Comprehensive Analysis of Partnership Eligibility for the Kansas Research and Development (R&D) Tax Credit (Post-2022)
The Kansas Research and Development (R&D) tax credit underwent a significant legislative overhaul for tax years beginning after December 31, 2022, expanding eligibility to include partnerships and pass-through entities. This transformation increased the credit rate to 10% and introduced full transferability, fundamentally altering the calculus for R&D-intensive businesses in the state.
I. Executive Overview: The Post-2022 Kansas R&D Credit for Pass-Through Entities
The Kansas R&D tax credit (K.S.A. 79-32,182b) is now available to partnerships and other flow-through entities, providing a significant 10% credit on qualified research expenditures that exceed a rolling three-year historical base.
This statutory modification has positioned the R&D incentive as a critical economic development tool, allowing these newly eligible entities to either reduce their partners’ Kansas tax liabilities or monetize the full credit through a one-time transfer.
A. The Strategic Significance of Expanded Eligibility and Rate Increase
The pre-2023 version of the Kansas R&D credit was limited exclusively to C corporations, severely restricting its utility for the vast majority of Kansas’s entrepreneurial and high-growth sectors, which are predominantly structured as partnerships, S corporations, or Limited Liability Companies (LLCs). House Bill 2239 (HB 2239), enacted in 2022, systematically addressed this barrier, effective for all taxable years commencing after December 31, 2022.1
This legislative shift transformed the program in two crucial ways:
- Expanded Eligibility: The credit is now available to “any Kansas income taxpayer,” explicitly including partnerships, S corporations, LLCs, individuals, and C corporations.2
- Increased Value: The credit rate was substantially increased from 6.5% to 10% of the difference between the current year’s qualified research and development expenditures (QREs) and the average of the current year and the two preceding tax years.4 This 3.5-percentage-point increase represents a considerable enhancement in the monetary incentive for maintaining or accelerating research investment within Kansas.
By incorporating partnerships and other pass-through entities (PTEs), the state broadened the scope of the incentive from a targeted corporate benefit to a comprehensive economic policy mechanism designed to stimulate innovation across the entire business landscape, including small and mid-sized enterprises.
B. Key Enhancements: Rate Increase and Transferability
The updated statute introduced several interlocking provisions that dictate how partnerships must manage the credit.
| Feature | Prior Law (Pre-2023) | Current Law (Post-2022) |
| Eligible Entities | C Corporations only | All Kansas Income Taxpayers (Including Partnerships, S-Corps, LLCs) |
| Credit Rate | 6.5% of Excess QREs | 10% of Excess QREs |
| Credit Transferability | Not Transferable | Fully Transferable (One time) if the generating entity has no current tax liability |
| Mandatory Application | Not Required | Form K-204 Application Required for Certification |
II. Statutory Foundation and Post-2022 Legislative Transformation (K.S.A. 79-32,182b)
The operative legal framework for the Kansas R&D tax credit is K.S.A. 79-32,182b, as modified by HB 2239. This statute governs the qualification, calculation, and utilization of the credit.
A. The Legislative Context: House Bill 2239
HB 2239 was specifically designed to overcome historical limitations related to entity structure and credit illiquidity. The introduction of transferability, in conjunction with expanded eligibility, was intended to ensure that businesses that generate substantial R&D credits, particularly early-stage partnerships or startups that often have high QREs but low or no current state tax liability, could immediately realize the economic benefit of the credit.5
B. Defining Qualified Expenditures: Adherence to IRC §41
The definition of qualifying expenses for the Kansas credit maintains a strict adherence to federal standards. As defined in K.S.A. 79-32,182b(c), “expenditures in research and development activities” are those expenses allowable for deduction under the provisions of the federal Internal Revenue Code of 1986, as amended.2 This linkage is foundational and critically important for compliance.
This means that Kansas QREs must satisfy the same criteria used for the federal R&D tax credit (IRC §41), focusing on costs such as in-state wages for qualified research, supplies used in the research process, and payments for contracted research performed within Kansas. For partnerships, this federal linkage mandates rigorous documentation of QREs according to federal methodologies, ensuring consistency during state audits and upholding the integrity of the claimed expenditure base.
C. The Limitation on Utilization and Indefinite Carryforward
The credit is subject to specific limits on annual utilization, balanced by a generous carryforward provision.7
1. The Annual Utilization Cap
In any one taxable year, the amount of the credit that may be deducted from the taxpayer’s Kansas income tax liability is capped at 25% of the total amount of the generated credit, plus any applicable carryforward amount.2 This annual cap serves as a mechanism to pace the utilization of the tax benefit, spreading its impact over multiple years. For highly profitable partners, this structure requires managing the tax benefit as a long-term asset.
2. Indefinite Carryforward
Any amount of the credit that remains unused because it exceeds the taxpayer’s current tax liability or the 25% annual utilization cap may be carried forward indefinitely until the total amount of the credit is used.2
The indefinite carryforward period, when combined with the 25% annual utilization rule, necessitates robust and perpetual record-keeping. The partnership must ensure that its partners track the specific vintage of the credit (the year it was earned) for potentially decades. This is crucial because carried-forward credits remain subject to the limitations and requirements that were in place at the time the credit was originally earned.2 This principle ensures consistency in application, even if future Kansas tax laws introduce different caps or restrictions.
III. Nuanced Eligibility: Defining the Partnership Taxpayer
The inclusion of partnerships fundamentally shifts the compliance responsibility, requiring a clear understanding of the difference between credit generation (at the entity level) and credit claiming (at the partner level).
A. The Removal of the C-Corporation Limitation
K.S.A. 79-32,182b(d), as amended, explicitly removed the previous limitation that allowed only C corporations to claim the credit.1 For tax year 2023 and all subsequent years, any entity subject to Kansas income tax may claim the credit, including individuals, S corporations, limited liability companies, and, specifically, partnerships.2
B. Flow-Through Mechanics: Generation and Allocation
For flow-through entities such as partnerships and LLCs, the operational mechanic involves a two-step process:
- Credit Generation: The partnership, based on its aggregated in-state QREs, is the entity that calculates and generates the total Kansas R&D tax credit liability. The partnership must complete the calculation (as detailed in Section IV) and apply for certification (Form K-204, as detailed in Section V).
- Credit Allocation and Claiming: Once certified, the generated credit flows through to the partners. The distribution to the individual partners/members must be based on their respective distributive shares of income or losses, as defined by the partnership or LLC operating agreement. The partners then claim their allocated portion of the credit on their individual Kansas income tax return (Form K-40).2
This flow-through mechanism introduces administrative complexity for the KDOR, which must verify the correct allocation of the credit among various owners, particularly in scenarios involving mid-year ownership changes or complex special allocations. Therefore, the partnership must provide detailed supporting statements for each partner’s Schedule K-1, accurately documenting the credit allocation and any remaining carryforward amounts specific to that individual partner.
C. Taxpayer Status and Transfer Eligibility Considerations
The statute allows the credit to be transferred by a taxpayer without a current tax liability.6 Given that partnerships are generally pass-through entities and do not pay income tax themselves (though some may participate in elective PTE taxes), the interpretation often centers on the entity’s ability to utilize the credit itself, or the partner’s eligibility to claim it.
If a partnership chooses to transfer the credit (as opposed to allocating it), the partnership must confirm its status as one without a current tax liability. The decision to transfer the credit must be made at the entity level, as only the full credit generated by the partnership can be transferred, which restricts the partnership’s flexibility if some partners wish to claim their portion while others wish to monetize it.
IV. Determining the Credit Base: The Kansas QRE Methodology
The calculation of the Kansas R&D credit is based on an incremental formula designed to reward the growth in research expenditures above an established historical norm.
A. The 10% Rate Calculation (Post-2022)
For tax years commencing after December 31, 2022, the credit is equal to 10% of the amount by which the current year’s qualified expenditures exceed the calculated historical base amount.6
The calculation is expressed as follows:
$$Credit\ Amount = 10\% \times (QRE_{Current\ Year} – QRE_{Average\ Base})$$
B. Formulaic Requirement: The Three-Year Averaging Period
The average base is calculated by taking the arithmetic average of the actual QREs expended during the current taxable year and the two immediately preceding taxable years.2 It is paramount that these QREs are strictly limited to those expenditures incurred for research and development activities conducted within this state.6
The mathematical determination of the average base is:
$$QRE_{Average\ Base} = \frac{QRE_{Current\ Year} + QRE_{Year-1} + QRE_{Year-2}}{3}$$
C. Special Rules for New Partnerships and Transition Mechanics
1. New Entity Calculation
For partnerships or entities that have not been in existence for the full three-year period, or if they had no QREs in the preceding two years, the methodology requires averaging the available QRE data. If a partnership has no QREs in the prior two years, the base amount is calculated by dividing the current year QREs by three.7
This methodology provides a substantial incentive for new research-intensive businesses to locate and invest in Kansas. By imposing a base that is effectively only one-third of current spending, approximately two-thirds of the current QREs qualify as excess expenditures, generating a higher initial credit compared to jurisdictions utilizing more restrictive historical fixed-base percentage methods.7
2. The Compliance Challenge of Base Period Documentation
A significant compliance requirement arises during the transition period. To calculate the 2023 credit base, a partnership must determine its “actual expenditures” for 2021 and 2022.6 Since partnerships were not eligible to claim the credit in those prior years, they may not have maintained the detailed, Kansas-apportioned QRE documentation necessary for the calculation. To achieve compliance for the 2023 claim, established partnerships must retroactively calculate and document their Kansas-specific QREs for 2021 and 2022, even though those years yielded no tax credit benefit.
V. KDOR Compliance, Forms, and Procedural Guidance
The Kansas Department of Revenue (KDOR) guidance, particularly Notice 23-09, outlines the new procedural requirements necessitated by the credit’s transferability.1
A. Integrating Kansas Revenue Notice 23-09 Guidance
Notice 23-09, issued on September 6, 2023, confirmed that the increase in the credit rate to 10%, the expansion of eligibility to include pass-through entities, and the introduction of transferability were effective for tax year 2023 and thereafter.1 This notice guides taxpayers through the mandatory steps required to certify and claim the credit.
B. Mandatory Step: Form K-204 Research and Development Credit Application
A critical change for post-2022 claims is the introduction of a mandatory pre-certification requirement. Unlike previous years, taxpayers must complete and submit Form K-204, the Research and Development Credit Application, prior to claiming or transferring the credit.1
The requirement to file Form K-204 is directly linked to the credit’s new transferability feature. By requiring the generating entity (the partnership) to certify the credit amount before it is allocated or monetized, the KDOR ensures the integrity and validated existence of the tax asset, protecting both the state and any subsequent transferee. The process sequence is therefore mandatory: certification via K-204 must precede allocation or transfer.
C. Claiming the Credit: Schedule K-53 Instructions
The claim for the R&D credit is executed using Schedule K-53, Research and Development Credit.2
1. Flow-Through Claim Procedures
The individual partner, member, or shareholder is the ultimate claimant of the allocated credit. On Schedule K-53, the claimant must provide the name and Employer Identification Number (EIN) of the generating entity (the partnership or LLC).2
The partner is responsible for managing the utilization of the allocated credit, specifically navigating the 25% annual limitation (detailed on Part D of K-53, Carry Forward Summary) and tracking the indefinite carryforward amounts against their individual Kansas income tax liability.
D. KDOR Compliance Roadmap for Partnerships (Post-2022)
The following forms are essential for managing the R&D credit compliance process for a partnership or LLC:
KDOR Required Forms for R&D Credit Compliance
| Form Number | Form Name | Purpose for Partnership/Partner | Entity Filing |
| K-204 | R&D Credit Application | Mandatory pre-certification of the generated credit amount. | Generating Partnership/PTE |
| K-53 | R&D Credit Schedule | Used by the ultimate claimant (Partner or Transferee) to calculate the allowable 25% portion on their personal return. | Partner or Transferee |
| K-260 | Tax Credit Transfer Notification | Required documentation submitted to KDOR upon official transfer of the credit. | Transferor and Transferee |
VI. The Mechanism of Credit Transferability for Partnerships
For growth-stage partnerships that often prioritize reinvestment and may not have immediate Kansas tax liabilities, the transferability of the R&D credit offers a vital avenue for monetization.7
A. Eligibility and Timing of Transfer
The law stipulates that the income tax credit shall be transferable by a taxpayer without a current tax liability.6 If the partnership meets this criterion, it may transfer the credit. The transaction can occur prior to the credit being claimed by the original taxpayer.1
The credit may be transferred to any person, who can then claim it against their Kansas income tax liability.6 This facilitates an active market for the tax asset, providing non-dilutive capital to the generating entity.
B. Rules Governing the Transfer
The following strict rules govern the transfer of the credit, which is mandatory for maintaining compliance:
- Full Credit Requirement: A partnership electing to monetize the credit may only transfer the full amount of the credit generated in the tax year. Partial transfers of the generated credit are not permitted.3 This rule forces a strategic decision: the partnership must choose between transferring the entire certified credit or allocating the entire certified credit to its partners.
- One-Time Transfer: The credit can be transferred only one time. Once acquired by the transferee, it must be utilized by that entity and cannot be re-transferred.3
- Non-Refundability: Transferred tax credits are explicitly non-refundable. Any excess credit retained by the transferee after applying the 25% annual limitation must be carried forward; no cash refund is available for the unused portion.3
C. Documentation: Form K-260 and Transferee Implications
The formal transfer of the credit must be documented using Form K-260, the Kansas Tax Credit Transfer Notification Form, which is submitted to the KDOR.2
The transferee claims the acquired credit using Schedule K-53 (Part B). The transferee becomes subject to the same 25% annual utilization cap and indefinite carryforward period that applied to the credit when it was originally earned by the partnership.2
The non-refundability and utilization caps inherently affect the market value of the credit. Buyers in the secondary market must factor in the time value of money, as a transferred credit must be utilized over a minimum of four years (due to the 25% cap), resulting in the credit typically trading at a discount to face value.
VII. Illustrative Case Study: Partnership R&D Credit Generation and Claim
This example demonstrates the calculation, allocation, and utilization tracking required of a Kansas partnership.
A. Scenario Setup: Research Partnership (RP, LLC)
- Entity Type: RP, LLC (taxed as a partnership, commenced R&D activities in 2021).
- Ownership Structure: Partner A (60% interest) and Partner B (40% interest).
- Tax Year: 2023.
| Metric | Year -2 (2021 QREs) | Year -1 (2022 QREs) | Current Year (2023 QREs) |
| Kansas QREs Expended | $400,000 | $500,000 | $1,000,000 |
1. Credit Generation Calculation (RP, LLC Entity Level)
The partnership first calculates the base and the total generated credit:
| Calculation Step | Value | Rationale |
| 1. Total 3-Year QREs | $1,900,000 | ($400,000 + $500,000 + $1,000,000) 7 |
| 2. Average Base (Step 1 / 3) | $633,333 | Required by K.S.A. 79-32,182b(a) 6 |
| 3. Excess QREs | $366,667 | ($1,000,000 – $633,333) |
| 4. Generated Credit (10% of Step 3) | $36,667 | The total certified credit amount 7 |
B. Allocation Decision and Annual Utilization
RP, LLC decides to allocate the $36,667 credit to its partners based on their ownership interests rather than transferring the full amount.
| Metric | Partner A (60%) | Partner B (40%) |
| 1. 2023 Allocated Credit | $22,000 | $14,667 |
| 2. Maximum 2023 Claim (25% Limit) | $5,500 | $3,667 |
| 3. Actual 2023 Claim (If Tax Liability Exists) | $5,500 | $3,667 |
| 4. 2023 Credit Carryforward (Unused) | $16,500 | $11,000 |
C. Analysis of the Partner Utilization
Both partners can utilize a maximum of 25% of their allocated credit in the current year, assuming their individual Kansas income tax liability is sufficient to absorb that amount.
The 25% cap mandates that Partner A will carry forward $16,500 and Partner B will carry forward $11,000. These amounts are subject to the indefinite carryforward provision. Each year, the partner can claim 25% of their original allocated amount until the total credit is depleted.
If, however, Partner B has minimal Kansas tax liability, their allocated credit effectively becomes a “stranded tax asset.” Because only the full generated credit may be transferred at the entity level, the partnership’s decision to allocate means Partner B cannot individually sell their $14,667 share. This underscores the critical nature of the partnership’s decision: whether to monetize the credit upfront via transfer or distribute it to partners who must then manage long-term utilization individually.
VIII. Conclusion and Strategic Implications
The post-2022 amendments to K.S.A. 79-32,182b have successfully positioned the Kansas R&D tax credit as a powerful and flexible incentive for partnerships and other pass-through entities. The combination of a generous 10% rate and the introduction of credit transferability marks a definitive move toward supporting early-stage and high-growth innovation across the state’s economy.
A. Compliance and Documentation Requirements
For partnerships, navigating the new R&D credit landscape requires stringent adherence to procedural requirements:
- Mandatory Pre-Certification: The requirement to file Form K-204 is essential for establishing the validity and certified amount of the credit, especially if the partnership anticipates a transfer.
- Base Period Documentation: Partnerships must ensure they can substantiate the QRE figures used for the two preceding tax years (Year -1 and Year -2), which form the denominator of the base calculation, even if the entity was previously ineligible to claim the credit. This retroactive quantification of Kansas-apportioned QREs is a necessary foundation for the current claim.
- Strategic Decision Point: Partnerships must proactively determine whether allocation to partners or full transfer is the optimal financial strategy, given that the “full credit only” rule restricts the ability to mix these two options.
- Partner-Level Tracking: Due to the indefinite carryforward and the 25% annual limitation, partnerships must provide exhaustive supporting documentation alongside K-1s to enable partners to accurately track the vintage and remaining balance of their allocated credits against their individual Kansas tax liability over time.
B. Economic Value of Transferability
For R&D-intensive partnerships that are currently in a tax loss or low-profit position, the transferability provision allows for the immediate conversion of a state tax asset into working capital. Although the credit’s value is discounted in the secondary market due to the non-refundability and the 25% annual utilization cap, this liquidity option provides critical support for continued research investment without reliance on equity financing. The ability to realize economic benefit instantly makes the Kansas R&D credit highly competitive among state tax incentives.
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What is the R&D Tax Credit?
The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.
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