Strategic Analysis: Defining Kansas Taxable Income and Maximizing the Enhanced Research and Development (R&D) Tax Credit (K.S.A. 79-32,182b)

I. Executive Summary: The Strategic Value of Kansas R&D Incentives

Kansas Taxable Income (KTI) is the portion of a taxpayer’s adjusted gross income or net corporate income that is subject to state taxation in Kansas. For multi-state corporations, KTI is derived by taking federal taxable income, applying specific state modifications, and then apportioning that income based on the percentage of business activity conducted within Kansas.

The Kansas Research and Development (R&D) Tax Credit, codified under K.S.A. 79-32,182b, offers substantial dollar-for-dollar reductions in a taxpayer’s state income tax liability.1 Effective for tax years commencing after December 31, 2022, recent legislative action significantly enhanced the program, notably by increasing the credit rate from 6.5% to 10% of qualifying expenditures.2 Additionally, the state expanded eligibility beyond C corporations to include all Kansas income taxpayers—such as individuals, partnerships, S corporations, and limited liability companies—and introduced a crucial provision allowing taxpayers without a current tax liability to transfer the credit to another party.5

This report examines the definition and calculation of KTI, which establishes the state income tax liability, against which the non-refundable R&D credit is claimed. Understanding KTI and the rigorous annual utilization limit (the 25% rule) is crucial for maximizing the financial benefit of the credit and navigating the multi-step compliance process mandated by the Kansas Department of Revenue (KDR).

II. Foundation of State Liability: Defining Kansas Taxable Income (KTI)

A. Detailed Determination of Corporate Kansas Taxable Income

The determination of a corporate taxpayer’s Kansas Taxable Income (KTI) begins with the federal taxable income (FTI), which is then subject to Kansas-specific additions and subtractions. For companies operating across state lines, the calculation culminates in the mandatory application of an apportionment formula to ensure only income fairly attributable to Kansas operations is taxed.

The corporate income tax calculation involves multiplying the apportioned net income by the corporate tax rate.7 Notably, any net income exceeding $50,000 is subject to a three (3) percent surtax.7 The ability of a taxpayer to utilize the non-refundable R&D tax credit is directly linked to the magnitude of the resulting tax liability imposed on KTI. A robust KTI is necessary to absorb the credit efficiently, particularly given the annual utilization restrictions.

B. Apportionment for Multi-State Operations: The Three-Factor Formula

For corporations deriving income from business activities both inside and outside Kansas, net income must be assigned to the state using an apportionment formula.7 Kansas statute dictates an equally weighted three-factor apportionment formula:

1. Property Factor: The proportion of the corporation’s property located in Kansas.
2. Payroll Factor: The proportion of the corporation’s total payroll paid to employees in Kansas.
3. Sales Factor: The proportion of the corporation’s total sales sourced to Kansas.7

The calculation averages these factors: the percentages calculated for the three factors are added together, and the result is divided by three to yield an average percentage.7 This average percentage is then multiplied by the total apportionable income to determine the Kansas net income, which constitutes KTI.7

A strategic exception exists under state law that permits corporations to opt for a two-factor (sales and property) apportionment formula when calculating tax liability, provided the payroll factor for a taxable year exceeds 200 percent of the average of the property and sales factors.7 This specialized opt-out can offer significant advantages to certain labor-intensive companies, potentially minimizing their KTI if sales and property factors within Kansas are relatively low. The consistent calculation of KTI is foundational because the R&D credit is applied strictly against the resulting Kansas income tax liability.2

C. KTI Context for Pass-Through Entities

The expansion of R&D credit eligibility starting in 2023 to include individuals, S corporations, partnerships, and limited liability companies required the integration of the credit mechanism with individual and pass-through taxation rules.5 For these entities, the R&D credit is generally calculated at the entity level but flows through to the owners. The utilization of the credit by the owner then depends on their individual Kansas income tax liability, which is derived from their share of the entity’s Kansas-sourced income (KTI), typically reported on Schedule K-1.6

III. The Enhanced Kansas R&D Tax Credit Program (Post-2022)

The Kansas Research and Development Credit is a primary tool for encouraging technological advancement and innovation within the state.4

A. Key Statutory Changes and Eligibility Expansion

House Bill 2239, enacted in 2022 and effective for tax years beginning after December 31, 2022, introduced critical changes that fundamentally altered the landscape of the Kansas R&D credit.2

1. Increased Credit Percentage: The credit amount was raised from 6.5% to a competitive 10% of the qualifying excess R&D expenditures.2
2. Expanded Taxpayer Eligibility: The credit is now available to any Kansas income taxpayer, removing the previous restriction that primarily limited the claim to C corporations. This expansion allows individuals, partnerships, S corporations, and LLCs to utilize the credit.5
3. Credit Transferability: New credits generated are now transferable by a taxpayer without a current tax liability to any person, which can then be claimed by the transferee.2 This modification creates a monetization pathway for businesses that are not yet profitable but are investing heavily in innovation.

B. Defining Qualified Research Expenditures (QREs)

The determination of eligible expenditures adheres closely to federal standards. The term “expenditures in research and development activities” means expenses allowable for deduction under the provisions of the federal Internal Revenue Code of 1986.2 This mandates that qualifying activities meet the rigorous requirements defined under IRC Section 41.

A critical state-specific limitation is that the expenditures must be made for research and development activities conducted within this state.2 Consequently, multi-state taxpayers must meticulously allocate or apportion their total QREs (including wages, supplies, and contract research expenses) specifically to Kansas to determine the basis for the state credit claim.

IV. Mechanical Calculation of the Incremental R&D Credit

Kansas utilizes an incremental approach, meaning the credit is calculated based on R&D spending that exceeds a historical base amount. This structure incentivizes increasing annual research investment.

A. The Three-Year Average Methodology

The core of the calculation is governed by K.S.A. 79-32,182b(a), which defines the credit as 10% of the amount by which the expenditures in the current taxable year exceed the taxpayer’s average of the actual expenditures for such purposes made in the current taxable year and the next preceding two taxable years.2

The Base Amount is calculated by taking the sum of Kansas QREs for the current year, the first preceding tax year, and the second preceding tax year, and dividing the total by three.9 This mechanism is detailed on Schedule K-53, Part A.

Table 1: R&D Credit Calculation Formula (Post-2022)

The inclusion of the current year’s QREs in the three-year average base creates a complex moving target for the taxpayer. For a company’s creditable excess to remain stable or increase, R&D spending must consistently grow faster than the average. If QRE spending stabilizes or plateaus, the base amount will continue to rise over time, eventually diminishing or eliminating the creditable excess amount. This structure is intended to reward continuous growth in research spending.

V. Compliance and KDR Guidance: A Three-Form Process

The transferability provision, effective for 2023 and subsequent years, necessitated the creation of a formal application process by the KDR, detailed in notices such as Notice 23-09.5 Taxpayers must now adhere to a three-form process to generate, claim, and, if applicable, transfer the credit.

A. Mandatory Application Requirement: Form K-204

For tax years beginning in 2023 and thereafter, taxpayers wishing to claim or transfer the credit must first complete and submit Form K-204, the Research and Development Credit Application, prior to claiming the credit on their return.4 This application requirement ensures the KDR validates the generated credit amount before any transfer or utilization takes place, a necessary procedural safeguard given the credit’s new status as a transferable asset.5

B. Claiming the Credit: Schedule K-53

Schedule K-53, Kansas Research and Development Credit, must be completed and submitted with the taxpayer’s annual income tax return.3 This form documents the step-by-step calculation of the gross credit generated (Part A) and determines the allowable credit utilized in the current year and the resulting carryforward amount (Parts B, C, and D).12 If a taxpayer transfers the credit, the transferor must still complete Part A of K-53 to establish the generated credit amount and provide this information to the transferee.9

C. Documentation of Transfer: Form K-260

If the generated credit is transferred, the transaction must be documented using Form K-260, the Kansas Tax Credit Transfer Notification Form.4 This notification ensures the KDR is aware of the change in ownership of the tax asset and facilitates the transferee’s subsequent claim.

VI. Credit Utilization and Strategic Limitations

The annual utilization of the generated R&D credit is constrained by two factors: the taxpayer’s Kansas tax liability and the statutory annual limitation rule.

A. The Critical 25% Annual Limitation Rule

The credit is non-refundable, meaning it can only offset income tax liability and cannot generate a tax refund.10 Furthermore, K.S.A. 79-32,182b(b) imposes a strict annual limit on the claimable amount: the amount of credit allowable for deduction in any one taxable year shall not exceed 25% of the total amount of such credit plus any applicable carry forward amount.2

This 25% cap fundamentally dictates the monetization speed of the credit. A taxpayer with sufficient KTI liability must, at a minimum, spread the usage of any newly generated credit over four separate tax periods.13 Schedule K-53 incorporates this limit by requiring the allowable credit to be the lesser of (1) the calculated maximum 25% (Line 7) or (2) the actual Kansas tax liability remaining after all other credits (Line 11).12

B. Indefinite Carryforward Provisions

Any amount of the generated credit that is unused due to either the 25% limitation or insufficient tax liability may be carried forward indefinitely until the total credit is fully utilized.2 The credit is carried forward in 25% increments.11 This indefinite carryforward provision mitigates the negative impact of the slow utilization pace imposed by the 25% cap by preserving the full value of the credit over time.

Table 2: R&D Credit Utilization Mechanics and Limitations

VII. Case Study: Multi-Year Application and Management of the R&D Credit

This example illustrates how a multi-state company calculates the credit based on the incremental method and how the 25% annual limitation controls utilization against a fixed KTI liability.

A. Scenario Parameters: KS Innovate Corp

KS Innovate Corp, a C-Corporation, is a multi-state manufacturer. The company generates annual Federal Taxable Income of $5,000,000. Through the Kansas three-factor apportionment formula (property, payroll, and sales), 15% of this income is attributed to Kansas, resulting in a Kansas Taxable Income (KTI) of $750,000. Based on KTI, the company’s annual pre-credit Kansas income tax liability is estimated at $45,000.

The company’s historical and projected Kansas QREs are:

• Year 2021 (Prior Year 2): $500,000
• Year 2022 (Prior Year 1): $650,000
• Year 2023 (Current Year 1): $1,200,000
• Year 2024 (Current Year 2): $1,500,000
• Year 2025 (Current Year 3): $1,800,000

B. Calculation of Generated Credit (2023–2025)

The calculation uses the 10% rate effective from 2023 onwards.

Table 3: Multi-Year R&D Credit Generation (10% Rate)

The calculation demonstrates that even with consistently increasing QREs (from $1.2M to $1.8M), the creditable excess begins to decline over time ($416,667 to $300,000) because the three-year average base increases rapidly, requiring ever-greater acceleration of R&D spending to maintain the credit level.

C. Utilization Against Tax Liability and Carryforward

Despite the high tax liability of $45,000 in each year, utilization is constrained entirely by the 25% rule, forcing a substantial carryforward.

Table 4: R&D Credit Utilization and Carryforward Management

In 2023, KS Innovate Corp generated $41,667 in credit but was only permitted to use $10,417 (25% of the total available credit), delaying the financial benefit of the remaining $31,250. This pattern illustrates that even large corporations with significant KTI must plan for the delayed monetization of their R&D credit, which is spread out across at least four years under the 25% utilization cap.

VIII. Transferability: Monetizing Credits Without Current Tax Liability

The provision allowing for the transfer of R&D credits is a powerful strategic addition designed to provide immediate value to innovative companies, especially those without the current profitability to utilize non-refundable tax assets.

A. Conditions and Process for Transfer

For tax years 2023 and thereafter, new R&D credits can be transferred by a taxpayer who does not have a current tax liability.2 This flexibility supports start-ups and high-growth technology companies that are likely operating at a loss while making significant R&D investments.

Strict rules govern the transfer process:

1. Full Transfer Required: Only the full credit amount generated may be transferred; partial transfers are prohibited.3
2. Single Transfer: The credit may be transferred only once.3
3. No Refund for Transferee: While the credit can offset the transferee’s tax liability, no refund is available to the transferee.10

The transferor must follow the KDR compliance pathway by submitting the K-204 Application and Schedule K-53 (documenting generation).5 The actual transfer is formalized using Form K-260, the Kansas Tax Credit Transfer Notification Form, which must be submitted to the KDR.4

B. Requirements for the Transferee and Strategic Implications

The transferee (the purchaser of the credit) must claim the credit against their own Kansas income tax liability in the year it was transferred.2 Critically, the transferee inherits the tax asset subject to all original limitations and requirements, including the mandatory 25% annual utilization limit.3

The transferability provision fundamentally alters the liquidity of the credit. By selling the credit (typically at a discounted rate), a company without tax liability transforms a long-term, illiquid tax asset into immediate cash flow. This immediate cash injection supports continued R&D investment and mitigates the financial strain caused by the indefinite carryforward period required by the 25% utilization cap for the generating taxpayer.

IX. Conclusion and Actionable Recommendations

The Kansas R&D Tax Credit is a vital component of the state’s economic development strategy, particularly following the 2023 program enhancements. Successful utilization requires a meticulous understanding of KTI determination and the application of utilization caps.

Nuanced Conclusions

1. KTI as the Limiting Factor: For multi-state businesses, the effectiveness of the non-refundable R&D credit is dictated by the magnitude of their Kansas Taxable Income and subsequent state tax liability. Strategic application of the equally weighted three-factor apportionment formula is necessary to maximize KTI and, consequently, the capacity to absorb the credit annually.7
2. Compliance is Front-Loaded: The KDR now mandates a formal application (Form K-204) before any credit can be claimed or transferred, signaling heightened state monitoring of the generated credit base.4 This application, combined with Schedule K-53 (calculation) and Form K-260 (transfer documentation), establishes a robust, necessary three-form compliance structure.
3. Delayed Monetization of Internal Credit Usage: The 25% annual utilization cap ensures that the full value of the R&D credit must be realized over a minimum of four years. Taxpayers with large credits and high tax liabilities must incorporate the indefinite carryforward provision into long-term financial forecasts, understanding that the Net Present Value of the generated credit is impacted by this delayed monetization.2

Actionable Recommendations

1. Optimize Apportionment: Corporations should regularly review their property, payroll, and sales factors to ensure KTI is accurately and strategically apportioned to Kansas, optimizing the tax base available for offset by the R&D credit.
2. Establish QRE Documentation: Implement robust internal accounting systems that clearly distinguish Kansas-sourced QREs (wages, supplies, contract research) in conformity with IRC §41 standards, essential for completing Schedule K-53.2
3. Develop a Transfer Strategy: Businesses, especially pass-through entities and newly formed corporations that anticipate operating at a net loss, should factor the credit transferability mechanism into their financing models. Selling the credit via Form K-260 offers immediate cash realization, providing superior liquidity compared to indefinite carryforward, even after factoring in a market discount.1

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/