms

KDOR Notice 23-09 (September 2023) formalized these legislative changes and clarified the procedural steps necessary to claim the credit.16

1. Application Requirement (Form K-204): A crucial procedural step introduced for tax year 2023 and after is the requirement for taxpayers to complete and submit Form K-204, Research and Development Credit Application, before claiming the credit.16 Failure to adhere to this pre-claim application requirement could lead to disallowance even if the underlying technical research satisfies the EOU test.
2. Credit Computation (Schedule K-53): Taxpayers must submit Schedule K-53, Research and Development Credit, with their income tax return (K-40, K-41, or K-120).3 This form calculates the total credit, applies the 25% utilization limitation, and tracks the carryforward amount.13 The K-53 instructions specifically require a “Description of the Research or Development activity,” making this the formal point where the taxpayer must narratively justify EOU compliance to the KDOR.13
3. Transfer Documentation (Form K-260): If the credit is transferred, the taxpayer (transferor) must file the K-53, and both the transferor and the transferee must complete Form K-260, Kansas Tax Credit Transfer Notification Form, to document the transaction.3

The transferability provision significantly enhances the economic value of the credit, particularly for startups with minimal current tax liability.14 However, this feature introduces an elevated need for due diligence. The validity of a transferred credit is entirely dependent on the transferor’s ability to substantiate the original EOU and QRE claim. If the original EOU documentation is found insufficient during an audit, the credit claimed by the transferee is jeopardized, emphasizing the importance of securing comprehensive documentation prior to any transfer.14

V. Substantiation and Documentation of EOU for Audit Defense

Successful defense of the R&D tax credit is a matter of linking expenditures directly to the resolution of technical uncertainty. The documentation must establish the chronological and causal relationship between the technical question, the investigative methodology, and the associated costs.

A. Documentary Evidence of Intent

To meet the EOU standard, documentation must demonstrate that the taxpayer had technical uncertainty at the outset of the project and that the QREs were incurred with the explicit intent of resolving that uncertainty. This requires contemporaneous records rather than post-project reconstruction.

• Project Documentation: Initial design specifications, scoping documents, or project notes must clearly articulate the technical uncertainty regarding capability, design, or method that necessitated the research.7
• Process Documentation: Technical reports, engineering notebooks, CAD file histories, simulation results (e.g., Finite Element Analysis or Computational Fluid Dynamics), and detailed records of failed prototypes or test runs provide necessary evidence of the Process of Experimentation.12 These records directly demonstrate the systematic approach used to evaluate alternatives and resolve the EOU.10
• Expenditure Documentation: Personnel expenses, which typically form the largest part of a QRE claim, must be meticulously tracked. Detailed time tracking should correlate the hours worked by qualified researchers (engineers, scientists, programmers) directly to the specific tasks and projects focused on eliminating the identified technical uncertainties.13

B. Itemization and Nexus to Schedule K-53

The expenditures reported on Schedule K-53, which cover machinery, equipment, payroll, and other qualified expenses, must have a clear documentary nexus to activities performed in Kansas that satisfied the EOU requirement.13

The requirement to submit an itemized schedule of expenditures claimed on lines 1, 2a, and 2b of the K-53 18 means the taxpayer must be able to present a detailed breakdown showing which salaries and supplies directly contributed to resolving the EOU.

The necessary link between the claimed expenditures and the federal criteria is illustrated below:

Mandatory Nexus: KDOR Forms and Federal Compliance

VI. Practical Application Example: EOU in Kansas Software Development

The expansion of the Kansas R&D credit to include pass-through entities and the increased rate underscores the need for thorough technical compliance across all eligible sectors. The following example demonstrates EOU compliance for a Kansas-based company.

A. Scenario Setup: Real-Time Data Processing

Context: Silicon Plains Software, LLC (a pass-through entity eligible post-2022) operating in Wichita, Kansas, develops custom telematics software for the logistics industry.

Project Goal (Permitted Purpose): Develop a next-generation routing engine capable of integrating continuous, real-time data from 5,000 active vehicles and recalculating optimal routes in under one second, significantly improving the quality and performance of the existing system.2

Financial Data (Tax Year 2024):

• QREs (2024): $1,000,000 (verified qualified expenses meeting IRC §41)
• QREs (2023): $700,000
• QREs (2022): $500,000

B. Step-by-Step EOU Application

The company’s engineers understood standard routing algorithms, but were uncertain how to design a system (Design and Method uncertainty) capable of ingesting and processing this volume of real-time data efficiently while meeting the sub-one-second latency requirement given the budget constraint on server infrastructure.

1. Defining the Technical Uncertainty (EOU): The engineers faced uncertainty regarding the appropriate data structure and retrieval method that could sustain the required throughput without causing excessive memory consumption or system failures. The specific technical question was: “Can a custom graph database architecture, combined with a novel data sharding technique, reliably process 5,000 concurrent, continuous data streams and complete a route calculation within 900 milliseconds, given current computational resources?”
2. Demonstrating the Process of Experimentation: To resolve this uncertainty, the team undertook systematic experimentation, which fundamentally relied on principles of computer science. They:

• Designed and built three distinct prototype data-layer architectures.
• Developed specialized load-testing software to simulate high-volume real-world data streams.
• Iteratively modified and optimized the data compression, queuing, and memory management algorithms based on stress test results.
• The eventual successful design (Architecture 3) required proprietary coding and a non-standard sharding method discovered through systematic trial-and-error, thus resolving the EOU.

1. Calculating the Qualified Kansas Credit (2024 Tax Year)

The $\$1,000,000$ in QREs associated with the software design and testing phase satisfies the EOU standard. The Kansas R&D credit is calculated as follows:

1. Current Year QREs (2024): $\$1,000,000$ 3
2. Three-Year Average QREs (Base Amount): $(\$1,000,000 + \$700,000 + \$500,000) / 3 = \$2,200,000 / 3 = \$733,333$ 13
3. Excess QREs (Eligible for Credit): $\$1,000,000 – \$733,333 = \$266,667$ 13
4. Total Credit Generated (10% Rate): $\$266,667 \times 10\% = \$26,667$ 3
5. Maximum Credit Allowable (25% Limitation): $\$26,667 \times 25\% = \$6,667$ 3

Silicon Plains Software can claim $\$6,667$ against its current Kansas income tax liability, and the remaining unused credit balance of $\$20,000$ may be carried forward indefinitely or, if the company had no current liability, the full $\$26,667$ could be transferred to a third party.3

VII. Conclusion and Strategic Recommendations

The Kansas R&D Tax Credit, governed by K.S.A. §79-32,182b, offers a significant incentive, particularly with the enhanced 10% rate and broadened eligibility post-2022. However, the mechanism is critically dependent upon proving the Elimination of Uncertainty (EOU), as dictated by the federal IRC Section 41. EOU serves as the necessary technical prerequisite; without evidence that the project was fundamentally driven by the need to resolve technological unknowns regarding capability, design, or method, the resulting expenditures will not qualify as QREs.

Strategic Recommendations:

• Implement Proactive Technical Documentation: Companies must establish protocols that mandate the documentation of EOU at the initiation of every research project. This includes clearly defined technical hypotheses and planned iterations or experiments to resolve the stated uncertainty. Documentation should move beyond generic descriptions and provide technical depth, linking payroll expenditures and supply costs directly to the specific tasks involved in resolving the EOU.
• Ensure Integrated Compliance: Taxpayers must recognize that Kansas compliance is synonymous with federal technical compliance. The documentation required for federal audit defense is the primary evidence needed to support the Schedule K-53 submission to the KDOR. The narrative description on the K-53 must directly reference the technical uncertainty resolved.
• Adhere to KDOR Procedural Mandates: The submission of the newly required Form K-204 (Research and Development Credit Application) prior to claiming the credit is a non-negotiable administrative step. Failure to follow this procedure could lead to the rejection of an otherwise technically sound claim.
• Vet Credit Transfer Documentation Thoroughly: For taxpayers utilizing the credit transfer provision, extensive due diligence is required. Since the credit’s validity transfers with the liability, the transferee must obtain and retain the transferor’s comprehensive EOU and QRE documentation (including the K-53 and K-260 forms) to defend against potential future audits of the original research activity.

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