Qualified Research Expenses (QREs): Defining and Maximizing the Kansas Research and Development Tax Credit

Qualified Research Expenses (QREs) are the direct costs—primarily wages, supplies, and contract research fees—incurred during a taxpayer’s technical development process aimed at creating or improving a product, process, or software. In Kansas, QREs serve as the crucial starting point for the state’s Research and Development (R&D) tax credit, requiring strict adherence to federal tax law (IRC §41) while the final credit calculation is based on an incremental growth formula.1

The Kansas R&D tax credit, governed by K.S.A. 79-32,182b, represents a significant financial incentive designed to reward investment in innovative activities conducted within the state.1 The foundation of this state credit rests entirely on the meticulous identification and documentation of QREs that comply with the requirements set forth in the Internal Revenue Code (IRC) Section 41. Effective for tax years beginning after December 31, 2022, the state program was substantially modernized, featuring an increase in the credit rate from 6.5% to 10% and the introduction of credit transferability, dramatically enhancing its strategic value for all eligible Kansas income taxpayers.1 Understanding this dual system—federal definition compliance coupled with a state-specific incremental calculation—is essential for maximizing credit utilization and ensuring regulatory compliance.

The Federal Foundation: Defining Qualified Research Expenses (QREs) under IRC Section 41

The Kansas statute establishes a direct reliance on the federal definition of qualified research expenditures, making compliance with the Internal Revenue Code Section 41 the initial and most critical hurdle for any state claim.1

The Statutory Components of QREs

The term “qualified research expenses” is defined as the sum of in-house research expenses and contract research expenses that are paid or incurred by the taxpayer during the taxable year in carrying on any trade or business.3

In-House Research Expenses

These expenses are fully includable (100%) as QREs:

1. Wages: Wages paid or incurred to an employee for “qualified services” performed by that employee qualify for inclusion.4 Qualified services encompass not only actively engaging in qualified research but also the direct supervision or direct support of such research activities.4 The definition of wages aligns with the meaning provided by IRC Section 3401(a).4 Appropriate documentation must track the time spent by employees directly contributing to the eligible R&D projects.
2. Supplies: The cost of tangible property consumed or used in the performance of qualified research can be included as QREs.4 Critically, this definition explicitly excludes expenditures for land, improvements to land, and property subject to the allowance for depreciation (i.e., capital expenditures).4
3. Rental/Lease Costs: Costs for the use of—or the right to use—personal property used in the conduct of qualified research are also included.

Contract Research Expenses

Payments made to third parties (non-employees) for the purpose of conducting qualified research on behalf of the taxpayer are generally includable at 65% of the total amount paid.3 This 65% inclusion rate reflects the federal mandate and is adopted by Kansas. Taxpayers must ensure that the contract research itself meets all federal qualifications, regardless of where the third party is located, though the final QREs must be apportioned to Kansas activities.

The Four-Part Test: Proving “Qualified Research”

For any expenditure to qualify as a QRE, the underlying activity must meet the strict definition of “qualified research” established by federal law. This definition is typically applied through the “Four-Part Test” derived from IRC §41:

1. IRC Section 174: The expenditure must be eligible for treatment as a research or experimental expenditure under IRC §174.
2. Elimination of Uncertainty: The activity must be undertaken to discover information that would eliminate uncertainty concerning the development or improvement of a business component. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the component, or the appropriate design of the component.
3. Technological in Nature: The research must fundamentally rely upon the principles of the physical or biological sciences, engineering, or computer science.
4. Process of Experimentation: Substantially all the research activities must constitute a process of experimentation, involving the evaluation of alternatives, systematic trial and error, or modeling and simulation to achieve a result where the capability or method is uncertain.

Activities Explicitly Excluded from Qualification

The rigorous requirements of IRC §41 mandate the exclusion of specific activities, a detail directly relevant to any Kansas claim. If an activity falls into any of the following categories, its associated costs cannot be claimed as QREs for federal or Kansas purposes 4:

• Post-Commercial Production: Research conducted after the beginning of commercial production of the business component.4
• Adaptation and Duplication: Activities related to adapting an existing business component to a particular customer’s requirement or merely duplicating an existing business component.4
• Foreign Research: Activities conducted outside the geographic boundaries of the United States.4
• Social Sciences and Humanities: Research in fields such as the social sciences, arts, or humanities.4
• Funded Research: Research where the taxpayer does not bear the financial risk or where the research is funded by any government grant, contract, or agreement.4 Kansas explicitly excludes expenditures of moneys made available pursuant to federal or state law.1

The Kansas R&D credit relies on this strict federal gateway.1 Consequently, the most common audit adjustments at the state level often stem from a failure to exclude non-qualifying costs or activities under the federal guidelines.

The Kansas Statutory Framework (K.S.A. 79-32,182b)

The Kansas statute adopts the federal definition of QREs while establishing specific rules regarding the credit calculation, eligibility, and administrative compliance necessary for claiming the incentive.

State Nexus and Definition Conduit

The Kansas Legislature stipulates that the credit is only allowed for expenditures in R&D activities “conducted within this state”.1 This mandates strict geographic apportionment, requiring taxpayers to meticulously track and ensure only Kansas-based payroll, supplies, and contracted research are included in the QRE base for the state credit calculation.6

K.S.A. 79-32,182b(c) confirms the definitional reliance on federal law, stating that “expenditures in research and development activities” means expenditures treated as expenses allowable for deduction under the provisions of the federal internal revenue code of 1986, as amended.1 The only specific exclusion added by Kansas law relates to expenditures for the performance of abortions.1

Legislative Modernization: Increased Rate and Expanded Eligibility

Significant legislative changes took effect for taxable years commencing after December 31, 2022, greatly enhancing the value and accessibility of the Kansas R&D credit.1

1. Rate Increase: The credit rate increased substantially from 6.5% to 10% of the qualifying excess expenditures.1
2. Expanded Eligibility: KDOR Notice 23-09 clarifies that, unlike prior law which sometimes restricted the credit, all Kansas income taxpayers—including individuals, partnerships, S corporations, limited liability companies, other pass-through entities, and C corporations—are now eligible to claim the credit.1

The Strategic Value of Transferability

Perhaps the most significant legislative enhancement is the introduction of credit transferability, effective for tax year 2023 and all years thereafter.1 The statute explicitly allows the income tax credit to be transferred by a taxpayer who does not have a current tax liability to “any person”.1

This provision is crucial for innovative, early-stage companies and pass-through entities (which often experience net operating losses) that generate substantial QREs but lack the corresponding tax liability to immediately use the credit. By enabling the transfer, Kansas allows these entities to monetize their tax assets, immediately converting a long-term carryforward benefit into working capital by selling the credit to a profitable transferee.1 This structural mechanism reduces the effective cost of R&D for startups and makes the Kansas business environment more competitive for high-growth, technology-intensive firms.

The table below summarizes the key differences in the credit before and after the 2023 statutory changes.

Key Differences in Kansas R&D Credit Provisions

Calculation Methodology: The Three-Year Incremental Approach

Unlike some states that offer a simplified credit or a fixed percentage of total QREs, Kansas utilizes a unique incremental formula designed to reward year-over-year growth in R&D investment.

The Kansas Credit Formula and Base Period Definition

The credit is calculated as 10% of the amount by which the expenditures in R&D activities in the current taxable year exceed the taxpayer’s base amount.1

The base amount is calculated as the average of the actual expenditures for qualified R&D purposes made in the current taxable year and the next preceding two taxable years.1

$$\text{Base Period Average} = \frac{\text{Current Year QREs} + \text{Year -1 QREs} + \text{Year -2 QREs}}{3}$$

$$\text{Credit Earned} = 10\% \times (\text{Current Year QREs} – \text{Base Period Average})$$

1

This formula structurally requires R&D spending to significantly outpace the three-year rolling average, including the current year’s spending, in order to generate a creditable excess. For new companies or those lacking two full prior years of Kansas QRE data, the calculation is simplified: the base calculation uses zero for missing prior years, resulting in a base that is approximately one-third of the current year’s QREs.6 This structure allows new R&D spenders to claim a credit on approximately 66.7% of their current year expenditures, significantly boosting the incentive for new or expanding R&D operations.

Annual Claim Limitation and Carryforward

Kansas imposes strict limitations on the amount of credit that may be utilized in any single tax year:

• Annual Limitation: The deduction from the taxpayer’s tax liability in any one taxable year cannot exceed 25% of the total amount of the credit earned in that year, plus any applicable carry forward amount.1
• Indefinite Carryforward: Any portion of the credit that exceeds the taxpayer’s tax liability or the 25% annual limit may be carried forward indefinitely until the total credit amount is used.1 However, if the credit is transferred, the carry forward rules and limitations apply to the transferee based on the requirements in place at the time the credit was originally earned.2

Compliance and Administrative Procedures: KDOR Guidance

The Kansas Department of Revenue (KDOR) has established specific mandatory application and documentation requirements, particularly following the introduction of credit transferability in 2023. This guidance is detailed in K.S.A. 79-32,182b and KDOR notices, such as Notice 23-09.1

Mandatory Pre-Claim Certification (Form K-204)

For tax years 2023 and subsequent years, taxpayers intending to claim the R&D credit must first submit Form K-204, the Research and Development Credit Application, to KDOR for certification before attempting to claim the credit on their state income tax return.2

This pre-claim certification process is mandated because the credit is now transferable.2 The certification ensures that KDOR verifies the computed credit amount and eligibility criteria before the credit is permitted to be transferred or utilized, thus maintaining the integrity and marketability of the tax asset.

Claiming the Credit on the State Return (Schedule K-53)

Once the credit has been calculated and, if applicable, certified, the taxpayer claims the credit against their Kansas income tax liability using Schedule K-53.6 This schedule must be submitted with the taxpayer’s annual income tax return.8 Although the Kansas claim is calculated independently, the underlying QREs should align with the documentation used to substantiate the federal R&D tax credit (Federal Form 6765).6

Transferability Requirements and Documentation (Form K-260)

The transfer of credits is subject to stringent rules to prevent fraud and ensure proper tracking.2 These requirements are critical for both the transferor (the entity that earned the credit) and the transferee (the entity receiving the credit):

1. Transfer Scope: Only the full credit amount earned in a specific taxable year may be transferred.1 This prevents the segmentation or fractionalization of the credit among multiple purchasers.
2. Transfer Limit: The credit may only be transferred one time.1
3. Eligibility: Only the entity that originally earned and certified the credit is permitted to perform the transfer.7
4. Notification: The transferor must complete and submit Form K-260, Tax Credit Transfer Notification, to KDOR.6 This form serves as official notification of the transaction but is not the legal transfer agreement itself.9
5. Transferee Use: The transferee may claim the credit in the tax year it was transferred.1 However, the credit claimed by the transferee remains subject to the original 25% annual usage limitation and is not refundable.1 Documentation of the acquired credit must be provided by the transferee in the manner established by the Secretary of Revenue.1

Practical Example: Calculating the Kansas R&D Tax Credit

The following example demonstrates the calculation of the Kansas R&D tax credit for a growing technology company, Innovate KS Tech, claiming the credit for Tax Year 2024 utilizing the 10% rate and the three-year rolling base methodology established in K.S.A. 79-32,182b.

Scenario Setup

Innovate KS Tech has determined and certified its total Kansas-apportioned QREs for the three-year period relevant to the 2024 claim:

Step-by-Step Base Calculation and Credit Determination

The first step is to calculate the three-year average base amount, which includes the current year’s QREs.6

$$\text{3-Year Average Base} = \frac{\$1,000,000 + \$650,000 + \$350,000}{3} = \frac{\$2,000,000}{3} \approx \$666,667$$

Next, the creditable excess QREs are calculated by subtracting the Base Period Average from the Current Year QREs.

$$\text{Excess QREs} = \$1,000,000 – \$666,667 = \$333,333$$

Finally, the total credit earned is calculated using the 10% statutory rate (applicable post-2022).

$$\text{Total Credit Earned} = \$333,333 \times 10\% = \$33,333$$

Application of Annual Limitation and Transfer Options

Innovate KS Tech earned a total credit of $33,333 in 2024. However, the annual amount claimable is restricted to 25% of the total credit generated 1:

$$\text{Maximum Claimable in 2024} = \$33,333 \times 25\% = \$8,333$$

The remaining unused credit is subject to carryforward rules:

$$\text{Carryforward to 2025 and Beyond} = \$33,333 – \$8,333 = \$25,000$$

If Innovate KS Tech anticipated having no Kansas tax liability in 2024 (e.g., due to losses), it would first submit Form K-204 to certify the full $33,333 credit. It could then transfer (sell) the full, one-time amount of $33,333 to a profitable third party using Form K-260.1 The transferee would then utilize that $33,333 credit, subject to the $8,333 annual limitation, carrying forward the remaining balance until it is fully utilized.

Conclusion: Strategic Implications for Maximizing R&D Investment in Kansas

The Kansas R&D tax credit is a significant incentive, yet its successful utilization requires a detailed understanding of its dual compliance nature: adherence to federal QRE definitions and mastery of the unique state incremental calculation and administrative framework.

The foundation of any defensible Kansas claim rests on rigorous documentation proving that the underlying expenditures meet the standards of IRC §41, including the crucial Four-Part Test and the exclusion of non-qualifying activities like post-commercial production and funded research.4 This federal requirement establishes the high qualitative bar for all expenditures claimed.

The state’s formula, which utilizes a three-year rolling average inclusive of the current year, is explicitly structured to reward companies demonstrating sustained expansion of R&D investment within Kansas.1 This design maximizes the benefit for high-growth enterprises but necessitates careful tracking of QREs across all three relevant years, even if the credit was not previously claimed.

Finally, the legislative changes effective for 2023—including the increase to a 10% rate, expanded eligibility for pass-through entities, and the highly strategic feature of transferability—have dramatically elevated the value proposition of R&D in Kansas.1 The ability to monetize credits immediately through transfer, mandated by the K-204 pre-certification and K-260 notification process, converts a future tax benefit into immediate liquidity, providing a compelling financial advantage for innovative businesses operating or relocating to the state.1 Strategic compliance with KDOR administrative requirements ensures that this valuable asset can be efficiently generated and utilized.

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/