The Administrative Oversight and Economic Impact of the Kansas Department of Revenue on the R&D Tax Credit

The Kansas Department of Revenue (KDOR) is the state office responsible for the administration, compliance, and enforcement of Kansas tax law, including the certification and auditing of the Research and Development (R&D) Tax Credit. This includes issuing critical procedural guidance (notices and forms) required for taxpayers to claim the 10% credit under K.S.A. §79-32,182b.1

The KDOR serves as the central administrative nexus for the Kansas R&D tax credit program, a vital income tax incentive governed by K.S.A. §79-32,182b. While the credit has been available to Kansas taxpayers since December 31, 1987 3, its scope and economic significance were dramatically expanded following legislative changes effective for tax years commencing after December 31, 2022.3 The Department’s responsibilities now encompass managing a higher-value, more broadly applicable, and newly transferable credit. This requires the KDOR to manage the entire lifecycle of the incentive, from pre-claim application and certification through compliance auditing and tracking complex utilization across tax years and between taxpayers.

The Current Regulatory Framework: Post-2022 Enhancements

The Kansas R&D credit, previously codified to provide 6.5% of excess qualified research expenditures (QREs), was significantly modernized by state law.3 The KDOR’s role in issuing interpretive guidance was critical to implementing these sweeping changes, formalizing the new structure and requirements for claiming the enhanced credit.

Key Legislative Changes and KDOR Formalization

Effective for all taxable years beginning after December 31, 2022, the state legislature passed changes that substantially increased the credit’s value and accessibility.3

1. Increased Credit Rate: The statutory rate applied to excess QREs increased from 6.5% to 10%.1 This 54% increase in incentive value was a significant policy move designed to stimulate greater private investment in research and development activities conducted within the state.4
2. Expanded Eligibility: A crucial change was the elimination of the pre-2023 restriction that limited the credit solely to C corporations subject to Kansas corporate income tax.5 Effective for 2023 and after, the credit is now available for any Kansas income taxpayer, including individuals, various flow-through entities (such as S corporations and partnerships), and C corporations.5
3. Introduction of Transferability: Perhaps the most economically impactful change was the introduction of credit transferability. Credits generated for tax year 2023 and thereafter can be transferred by a taxpayer without a current tax liability to any person for use against their Kansas income tax.3

KDOR Official Guidance: Notice 23-09

The KDOR addressed these legislative updates directly by issuing Notice 23-09 in September 2023.5 This notice serves as the Department’s primary administrative document clarifying the updated procedures, confirming the 10% rate increase, the expansion of eligibility to all income taxpayers, and detailing the rules surrounding the new credit transfer provisions.5

Conformity to Federal Standards

Kansas state law requires strong conformity with the federal R&D tax credit definition.3 The term “expenditures in research and development activities” under K.S.A. §79-32,182b is defined as expenditures that would be allowable for deduction under the provisions of the federal Internal Revenue Code of 1986, as amended.3

This conformity means that KDOR relies on the federal definition of Qualified Research Expenses (QREs) as outlined in Internal Revenue Code (IRC) Section 41.7 Specifically, activities must be intended to discover information that eliminates technical uncertainty concerning the development or improvement of a product, process, technique, formula, or invention.5 Taxpayers must ensure their research activities meet the four-part test for qualified research: Permitted Purpose, Elimination of Uncertainty, Process of Experimentation, and Technological in Nature.9

However, the state statute does impose certain Kansas-specific limitations. Critically, expenditures must be made for research and development activities conducted within this state.4 Additionally, state law explicitly excludes expenditures related to the performance of any abortion.4 The application of QREs must therefore be carefully apportioned to Kansas-based activity only, excluding non-Kansas expenses.1

Mechanics of the Kansas R&D Tax Credit Calculation

The Kansas R&D tax credit is calculated using an incremental formula known as the “excess method,” designed to reward taxpayers for increasing their R&D investment over time.

The Excess Method Formula

The calculation isolates the growth component of R&D spending by comparing the current year’s QREs to a rolling historical average. For tax years starting after December 31, 2022, the calculation utilizes the 10% rate.3

The fundamental formula is:

$$\text{Kansas R\&D Tax Credit} = 10\% \times (\text{Current Year Kansas QREs} – \text{Three-Year Average Base})$$

Determining the Base Amount: The Three-Year Rolling Average

The KDOR requires the determination of a base amount, which acts as a threshold that must be surpassed before a credit is generated. This base is calculated using a three-year rolling average.1

1. Identify QREs: The taxpayer must identify all Kansas-apportioned QREs for the current tax year (CY) and the two immediately preceding tax years (PY-1 and PY-2).1
2. Compute Average: The base amount is calculated as the simple average of these three annual QRE totals:
   
   $$\text{Base Amount} = \frac{\text{CY QREs} + \text{PY-1 QREs} + \text{PY-2 QREs}}{3}$$
3. New Taxpayer Rule: For taxpayers lacking two years of prior QRE history, the base calculation simplifies. If no prior QREs exist, the base is calculated as the current year QREs divided by three.1 This special rule ensures that, in the first year of R&D spending, only approximately 67% of current QREs are considered “excess” and thus creditable.

Credit Utilization and Carryforward Limitations

While the credit is generous, the statute imposes strict limitations on how quickly it can be used against Kansas income tax liability.4

• Annual Limitation: In any one taxable year, the amount of the credit that can be deducted from the taxpayer’s liability is capped at 25% of the total available credit.3 The total available credit includes the amount earned in the current year plus any applicable carryforward amount.3
• Indefinite Carryforward: The amount of the credit that exceeds the taxpayer’s liability, or the amount that exceeds the 25% utilization cap, may be carried forward indefinitely until the total credit is fully used.1
• Carryforward Increment: Unused credit must be applied in 25% increments annually.1 This utilization structure mandates that even large credits must be systematically utilized over several years, providing long-term incentive relief while managing the state’s fiscal exposure.

KDOR Administrative Procedures and Required Forms

The legislative changes enhancing the R&D credit, particularly the introduction of transferability, significantly altered the administrative requirements enforced by the KDOR. Taxpayers must navigate three specialized forms to ensure compliance.

Form K-204: Mandatory Pre-Certification Application

For tax years beginning after 2022, the process of claiming the R&D credit necessitates a new, preliminary administrative step: the completion and submission of Form K-204, the Research and Development Credit Application.1

This requirement represents a fundamental shift in KDOR procedure. Historically, the credit was claimed directly on the tax return (Schedule K-53) without prior application. The current application requirement is a direct response to the credit’s newfound transferability.6 By mandating pre-certification, KDOR requires validation of the calculated credit amount before the credit can be transferred and claimed by a third party. This increased upfront administrative burden allows the Department to certify the legal validity and exact monetary value of the tax credit asset before it enters the marketplace, effectively managing the integrity of the transfer process and mitigating risks to state revenue from invalid or overstated claims.

Schedule K-53: Computation and Claim

Regardless of whether the credit is eventually transferred, the taxpayer who earns the credit must calculate it using Schedule K-53, which is then submitted with the taxpayer’s annual Kansas income tax return.3

Schedule K-53 formalizes the mechanical calculation detailed in K.S.A. §79-32,182b, capturing the QREs for the current and prior two years, calculating the average base, determining the creditable excess, and applying the 10% rate. Furthermore, K-53 is used to track the application of the 25% annual utilization limitation against the current year’s tax liability and to account for any resulting carryforward balance.3

Documentation for KDOR Compliance and Audit Defense

The statutory tie to the federal IRC mandates that state R&D claims be supported by comprehensive documentation that adheres to federal standards. KDOR auditors rely heavily on the documentation underpinning the federal Form 6765.1

The complexity KDOR faces in accurately tracking and auditing tax credits, especially those related to pass-through entities with numerous owners or shareholders, has historically been noted in other incentive programs.11 Given that R&D credit eligibility was recently expanded to include these highly complex flow-through structures 5, KDOR is anticipated to implement stringent audit protocols focusing on the traceability of QREs. Taxpayers must maintain detailed records ensuring the R&D expenditures earned by the pass-through entity are accurately allocated and documented when claimed on the owners’ individual Schedule K-53 filings.

Furthermore, recent significant changes to the documentation standards for the federal R&D tax credit (Form 6765, mandatory by 2026) require far greater specificity, including providing a list of all qualified R&D business components, detailed research activities performed for each component, and descriptions of the process of experimentation.10 Since Kansas conformity requires the underlying activity and expenses to qualify federally, taxpayers should proactively adopt these stringent documentation standards now to build a robust defense against any future KDOR state audit, even if the state’s K-53 requirements currently appear less demanding.12

The Transferable Credit System and KDOR Oversight

The provision allowing the transfer of R&D credits is a powerful economic development tool that facilitates the monetization of R&D investment for pre-profit firms. This system requires meticulous administrative oversight by the KDOR to ensure compliance with statutory limits.

Conditions for Credit Transfer

The authority to transfer the credit, effective for credits earned in 2023 and thereafter, is subject to specific administrative constraints.3

• Transferor Eligibility: The transferring entity must be a taxpayer without a current tax liability.1 This restriction strategically channels the benefit of transferability toward startup and growth companies that have generated valuable credits but lack the corresponding state tax liability to utilize them immediately.
• Transfer Limitations: The law stipulates that only the full credit amount may be transferred; partial sales are strictly disallowed.1 Moreover, the credit may be transferred only one time.1
• Transferee Utilization: The buyer (transferee) claims the credit against their Kansas income tax liability in the tax year of the transfer.3 While the transferred credit can offset the transferee’s tax liability, it is explicitly non-refundable.5 Any unused portion of the transferred credit remains subject to the original utilization limitations—it must be carried forward and applied annually in increments of no more than 25% of the remaining balance.3

Form K-260: Documenting the Transfer

The KDOR administers the transfer process through Form K-260, the Kansas Tax Credit Transfer Notification Form.1

The requirement to file Form K-260 and for the transferor to submit the corresponding Schedule K-53 with their income tax return ensures that the Department maintains a clear, auditable record of the credit’s journey.3 This detailed notification process is vital for tracking the “one-time” limitation and correctly enforcing the carryforward rules on the transferee, thereby preventing the double utilization or misuse of the state incentive. The administrative structure ensures that while the credit is monetized externally, its utilization remains subject to the state’s fiscal controls.

Table of KDOR Required Forms and Functions for R&D Tax Credit

Detailed Application Example: Calculating and Utilizing the 10% Credit

The following example demonstrates the calculation mechanics required under K.S.A. §79-32,182b for a Kansas manufacturing firm (Taxpayer A), showing the determination of the credit earned and the application of the 25% annual utilization limitation for the years 2023 and 2024.

Example Scenario Data

Note: The credit rate for 2023 and 2024 is 10%.4

Year 2023 Calculation and Utilization

1. QREs: $1,000,000
2. Base Calculation (Average of 2023, 2022, 2021 QREs):
   
   $$\text{Base} = \frac{\$1,000,000 + \$600,000 + \$400,000}{3} = \$666,667$$
3. Excess QREs: $1,000,000 (QREs) – $666,667 (Base) = $333,333
4. Credit Earned (10%): 10% $\times$ $333,333 = $33,333
5. Total Available Credit: $33,333 (Current Year Credit) + $0 (Carryforward) = $33,333
6. Annual Utilization Limit (25%): 25% $\times$ $33,333 = $8,333
7. Credit Utilized: The tax liability ($25,000) exceeds the annual limit ($8,333). Therefore, the amount utilized is capped by the statutory limit. Utilized = $8,333
8. Carryforward: $33,333 (Available) – $8,333 (Utilized) = $25,000

Year 2024 Calculation and Utilization

1. QREs: $1,200,000
2. Base Calculation (Average of 2024, 2023, 2022 QREs):
   
   $$\text{Base} = \frac{\$1,200,000 + \$1,000,000 + \$600,000}{3} = \$933,333$$
3. Excess QREs: $1,200,000 (QREs) – $933,333 (Base) = $266,667
4. Credit Earned (10%): 10% $\times$ $266,667 = $26,667
5. Total Available Credit: $26,667 (Current Year Credit) + $25,000 (Carryforward from 2023) = $51,667
6. Annual Utilization Limit (25%): 25% $\times$ $51,667 = $12,917
7. Credit Utilized: The tax liability ($30,000) exceeds the annual limit ($12,917). The amount utilized is capped by the statutory limit. Utilized = $12,917
8. Carryforward: $51,667 (Available) – $12,917 (Utilized) = $38,750

The process demonstrates that even with significant R&D growth and corresponding credit generation, the KDOR-enforced 25% annual utilization cap ensures that the benefit is spread over time, requiring consistent tracking of the indefinite carryforward balance.

Modeling Kansas R&D Credit Utilization and Carryforward

Strategic Business Takeaways and Conclusion

The Kansas Department of Revenue’s administration of the R&D Tax Credit is essential for translating legislative intent into tangible economic benefits. The KDOR’s updated procedures reflect the state’s strategic intent to enhance the program’s competitiveness, particularly through the monetization of credits via transferability.1

Monetization and Cash Flow Generation

The most powerful administrative change implemented by the KDOR is the framework for transferable credits. By requiring Form K-204 for certification and Form K-260 for transfer notification, the KDOR has created a mechanism that allows high-growth, innovation-focused firms—which frequently operate at a loss and cannot use tax offsets immediately—to sell their full credit amount once to a profitable Kansas taxpayer.1 This structure provides immediate cash flow, fundamentally changing the nature of the credit from a deferred liability offset to a current capital asset. This is a critical component for driving investment in Kansas’s manufacturing and technology sectors.1

Enhanced Compliance Planning

The KDOR’s administrative requirements necessitate a proactive approach to compliance. The shift to mandatory K-204 pre-certification means taxpayers must finalize their QRE calculation and documentation earlier in the tax cycle than in prior years.6

Furthermore, the statutory alignment with IRC Section 41 means that the KDOR’s audit capabilities are implicitly supported by federal documentation standards. As the IRS introduces more granular reporting requirements on Form 6765—demanding specific details on business components, research activities, and experimentation—taxpayers must prepare their state-level documentation to meet this rigorous federal threshold.12 Failure to maintain this comprehensive, federal-level detail, even when only filing state Schedule K-53, significantly increases the risk of credit disallowance during a KDOR audit, as Kansas law requires federal eligibility for the underlying expenses.3

Conclusion

The Kansas Department of Revenue plays a proactive and expanded role in facilitating the state’s R&D ecosystem. By formalizing the 10% credit rate, expanding eligibility to flow-through entities, and administrating the transferability provisions through Forms K-204, K-53, and K-260, the KDOR ensures the integrity and effectiveness of K.S.A. §79-32,182b. For businesses, mastering the mechanics of the incremental three-year average calculation and meticulously adhering to the 25% annual utilization limitation—especially when coupled with the stringent new documentation requirements necessary for audit defense—is essential to maximizing this valuable, indefinitely carried forward tax incentive. The KDOR’s structure successfully balances the goals of fostering innovation through generous incentives with the necessity of maintaining state fiscal accountability through procedural control and long-term utilization limits.

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