The Transformation of the Kansas R&D Tax Credit: Eligibility and Compliance for Individual Taxpayers (Post-2022)

The Kansas Research and Development (R&D) tax credit, enhanced by legislative changes effective January 1, 2023, now includes all eligible Kansas income taxpayers, specifically removing the previous limitation to C corporations.1 This expansion allows individuals, sole proprietorships, partnerships, S corporations, and limited liability companies to claim a significantly increased 10% credit against their Kansas income tax liability.3

This report provides an exhaustive analysis of the meaning of “Individual (Post-2022 Eligibility)” within the context of the Kansas R&D tax credit (K.S.A. §79-32,182b), detailing the governing statutory amendments, corresponding guidance from the Kansas Department of Revenue (KDOR), and the compliance requirements necessary for claiming and utilizing this enhanced incentive.

I. Defining Individual Eligibility and the Legislative Foundation

1.1 The Statutory Shift via House Bill 2239

Prior to the legislative changes enacted in 2022, the Kansas R&D tax credit was highly restricted, with eligibility limited almost exclusively to corporations subject to Kansas corporate income tax, specifically C corporations.5 This historic limitation severely curtailed the ability of smaller businesses, entrepreneurs, and start-ups—which are frequently structured as pass-through entities—to benefit from the state’s incentive program.

The critical amendment came through House Bill 2239, which specifically removed the existing limitation found in K.S.A. §79-32,182b(d). This amendment took effect for all taxable years commencing after December 31, 2022.2 Following this statutory modification, eligibility was broadened to encompass “any Kansas income taxpayer”.2

1.2 Scope of Expanded Individual Eligibility

The new eligibility definition encompasses a wide range of non-corporate structures that file using the Kansas income tax framework:

1. Individuals/Sole Proprietors: Those conducting qualified research as a sole proprietorship and reporting income on Schedule C are now directly eligible to claim the credit on their personal Kansas income tax return (Form K-40).5
2. Pass-Through Entities: The expansion explicitly covers partnerships, S corporations, and Limited Liability Companies (LLCs).4 These entities calculate the credit at the entity level but then allocate the benefit to the individual owners (partners or shareholders) via Schedule K-1, who subsequently claim the credit against their personal Kansas income tax liability.4
3. Qualified Research Requirement: A fundamental qualification remains that all expenditures must be made for research and development purposes and must be allowable under the provisions of the federal Internal Revenue Code (IRC) Section 41.1 This federal standard requires that activities meet the four-part test for qualified research activities and expenses (QREs). Furthermore, only QREs conducted physically within the State of Kansas are eligible for the state credit.3

The inclusion of flow-through entities in HB 2239, alongside the introduction of the SALT Parity Act within the same legislative package 8, signifies a unified legislative intent to foster a more favorable tax climate for small to mid-sized businesses and private entrepreneurial capital. By making the R&D credit accessible across all filing structures, Kansas ensures that the incentive is no longer restricted to traditional corporate structures, thereby directly encouraging innovation across a broader economic base, including the state’s substantial agricultural, manufacturing, and technology sectors.5

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

The KDOR has provided administrative guidance, notably through Notice 23-09, detailing the mandatory procedures and forms required to claim and transfer the enhanced R&D credit.2 Compliance for individuals and pass-through entities now requires managing a multi-step process involving pre-certification, computation, and, if necessary, notification of transfer.

2.1 The Application Requirement: Form K-204

A significant procedural change for tax years beginning after December 31, 2022, is the introduction of a mandatory pre-certification step. Unlike previous years, where a taxpayer could simply claim the credit with the return, the amended law requires taxpayers to complete and submit Form K-204, Research and Development Credit Application, prior to claiming the credit.2

This application requirement is fundamentally linked to the credit’s newfound transferability. By requiring the taxpayer to apply for and certify the credit amount before it is claimed or sold, the state validates the asset. This proactive authentication helps protect subsequent transferees and mitigates the risk of invalid credit claims being challenged years after they have been bought and sold, thereby maintaining the integrity of the transfer market.2

2.2 Computation and Reporting: Schedule K-53 and Form K-260

All Kansas income taxpayers, including individuals and flow-through entities, must use Schedule K-53, Kansas Research and Development Credit, to calculate the generated credit amount.4 This schedule requires the input of detailed, itemized expenditures for machinery, payroll, and other qualified expenses conducted in Kansas.4

The calculation detailed in Part A of Schedule K-53 determines the total credit generated. The allowable portion of the credit (after applying the 25% annual limitation) is then carried to the appropriate line of the individual’s income tax return (e.g., Form K-40).4

If an eligible taxpayer chooses to transfer the credit, they must complete Form K-260, Kansas Tax Credit Transfer Notification Form.7 The transferor must also submit Schedule K-53 (completed through Part A) with their income tax return to document the credit that was generated and subsequently transferred.4

KDOR R&D Credit Compliance Forms

III. The Enhanced 10% Credit Calculation Methodology

For all taxable years commencing after December 31, 2022, the state R&D credit rate increased from 6.5% to 10%.3 This rate applies to the amount of qualified research expenditures (QREs) that exceed the taxpayer’s statutory base amount.

3.1 Defining the Base Amount

The Kansas R&D tax credit employs a fixed-base calculation method, though it differs slightly from the federal definition. The base amount is defined as the average of the actual QREs made during the current taxable year and the two immediately preceding taxable years.3

The calculation proceeds as follows, mirroring the steps outlined in Schedule K-53 instructions 4:

1. Identify the QREs for the current tax year ($\text{QRE}_{\text{Current}}$).
2. Identify the QREs for the first preceding year ($\text{QRE}_{\text{Y-1}}$) and the second preceding year ($\text{QRE}_{\text{Y-2}}$).
3. Calculate the total three-year expenditure: $\text{QRE}_{\text{Total}} = \text{QRE}_{\text{Current}} + \text{QRE}_{\text{Y-1}} + \text{QRE}_{\text{Y-2}}$.
4. Determine the Average Expenditures (Base Amount): $\text{Base Amount} = \text{QRE}_{\text{Total}} / 3$.
5. Determine the Excess QREs: $\text{Excess QREs} = \text{QRE}_{\text{Current}} – \text{Base Amount}$ (If negative, the excess is zero).
6. Calculate the Total Generated Credit: $\text{Credit} = \text{Excess QREs} \times 10\%$.

3.2 Strategic Advantage for New R&D Operations

The specific structure of the three-year average calculation provides a distinct and immediate benefit for individuals and pass-through entities that are newly initiating R&D activities or claiming the credit for the first time following the 2022 expansion.

When a new taxpayer has zero or very low QREs in the two preceding years ($\text{QRE}_{\text{Y-1}}$ and $\text{QRE}_{\text{Y-2}}$), the denominator of the base calculation remains three, but the numerator contains only the current year’s expenditures. This results in the base amount being only one-third of the current QREs ($\text{QRE}_{\text{Current}} / 3$). Consequently, two-thirds (approximately 66.67%) of the current year’s QREs are considered “excess,” accelerating the creditable amount significantly in the initial year.3 This structural aspect acts as a strong incentive for immediate and aggressive R&D investment by new Kansas taxpayers.

3.3 Numerical Example: Individual Sole Proprietor (Tax Year 2023)

To illustrate the calculation process for an individual taxpayer claiming the credit post-2022, consider the case of a sole proprietor, “Company A,” operating in Kansas.

Scenario Data:

Calculation Steps (Following Schedule K-53, Part A):

1. Current Year QREs (Line 1): $600,000
2. Total Prior Two Years QREs (Part of Line 2): $240,000 + $120,000 = $360,000
3. Total Three Years QREs (Line 3): $600,000 + $360,000 = $960,000 4
4. Average Expenditures (Base Amount – Line 4): $960,000 / 3 = $320,000 4
5. Excess QREs Eligible for Credit (Line 5): $600,000 (Current QREs) – $320,000 (Base) = $280,000 4
6. Total Generated Credit (Line 6): $280,000 $\times$ 10% (.10) = $28,000 4
7. Maximum Allowed Credit for Tax Year (Line 7): $28,000 $\times$ 25% (.25) = $7,000 4

Company A generated a total R&D credit of $28,000 for 2023. However, the maximum amount Company A can utilize against its Kansas income tax liability in 2023 is capped at $7,000.

IV. Limitations, Carryforwards, and Strategic Utilization

4.1 The 25% Annual Utilization Constraint

A crucial feature of the Kansas R&D credit is the limitation placed on its annual utilization. The credit allowed in any single tax year is capped at 25 percent of the total credit generated for that year, plus any applicable carry forward amount from previous years.7 This limitation applies equally to C corporations, and now, to individual taxpayers and flow-through owners.4

This constraint prevents the full immediate offset of tax liability, requiring taxpayers to treat the credit as a long-term asset. The maximum allowable credit (Line 7 of Schedule K-53) is the amount that can be applied against the taxpayer’s Kansas income tax liability (Line 8 of Schedule K-53).4

4.2 Indefinite Carryforward and Long-Term Planning

Any portion of the generated credit that exceeds the amount utilized in the current tax year is considered an unused credit. This remaining unused balance may be carried forward indefinitely until the total amount of the credit is fully exhausted.3 These carry forward amounts must also be applied in 25% increments annually.3

The indefinite carryforward period provides significant benefit, ensuring that the tax asset remains valuable even if the taxpayer experiences volatility in profits or tax liability over many years. This durability necessitates sophisticated long-term tax planning and income forecasting for individual taxpayers. Specifically, individuals and their advisors must model their future Kansas taxable income to maximize the efficiency of credit utilization while ensuring compliance with the 25% annual usage rule.

For administrative purposes, taxpayers are required to meticulously track the carryforward amounts using Part D of Schedule K-53.4 Because the credit may be utilized decades after it was initially earned, robust documentation supporting the original QREs and the initial credit calculation (Schedule K-53, Part A) must be retained indefinitely to withstand potential audit scrutiny.

V. Strategic Analysis of Credit Transferability (Post-2022)

The most notable statutory enhancement, particularly relevant to individual taxpayers operating research-intensive start-ups, is the introduction of credit transferability, effective for credits earned in tax year 2023 and all subsequent years.4 This feature provides a mechanism for immediate monetization of the tax asset.

5.1 Conditions for the Transferor

Transferability is subject to specific statutory constraints 1:

1. Eligibility: Only the entity that originally earned the credit is permitted to transfer it.7
2. Tax Liability: The transferor must be a taxpayer without a current tax liability in Kansas.2 This provision ensures that the option to sell the credit is available to new ventures or companies undergoing rapid R&D growth that may not yet be profitable or generate sufficient tax liability to utilize the credit immediately due to the 25% limitation.
3. Transfer Limits: Only the full credit amount may be transferred, and the credit may only be transferred one time.1 This ensures administrative simplicity and prevents the fractionalization of the credit on secondary markets.
4. Documentation: The transferor must submit Schedule K-53 with their return and complete Form K-260 to notify the KDOR of the transfer.7

This transfer option transforms the economic utility of the R&D credit. For an individual taxpayer whose innovative activities generate substantial credits but whose business structure results in little or no current Kansas tax liability, the ability to transfer the credit provides immediate capital and liquidity, supporting continued investment and growth, rather than waiting years for the indefinite carryforward to be used.

5.2 Rules for the Transferee and Strategic Due Diligence

The credit can be transferred to any person, who may then claim it against their Kansas income tax liability in the tax year the credit was transferred.2 However, transferees must observe several key constraints that impact the value and utilization of the purchased asset:

1. Non-Refundability: Transferred credits are strictly non-refundable. The transferee cannot receive a refund for any excess credit that may exceed their tax liability.1
2. Adherence to Original Limitations: Critically, the credit claimed by the transferee is subject to the limitations and requirements in place at the time the credit was earned.4 This rule is paramount, meaning the transferee is fully bound by the 25% annual utilization cap imposed on the credit generated by the transferor. If a transferee purchases a $100,000 credit, they can only use $25,000 in the first year (assuming no prior carryforward) and must treat the remainder as a carryforward subject to the same limitations.

Because the transferee inherits the historical limitations and is exposed to the underlying documentation requirements, rigorous due diligence is required to verify the initial computation, the successful pre-certification (Form K-204), and the completion of the transfer notification (Form K-260) by the transferor.

VI. Conclusion and Key Takeaways

The statutory changes effective post-2022 have revolutionized the Kansas R&D tax credit, turning it into a powerful and broadly accessible incentive. By expanding eligibility to individuals and flow-through entities, increasing the rate to 10%, and introducing transferability, Kansas has established one of the most proactive state R&D programs in the nation.

Strategic Recommendations for Individual Taxpayers

1. Mandate Proactive Pre-Certification: Given the new administrative requirement, failure to file Form K-204 prior to claiming the credit will render the credit invalid for both the generator and any potential transferee. This compliance step must be integrated into the annual tax preparation schedule.
2. Leverage the Acceleration Effect: Individuals and newly formed pass-through entities should calculate their base period carefully. The three-year averaging formula provides a substantial, accelerated benefit in the first years of operation, maximizing the creditable excess QREs.
3. Model Long-Term Tax Liability: The 25% annual utilization limit mandates that the credit be viewed as a long-term asset with an indefinite carryforward. Taxpayers must project future Kansas income to determine the optimal strategy for utilizing the credit versus monetizing it through transfer.
4. Utilize Transferability for Liquidity: For individual taxpayers whose businesses are in an R&D-intensive but pre-profit phase, the ability to transfer the full credit once provides immediate, non-taxable cash proceeds in exchange for an otherwise restricted tax asset. This serves as a vital tool for private equity injection into innovation activities.
5. Maintain Perpetual Documentation: Due to the indefinite carryforward and the potential for a credit to be transferred, all records supporting the initial calculation of QREs must be maintained beyond standard audit limitations to substantiate the credit in future utilization or transfer validation cycles.

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