The Interpretation and Application of “Tax Imposed by the Kansas Income Tax Act” in the Context of the Research and Development Tax Credit

I. Executive Summary: The Meaning of “Tax Imposed” in Kansas

The “Tax Imposed by the Kansas Income Tax Act” refers strictly to the corporate income tax liability (Total Tax, typically Line 31 of Form K-120) calculated under K.S.A. 79-32,110 before the application of any non-refundable credits. This dollar amount represents the statutory maximum ceiling against which the Kansas Research and Development (R&D) Tax Credit (K.S.A. 79-32,182) may be applied, which is further subject to a stringent 25% annual utilization cap.

The Kansas R&D Credit, effective for taxable years commencing after December 31, 1986, is a non-refundable mechanism designed to incentivize investment in innovative activities within the state.1 Recent legislative changes, particularly those effective post-2022, have elevated the credit rate to 10% of qualified excess expenditures, compared to the previous 6.5%.2 While this generation rate is generous, the primary operational constraint imposed by state law is the severe limitation on utilization: a taxpayer may only use 25% of the total available credit (current year plus carryforward) in any single tax year.2 Furthermore, the Kansas Department of Revenue (KDOR) codified transferability in Notice 23-09, allowing entities without sufficient “Tax Imposed” liability to sell the credit, thereby creating immediate liquidity for a long-term asset.4 Understanding the precise definition of the “Tax Imposed” liability is paramount, as it dictates the environment for credit utilization and the necessary timeframe for realization.

II. Foundational Analysis: Defining the “Tax Imposed” under K.S.A. Chapter 79

2.1. Statutory Basis of the Kansas Corporate Income Tax Act

The assessment of the “Tax Imposed” begins with the fundamental requirement for filing. K.S.A. 79-32,110 mandates that a Kansas corporate income tax return (Form K-120) must be filed by all corporations doing business in or deriving income from sources within Kansas, provided they are required to file a federal income tax return, regardless of whether a net tax liability is ultimately calculated.6

This filing requirement extends critically to members of unitary groups for taxable years after December 31, 1990. If any single member of a unitary group has activity in Kansas that exceeds the protected solicitation threshold established by 15 U.S.C. Section 381, then all unitary group members possessing Kansas property, payroll, or sales must file Kansas returns and remit the required tax.7 This principle necessitates that a broad range of entities, including those potentially generating R&D credits, participate in the Kansas tax system, setting the stage for the calculation of the “Tax Imposed.”

2.2. Components of the Corporate Income Tax Liability (The Calculation Base)

The “Tax Imposed” liability is fundamentally derived from the application of statutory rates against Kansas Taxable Income (KTI), as determined after state-specific addition and subtraction modifications (K.S.A. 79-32,138) and the required apportionment for multi-state entities. This calculated figure establishes the absolute monetary base against which non-refundable credits, such as the R&D credit, are ultimately claimed.

The Kansas corporate income tax structure is bifurcated into two components applied to KTI 8:

1. Normal Tax: A baseline rate of 4% is applied to all calculated Kansas Taxable Income.
2. Surtax: An additional surtax of 3.05% is imposed on KTI that exceeds the $\$50,000$ threshold.

Collectively, these rates mean that KTI below $\$50,000$ is taxed at 4%, while income exceeding $\$50,000$ is subjected to a combined statutory rate of 7.05%.8 The resulting dollar amount, calculated by multiplying the KTI by the applicable rates, constitutes the “Total Tax” (Line 31 of Form K-120) and is the operational definition of the “Tax Imposed” liability.6 This pre-credit calculation is critical because it represents the highest possible offset obtainable through the use of non-refundable credits in that year, assuming the statutory 25% utilization cap does not bind the taxpayer further.

The following table summarizes the statutory rate structure that defines the tax base:

Table 1: Kansas Corporate Income Tax Rate Structure (The “Tax Imposed” Base)

2.3. Exclusion of Separate Statutory Regimes

A nuanced understanding of the “Tax Imposed by the Kansas Income Tax Act” requires recognizing what it excludes. The R&D tax credit is an income tax credit and, therefore, cannot be used to offset liabilities arising under separate statutory regimes, even if those regimes apply to entities otherwise operating in Kansas.

For example, insurance companies are subject to a Premium Tax, and national bank associations, trust companies, banks, and savings and loan associations are required to file the Privilege Tax (Kansas Form K-130).6 These specific entity types are exempt from the standard income tax for Kansas purposes, meaning they do not calculate the “Tax Imposed” under K.S.A. 79-32,110. Consequently, they cannot use the R&D income tax credit to offset their Privilege Tax or Premium Tax obligations. Additionally, certain cooperatives and specified electric and natural gas public utilities are explicitly exempted from the tax imposed by the Kansas Income Tax Act.6 This distinction confirms that the applicability of the R&D credit is narrowly confined to the corporate income tax liability established on Form K-120.

2.4. Compliance Complexities for Unitary Groups

The use of non-refundable credits in the context of unitary combined filing presents a significant compliance constraint that limits the strategic application of R&D credits. While unitary groups are required to file combined returns using Schedule K-121, calculating the total tax based on the combined income of all members, the utilization of tax credits is not aggregated at the group level.6

KDOR guidance strictly dictates that when filing a combined return, “the amount of nonrefundable credits for each separate entity cannot exceed that entity’s tax liability”.6 This constraint prevents the inter-company transfer or cross-entity pooling of the R&D tax credit within the combined filing structure. For example, if Member A generates a large R&D credit but has a negligible Kansas apportionment factor (and thus a low individual “Tax Imposed” liability), and Member B has a significant tax liability, Member A cannot utilize its credit against Member B’s portion of the combined tax. This necessitates meticulous internal tracking to ensure that R&D credits are generated and utilized based solely on the separate, apportioned tax liability of the generating entity. This requirement effectively undermines the immediate benefit of credit generation within a multi-entity structure unless the generating entity has sufficient stand-alone Kansas Taxable Income.

III. KDOR Guidance: Research & Development Credit Generation Mechanics (Schedule K-53)

The statutory authority for the Research and Development Tax Credit is K.S.A. 79-32,182, which is operationalized through Kansas Schedule K-53. The process of generating the credit defines the dollar amount that is then subjected to the “Tax Imposed” ceiling and the 25% utilization throttle.

3.1. Qualifications and QRE Definition

To qualify for the Kansas R&D credit, the expenditures must meet two criteria. First, the expenditures must align with the definition of qualified research expenditures (QREs) as allowable for deduction under the provisions of the federal Internal Revenue Code (IRC) of 1986, specifically IRC §41.2 This federal alignment simplifies compliance by piggybacking on established IRS audit standards but necessitates stringent record-keeping to substantiate the QREs. Second, the R&D activities leading to the expenditures must be physically conducted within Kansas.1 This geographical constraint requires taxpayers to accurately apportion R&D costs, such as wages and supply costs, to the state of Kansas.

Historically, beginning in tax year 2013, the credit was only available to C corporations subject to the Kansas corporate income tax.1 However, recent legislation has broadened the eligibility (as formalized in KDOR Notice 23-09), removing the strict limitation to C corporations for post-2022 years, allowing other business types to generate the credit.4

3.2. Legislative Shift to the 10% Rate

Prior to recent legislative action, the Kansas R&D credit was calculated at a rate of 6.5% of the excess QREs.1 For all taxable years commencing after December 31, 2022, the credit rate was significantly increased to 10%.2 This 10% rate applies to the defined “excess” qualified research and development expenditures and enhances the economic incentive for companies conducting research in the state.

3.3. Calculating the Excess QREs (Schedule K-53, Part A)

The Kansas R&D credit utilizes an incremental approach, rewarding the growth of research activity rather than the maintenance of static spending levels. The credit is calculated based on the difference between the current year’s QREs and a defined base amount.2

The base amount computation is structured around a three-year moving average, requiring data from the current tax year (CY) and the two immediate preceding tax years (CY-1 and CY-2).2 The specific instructions on Schedule K-53, Part A, guide the taxpayer through this calculation 12:

1. Line 1 captures the total amount of allowable Kansas R&D expenditures for the current taxable year.
2. Lines 2a and 2b capture the corresponding expenditures for the first and second preceding tax years, respectively.10
3. Line 4 requires the sum of Line 1, Line 2a, and Line 2b to be divided by three, establishing the average expenditures over the three-year period.
4. Line 5 determines the “Excess QREs” by subtracting the average expenditures (Line 4) from the current year QREs (Line 1). If the current year’s expenditures are less than or equal to the average, the result is zero.12
5. Line 6 calculates the Total Generated Credit by multiplying the Excess QREs (Line 5) by the current 10% rate (.10).12

This calculation method is designed to provide a greater proportional credit to companies initiating or rapidly expanding R&D operations. For a new company, or one with no historical QREs in Kansas, the base amount (Line 4) is simply the current year’s QREs divided by three.11 This structural dynamic immediately results in two-thirds of the current QREs being deemed “excess.” Consequently, a taxpayer with zero prior QREs effectively receives a credit equal to $10\% \times (100\% – 33.33\%)$ of their current QREs, yielding a first-year credit equivalent to approximately 6.67% of their total current R&D spending. This calculation strongly encourages the initial establishment or immediate ramp-up of R&D functions within the state.

Table 2: Kansas R&D Credit Computation Formula (K-53, Post-2022)

IV. The Critical Nexus: Applying the R&D Credit Against the “Tax Imposed”

Once the credit amount is generated (Schedule K-53, Line 6), the taxpayer must navigate two limitations that determine the actual benefit realized in the current year. The first is the total “Tax Imposed” liability, and the second, and generally more restrictive, is the statutory 25% utilization cap.

4.1. The Operational Definition of the Utilization Constraint

The R&D credit is strictly categorized as a non-refundable credit.6 This designation means that while the credit is applied directly against the corporation’s income tax liability, it can never generate a tax refund. The credit utilized is entered on the Schedule of Nonrefundable Credits (aggregated on Line 38) and then carried to the Total Nonrefundable Credits line (Line 32) of Form K-120.6

The fundamental ceiling for credit utilization is the “Tax Imposed” liability, which is calculated prior to any non-refundable credits (Line 31 of Form K-120). As KDOR explicitly states, the total nonrefundable credits claimed “cannot exceed your total tax on line 31 of Form K-120”.6 This ceiling ensures that the credit serves only as an offset to the Kansas corporate income tax and does not result in a direct state expenditure or negative tax liability.

4.2. The 25% Annual Utilization Limitation (The Primary Hurdle)

The most significant operational constraint on the Kansas R&D credit is the limitation on the amount that can be deducted annually. State statute mandates that the credit allowed in any one tax year is restricted to 25% of the total available credit.2

The “total available credit” includes the newly generated credit for the current year plus any carry forward amounts from previous tax years.2 This calculation is performed on Schedule K-53, where Line 7 determines the maximum credit allowed in the current tax year by multiplying the total available credit by 25% (.25).12

This 25% limitation dictates the pace of realization, regardless of the corporation’s income level. If a corporation generates a substantial credit amount, the statute dictates that, under normal circumstances, it will take a minimum of four years to fully utilize that generated credit, assuming the corporation maintains a “Tax Imposed” liability that is always greater than the 25% limit. This characteristic fundamentally transforms the generated R&D credit from a current-year benefit into a long-term deferred tax asset, demanding robust multi-year tax planning and accurate Net Present Value (NPV) analysis for proper financial reporting and valuation (e.g., under ASC 740).

4.3. Indefinite Carryforward and Utilization Management

Any portion of the R&D credit that remains unused due to the “Tax Imposed” ceiling or the 25% utilization cap is allowed to be carried forward.10 Kansas law provides for an indefinite carryforward period, meaning the remaining unused credit can be preserved and utilized in subsequent tax years until the total credit amount has been fully expended.10

The calculation of the actual credit used in any year is a comparison between two restrictive amounts: the 25% statutory limit (K-53, Line 7) and the pre-credit “Tax Imposed” liability (K-120, Line 31). The taxpayer uses the lower of these two amounts as the allowable credit offset for the year.6 If a corporation’s tax liability is low, its credit utilization rate may fall below the 25% statutory allowance, stretching the realization period beyond the minimum four years. Conversely, if a corporation has a high tax liability, the 25% rule will still bind them, ensuring that the carryforward mechanism remains the primary mechanism for managing the generated R&D tax asset.

V. Advanced Strategy and Compliance: KDOR Notice 23-09 and Transferability

In recent years, Kansas enacted legislation to address the issue of valuable R&D credits becoming “stranded” in companies that were not immediately profitable or were shielded from tax by federal deductions or Net Operating Losses (NOLs). KDOR Notice 23-09 formalized the guidelines for this new transferability regime.4

5.1. KDOR Notice 23-09: Codifying Modernization

KDOR Notice 23-09, issued on September 6, 2023, confirmed key legislative updates, including the rate increase to 10% and, most significantly, the new ability to transfer the credit.4 These changes apply to tax years beginning after December 31, 2022.2

5.2. Transferability Provisions (K.S.A. 79-32,234)

The transferability provision fundamentally alters the liquidity of the R&D credit. It allows taxpayers who generate new R&D tax credits but who lack a current Kansas income tax liability to transfer the credit to any other person.2

The procedure requires specific compliance steps: the transferor (the entity earning the credit) must first complete Schedule K-53 to establish the valid amount of the generated credit and then must submit Form K-260 (Transfer of Credit) to the Department of Revenue.2

The KDOR guidance imposes strict limitations on this process 2:

1. Full Transfer Only: Only the full generated credit amount may be transferred. Partial transfers are not permitted.
2. One-Time Transfer: The credit may only be transferred once by the original generating entity.
3. No Refund for Transferee: While the transferee utilizes the credit against their own “Tax Imposed” liability, the credit remains non-refundable. The transferee cannot receive a cash refund for any unused portion, although they may carry forward the excess amount.

5.3. Strategic Planning Implications for Transferors

For start-ups, high-growth entities, or companies undergoing substantial capital investment that results in large deductible expenses or NOLs—and thus, a zero or near-zero “Tax Imposed” liability—the R&D credit would traditionally have been a stranded asset, only realizable years into the future. The ability to transfer the credit unlocks immediate economic value, converting a non-usable tax asset into marketable proceeds.11 This provision facilitates direct capital formation by monetizing the state incentive without waiting four or more years for utilization against future income.

5.4. Transferee Obligations and Continuing Limitations

The strategic acquisition of a transferred R&D credit requires significant due diligence from the recipient (transferee). Although the transferee may utilize the credit against their own “Tax Imposed” liability in the tax year it was transferred, they are bound by the statutory limitations governing the credit.2

Crucially, the transferee must adhere to the same 25% annual utilization limitation that applied to the original entity.2 If a large credit is transferred, the recipient cannot immediately apply the entire amount, even if their “Tax Imposed” liability is high. They must spread the usage over a minimum of four years, utilizing 25% of the total available credit each year, subject always to their actual annual tax liability. This long realization horizon must be factored into the purchase price negotiation to accurately reflect the time value of money inherent in the transferred tax asset.

VI. Detailed Illustrative Case Study: Multi-Year R&D Credit Utilization

The following case study demonstrates the mechanical interplay between the calculation of the “Tax Imposed” liability (the ceiling) and the 25% statutory utilization cap (the throttle) for a Kansas C-Corporation, Kansas Innovate, Inc.

6.1. Setup and Financial Assumptions (Years 1-4)

Kansas Innovate, Inc. began significant R&D activities in Year 1. For simplicity, the example assumes prior R&D expenditures (CY-2 and CY-1) were zero, allowing for maximum initial credit generation.

6.2. Calculation of the “Tax Imposed” (K-120 Liability)

The “Tax Imposed” is calculated using the 4% normal tax rate on all KTI and the 3.05% surtax on KTI exceeding $\$50,000$.

$$\text{Tax Imposed} = (4\% \times \text{KTI}) + (3.05\% \times \text{Max}(0, \text{KTI} – \$50,000))$$

For this example, the “Tax Imposed” liability is always sufficient to absorb the maximum 25% allowable credit, meaning the 25% rule will be the binding constraint, not the total tax liability.

6.3. Calculation of Credit Generation (Schedule K-53)

The credit is calculated at 10% of the difference between the current year QREs and the three-year average (including the current year).12

Year 1 Credit Generation:

• Average Base: $(\$1,000,000 + \$0 + \$0) / 3 = \$333,333$
• Excess QREs (K-53 Line 5): $\$1,000,000 – \$333,333 = \$666,667$
• Total Credit Generated (K-53 Line 6): $\$666,667 \times 10\% = \$66,667$

Year 2 Credit Generation:

• Average Base: $(\$1,100,000 + \$1,000,000 + \$0) / 3 = \$700,000$
• Excess QREs: $\$1,100,000 – \$700,000 = \$400,000$
• Total Credit Generated: $\$400,000 \times 10\% = \$40,000$

Year 3 Credit Generation:

• Average Base: $(\$1,200,000 + \$1,100,000 + \$1,000,000) / 3 = \$1,100,000$
• Excess QREs: $\$1,200,000 – \$1,100,000 = \$100,000$
• Total Credit Generated: $\$100,000 \times 10\% = \$10,000$

Year 4 Credit Generation:

• Average Base: $(\$1,200,000 + \$1,200,000 + \$1,100,000) / 3 = \$1,166,667$
• Excess QREs: $\$1,200,000 – \$1,166,667 = \$33,333$
• Total Credit Generated: $\$33,333 \times 10\% = \$3,333$

6.4. Annual Utilization and Carryforward Tracking (The 25% Constraint vs. Liability)

The total amount of credit available in any year is the sum of the current year’s generated credit and the carryforward from prior years. The actual credit used is the lesser of the “Tax Imposed” liability or 25% of the total available credit.2

Table 3: Multi-Year R&D Credit Utilization Example

Case Study Conclusion

This detailed tracking reveals the stringent control exercised by the 25% utilization cap. In Year 1, while Kansas Innovate, Inc. generated a $\$66,667$ credit, only $\$16,667$ (25%) could be used, despite the “Tax Imposed” liability of $\$146,025$ being far greater. This $\$50,000$ unused portion was immediately carried forward.

By Year 4, the company had generated a total credit asset of $\$120,000$ (sum of B), yet the cumulative utilization over four years (sum of F) totaled only $\$86,875$. The remainder, $\$75,624$, continues to carry forward indefinitely.11 The constraint dictates that even a profitable company with substantial tax liability must spread the realization of the R&D incentive over an extended period.

VII. Conclusion and Expert Recommendations

The Kansas R&D Tax Credit is a powerful economic incentive, particularly following the 2023 increase to a 10% rate and the introduction of transferability. However, the operational reality of utilizing this credit is governed entirely by the strict statutory meaning of the “Tax Imposed” and the inflexible 25% utilization mandate.

The “Tax Imposed” is the pre-credit corporate tax liability, which acts as the maximum potential annual offset. However, for most credit-generating corporations, the necessary condition for use (sufficient liability) is overshadowed by the sufficient limitation (the 25% cap). This constraint dictates that the R&D credit is inherently a long-term asset, realized incrementally over a multi-year horizon.

Recommendations for Corporate Tax Planning

Based on the statutory analysis and KDOR guidance, corporate taxpayers must implement sophisticated planning and compliance strategies to maximize the economic value of the R&D credit:

1. Mandate Long-Range Tax Liability Forecasting: Given the indefinite carryforward and the 25% annual throttle, accurate financial modeling spanning four or more years is essential. This forecasting must predict future Kansas Taxable Income and the resulting “Tax Imposed” liability to determine the actual timing and Net Present Value of the R&D credit asset.11 Strategic planning should focus on maintaining R&D investment growth to sustain the generation of excess QREs while managing the carryforward balance.
2. Evaluate Transferability for Liquidity Management: For entities projecting near-term losses, extended zero-tax periods due to large federal NOLs, or those within unitary groups where the generating entity has a low individual Kansas apportionment, the transferability provision should be actively evaluated.4 Utilizing Form K-260 to transfer the credit provides immediate liquidity, mitigating the financial risks associated with a non-refundable, slow-utilizing asset. However, the transferor must ensure all documentation supporting the K-53 calculation is impeccable, as the transferee inherits the credit and its associated audit risk.
3. Ensure Unitary Compliance at the Entity Level: Unitary groups must strictly adhere to the rule that non-refundable credits cannot exceed the individual entity’s apportioned tax liability.6 Tax modeling must track credit generation and utilization on a separate-entity basis to avoid disallowed offsets during KDOR examination. Strategic structuring should aim to align R&D activities (and thus credit generation) with the entity or entities that command the largest Kansas apportionment factors and highest “Tax Imposed” liability.
4. Maintain Meticulous Documentation: All claims must be supported by itemized schedules of qualified expenditures, clearly linking them to R&D activities conducted within Kansas, and demonstrating compliance with federal IRC §41 standards.2 This documentation is crucial not only for the generating taxpayer but also, by extension, for any transferee that purchases the tax asset. A deficiency in the transferor’s documentation could invalidate the credit for the recipient.

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