Navigating the Kansas R&D Tax Credit: An Exhaustive Analysis of the “Technological in Nature” Requirement (K.S.A. 79-32,204)

Section 1: Executive Summary and Defining the Research Nexus

1.1 The Meaning of “Technological in Nature”

The “Technological in Nature” test requires that research activities fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. 1

This reliance must serve the purpose of discovering information intended to eliminate technical uncertainty regarding the design, capability, or methodology of developing a new or improved business component. 2

1.2 Overview of the Kansas R&D Credit and Federal Foundation

The Kansas Research and Development (R&D) Tax Credit is a significant state incentive designed to promote innovation and economic growth within the state. Governed primarily by K.S.A. 79-32,204, this credit allows taxpayers who incur qualified research and development expenditures in Kansas to claim an offset against their state income tax liability.3

The Critical Federal Nexus

A crucial aspect of the Kansas R&D credit statute is its direct reliance on federal definitions. The Kansas law explicitly mandates that all expenditures made for research and development purposes must be “allowable under the provisions of the federal internal revenue code of 1986”.3 This statutory linkage means that Kansas does not maintain a separate set of rules for defining qualified research activities; instead, it adopts, in full, the stringent requirements set forth in Internal Revenue Code (IRC) Section 41.

Consequently, compliance for the Kansas credit hinges entirely on successfully meeting the four-part test for qualified research activities defined in IRC §41, of which “Technological in Nature” is a cornerstone component.

Current Kansas Credit Mechanics

For taxable years commencing after December 31, 2022, the state of Kansas increased the value of its incentive, offering a credit rate of 10%.3 This rate is applied to the difference between the actual qualified research and development expenses (QREs) for the current year and a calculated base amount.3

The base amount is calculated as the average of the QREs incurred during the current year and the two preceding tax years.4 This calculation method ensures that the credit primarily incentivizes growth in research spending rather than merely rewarding steady-state operations.

1.3 The R&D Four-Part Test (IRC §41): Contextualizing “Technological in Nature”

For any R&D activity to qualify for the Kansas credit, it must satisfy four concurrent requirements, often referred to as the Four-Part Test.2 The “Technological in Nature” requirement provides the scientific foundation, but it must work in concert with the other three parts to establish eligibility.

The four components are designed to filter out routine engineering, manufacturing, or commercial activities, focusing the incentive solely on genuine investigative and systematic research efforts.6

The required components are outlined below:

Table 1: The Federal Four-Part Test for Qualified Research (Adopted by Kansas)

Section 2: Deconstructing “Technological in Nature”

The “Technological in Nature” requirement, sometimes called the “Technological Information Test,” is the scientific gatekeeper for the R&D credit. Its purpose is to ensure that the research activity goes beyond routine business practices or simple adjustments and delves into the application of established scientific or technical principles to discover new information.8

2.1 Principles of Hard Science: The Foundational Reliance

Information discovered is considered “technological in nature” if the underlying process of experimentation relies fundamentally on principles derived from specific scientific fields.1

Physical and Biological Sciences

This category encompasses traditional academic and industrial research fields, including chemistry, physics, metallurgy, material science, and biology. For Kansas businesses, this is particularly vital in the context of its dominant agricultural and manufacturing sectors.4 For instance, developing a new alloy for a piece of heavy machinery or experimenting with novel fertilization formulas would rely on physical and biological sciences, respectively.

Engineering and Computer Science

These fields cover modern activities essential to nearly all industries. Engineering principles are involved in design optimization, prototyping, developing new manufacturing processes, or enhancing structural integrity.9

Computer science is crucial for activities like software development, including creating new algorithms, designing complex software architecture, or developing machine learning models (AI) that resolve technological uncertainties.7 This emphasis ensures that modern digital and technical innovation remains eligible for the credit.

2.2 Defining “Discovery of Information” and Subjective Innovation

A key element of the “Technological in Nature” test is the purpose of the activity: the taxpayer must be undertaking the research for the goal of discovering information.8

Crucially, the information discovered does not need to be groundbreaking or universally novel. It does not have to expand or refine the common knowledge within a specific field of science.8 Instead, the standard is subjective: the information must merely be new to the taxpayer claiming the credit.7 This framework permits small and incremental projects aimed at internal operational improvements or product enhancements to qualify, provided they meet the other three tests.7

It is also important to note that the taxpayer is not required to succeed in developing a new or improved business component from the discovered information for the research to qualify. The intent and the systematic process are what matter for eligibility.8

2.3 Common Statutory Exclusions from the Technological Test

IRC Section 41 specifically excludes certain types of activities from qualifying research, even if they involve some degree of technical effort.1 Kansas adherence to the federal code means these exclusions apply equally to state claims. These exclusions typically fail the “Technological in Nature” requirement because they do not rely fundamentally on the required hard sciences but rather on other, non-investigatory principles.

• Research After Commercial Production: Any research conducted after the beginning of commercial production of a business component is generally excluded. The purpose of the credit is to incentivize pre-production investigative work.1
• Adaptation of Existing Components: Routine adaptation of an existing business component to meet a particular customer’s requirement or need is usually excluded.1 If the adaptation is routine, it typically relies on existing, known technological information rather than the discovery of new information through scientific principles.
• Duplication of Existing Components: Activities related to simply copying an existing business component are excluded.1
• Style, Taste, Cosmetics, and Seasonal Design Factors: Research focused on non-functional aspects of a product, such as its color, texture, or market appeal, are explicitly excluded.13 These activities fail the “Technological in Nature” test because they rely on market research or aesthetics rather than physical or computer science principles.1
• Social Sciences, Arts, and Humanities: Research conducted in these fields is ineligible for the credit.1

2.4 The Interplay: Technological Reliance Validates Uncertainty Resolution

The distinction between routine engineering and qualified research often rests heavily on the required reliance on scientific principles. Complex tasks performed by highly skilled engineers do not automatically qualify for the credit; the research must still adhere to the statutory provisions.14

The only way to validate a claim that technical uncertainty was present and subsequently eliminated is to demonstrate that the activity required a rigorous, non-routine application of scientific methods. If a project merely involves the standard application of widely accepted engineering knowledge or practices, courts and auditors are likely to view it as routine and deny the credit.14

Therefore, the claim must establish that the principles relied upon (the Technological in Nature element) were systematically manipulated, tested, and recorded (the Process of Experimentation element) in an attempt to overcome a specific technical unknown (the Elimination of Uncertainty element). Without verifiable documentation showing this systematic reliance on hard science to overcome a technical hurdle, the activity often collapses into non-qualifying routine engineering. The “Technological in Nature” requirement thus serves as the essential basis for proving that the systematic effort was truly investigative, rather than merely procedural.6

Section 3: The Kansas R&D Credit Mechanics and State Interpretation

The administration and compliance structure for the Kansas R&D tax credit reflect the state’s explicit linkage to federal tax policy, simplifying the technical definition of qualified research but shifting the focus to documentation and utilization.

3.1 Statutory Framework and KDOR Guidance

Explicit Deferral to IRC §41

The foundational law, K.S.A. 79-32,204, confirms that qualifying expenditures must be “allowable under the provisions of the federal internal revenue code of 1986”.3 This means that if a business activity fails the four-part test for the federal credit, it simultaneously fails to qualify for the Kansas credit.

KDOR Regulatory Stance and Audit Preparedness

The Kansas Department of Revenue (KDOR) does not issue publicly available, detailed audit manuals or procedural guidelines that interpret the four-part test independent of the federal framework.3

This lack of explicit state-level technical guidance places a substantial compliance obligation on Kansas taxpayers. Since the state defers to federal definitions, the business must anticipate that a KDOR audit will rely heavily on established federal case law and the Internal Revenue Service (IRS) Audit Techniques Guide (ATG).13 Consequently, a successful claim in Kansas is synonymous with a claim that meets the stringent federal documentation requirements. Taxpayers must meticulously collect and organize documentation sufficient to satisfy a detailed federal inquiry into the existence of the technological uncertainty and the systematic application of hard science used to resolve it.14

3.2 Financial Parameters and Calculation

The Kansas R&D credit is calculated based on the excess of current QREs over an average base amount, encouraging sustained and growing investment in research conducted within the state.

Credit Rate and Calculation Formula

For taxable years beginning after December 31, 2022, the credit rate is 10%.3 The credit is computed using the following formula:

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

The Base Amount is calculated using a three-year average:

$$\text{Base Amount} = \frac{(\text{Current Year QREs} + \text{Year}-1 \text{ QREs} + \text{Year}-2 \text{ QREs})}{3}$$

If a taxpayer has zero QREs in previous years, the base is simplified to one-third of the current year’s QREs.4 This structure ensures that only the growth in research spending is incentivized at the 10% rate, maximizing the benefit for rapidly expanding R&D operations.

Limitation and Carryforward

The total credit allowed in any single tax year is subject to a utilization limit: the amount claimed cannot exceed 25% of the earned credit, plus any carryforward from prior years. Any remaining unused credit may be carried forward indefinitely, but it must be applied in 25% annual increments until the entire amount is used.3

3.3 Strategic Advantage: Transferability of Credit

One of the most powerful features of the Kansas R&D credit, especially for newer enterprises, is its transferability. This mechanism allows businesses to monetize the credit even if they lack sufficient current taxable income to use it.

Transfer Mechanism Details

For credits earned in the tax year 2023 and subsequent years, the new research and development tax credits can be transferred to any person who can claim it against their Kansas income tax liability in the year of the transfer.17 This option is primarily available to taxpayers who have no current Kansas income tax liability themselves.3

Only the entity that originally earned the credit is allowed to initiate the transfer, and only the full credit amount may be transferred. Crucially, the credit may only be transferred once.3 The credit claimed by the transferee may be carried forward, subject to the same 25% annual limitations and requirements that were in place when the credit was originally earned.3

Monetizing Early-Stage R&D

The combination of the 10% rate and the full transferability option provides a substantial liquidity advantage, particularly for startups and research-intensive businesses that may be operating at a loss. Without this provision, such businesses would be forced to carry forward 75% of their credit indefinitely, subject to the 25% annual usage cap. The transferability feature bypasses the annual 25% limitation delay for the originating taxpayer, allowing them to effectively convert a deferred tax asset into immediate cash proceeds.4 This policy encourages immediate investment in R&D activities across Kansas’s key sectors, including manufacturing and technology.4

Documentation for the transfer requires the originating taxpayer (transferor) to submit Schedule K-53 showing the credit amount transferred, while the transfer itself must be documented using Form K-260, which is submitted to the Department of Revenue.3

Table 2: Key Kansas R&D Credit Parameters and Compliance Forms (Post-2022 Tax Years)

Section 4: KDOR Compliance, Documentation, and Audit Preparedness

Given the heavy reliance on federal definitions for the Kansas R&D credit, audit preparedness must focus on substantiating the four-part test through comprehensive documentation. The “Technological in Nature” requirement is substantiated not by intent alone, but by rigorous records detailing the systematic use of scientific principles.

4.1 Proving the Technological Basis: The Documentation Imperative

While KDOR reserves the right to request an itemized schedule of expenditures 17, the core defense of a qualified research claim lies in technical documentation that explicitly links expenses to the scientific methodology.

Documenting Scientific Reliance

Documentation must clearly articulate how the principles of physical science, biological science, engineering, or computer science were utilized to resolve a specific technical uncertainty.1

Effective documentation includes:

• Engineering Change Orders (ECOs): Showing specific design modifications made based on testing results, indicating alternatives considered during the systematic process.9
• Design Review Minutes: Records of meetings where technical staff identified, discussed, and sought to eliminate technological uncertainties regarding design, methodology, or capability.14
• Test Protocols and Results: Detailed procedures for experimentation, including parameters varied, measurements taken, and resulting outcomes. These records demonstrate the systematic nature of the effort and its reliance on scientific metrics.9
• Laboratory and Engineer Notebooks: Contemporaneous notes detailing the scientific rationale, methodology used, and interpretation of trial results.14

The process of documentation is the essential mechanism that translates the theoretical standard of “Technological in Nature” into practical compliance. If an engineer asserts reliance on scientific principles (e.g., thermal dynamics or structural engineering), but the documentation fails to show detailed calculations, modeling, or systematic manipulation of variables consistent with those principles, the claim of genuine investigative research may fail. Technical documentation must clearly show that the investment was not merely spent on routine design or construction, but on discovering new technological information.14

4.2 Categorizing Qualifying Expenditures in Kansas

The QREs that form the basis of the Kansas credit calculation must align exactly with the QRE definitions provided under IRC §41. These expenses fall into four main categories 10:

• Wages: This includes compensation paid to employees for services directly performing, directly supervising, or directly supporting qualified research activities. The segregation of time spent on R&D versus non-R&D tasks is critical for accurately claiming the credit.
• Supplies: The cost of tangible property used or consumed during the qualified research process, such as materials utilized in building experimental models and prototypes.10
• Computer Time-Sharing: Costs related to external computing resources, such as cloud hosting or dedicated computer time used specifically for development, simulation, and testing environments.10
• Contract Research: 65% of amounts paid to third-party consultants or contract researchers who conduct qualified research on behalf of the taxpayer. The taxpayer must retain the economic risk for the success of the research for these costs to qualify.10

Section 5: Detailed Example: Advanced Agricultural Robotics

This section illustrates how a Kansas-based company can meet the “Technological in Nature” standard and the other components of the four-part test through a modern, industry-relevant R&D project.

5.1 Scenario Setup: A Kansas Ag-Tech Firm

Prairi-Tech Systems, a Kansas agricultural technology company, undertakes a project to develop a new, fully autonomous robotic planter. The goal is to integrate multiple environmental sensors and hydraulic actuators to allow the planter head to adjust planting depth and seed density dynamically and instantaneously based on real-time soil analysis—a function beyond the current commercial technology’s capability (Permitted Purpose).18

5.2 Identifying the Technological Uncertainty

At the project’s outset, Prairi-Tech faces several core unknowns (Elimination of Uncertainty):

1. System Integration: It is uncertain whether the company can successfully integrate high-speed sensor inputs (measuring soil conductivity, moisture, and density) into a real-time control system and maintain sufficient data processing speed on low-power, rugged hardware.
2. Actuation Lag: There is uncertainty regarding the feasibility of designing a hydraulic system capable of executing the precise, variable-depth planting action with the required millisecond reaction time necessary for the robot to operate at commercially viable field speeds.

5.3 Demonstrating “Technological in Nature”

The activities undertaken to resolve these technical unknowns must demonstrate a fundamental reliance on hard science.1

• Reliance on Computer Science and Engineering: To resolve the system integration uncertainty, Prairi-Tech engineers develop proprietary firmware and sophisticated machine learning algorithms (AI/ML models) designed specifically to process large, noisy datasets from the field sensors in real time and generate predictive control commands.7 This effort is rooted entirely in computer science principles.
• Reliance on Physical Sciences and Engineering: To resolve the actuation lag uncertainty, mechanical engineers conduct intensive modeling and analysis of fluid dynamics to optimize the hydraulic circuit design, seeking to minimize resistance and latency. They also use material science principles to test the durability and stress tolerance of specific actuator components under simulated field loads.1

Prairi-Tech maintains detailed records, including the mathematical specifications of the algorithms, the design blueprints for the hydraulic circuit, and the results of material fatigue testing, all of which directly confirm the reliance on these hard science principles.

5.4 The Process of Experimentation

To resolve the uncertainties identified, Prairi-Tech employs a rigorous Process of Experimentation 2:

1. Phase I – Virtual Modeling: Engineers use simulation software to model the control loop and hydraulic performance, establishing theoretical parameters and alternative designs.
2. Phase II – Prototype Fabrication: An experimental mechanical prototype of the planting head and the dedicated control hardware are fabricated. Initial firmware is developed and loaded (Fabricating experimental models).10
3. Phase III – Iterative Field Testing: The prototype is taken to a test field (in Kansas). Engineers conduct systematic field trials where they intentionally vary parameters (e.g., soil moisture, forward speed) to test the robot’s real-time depth adjustment capability (Testing an experimental product).10 When a test fails to meet the performance threshold (e.g., the depth adjustment is too slow), the engineering team documents the failure, designs an alternative hydraulic valve configuration or algorithm adjustment, and re-tests. This systematic, trial-and-error process, documented through detailed test logs and technical design reviews, is essential for satisfying the experimentation requirement.9

5.5 Segregation of Non-Qualifying Elements

Not all costs associated with the overall project qualify. For instance, the company hires a graphic designer to develop the aesthetic casing for the robot and marketing specialists to conduct consumer surveys about the preferred color scheme and decal placement. These activities relate to style, taste, and cosmetics, and they do not rely on principles of engineering or computer science. They are therefore excluded from QREs.1 Prairi-Tech must accurately segregate these non-qualifying costs from the eligible wages and supplies associated with the algorithm development and hydraulic optimization.

Section 6: Conclusion and Actionable Recommendations

The Kansas Research and Development Tax Credit offers a substantial incentive—10% of qualified research expenditure growth for taxable years commencing after 2022—but the accessibility of this benefit is conditional on strict adherence to the federal qualification standards, particularly the “Technological in Nature” requirement.3

The essential conclusion for Kansas-based R&D organizations is that achieving state R&D compliance is inseparable from achieving federal R&D compliance. Because the KDOR relies entirely on IRC §41 and does not publish proprietary technical guidance, the taxpayer must demonstrate that their activities involve genuine, systematic investigation utilizing hard science principles to resolve specific technical unknowns.

6.1 Strategic Compliance Checklist for Kansas Businesses

To maximize the benefits of the Kansas R&D credit and ensure audit resilience, companies engaged in research must adopt a proactive compliance strategy:

1. Rigorous Quantification of the Technical Basis: For every R&D project claimed, management must explicitly isolate the underlying scientific or engineering principle relied upon (physical science, biological science, engineering, or computer science).1 The documentation must demonstrate that this reliance was fundamental to the process of discovery, not incidental or routine.
2. Contemporaneous Record Keeping: Since documentation serves as the primary evidence linking expenditures to the technological requirements, records must be generated concurrently with the research activity. This includes engineering notes, test logs, design review minutes, and financial tracking that meticulously segregate qualified research time and supply usage from general production or administrative activities.14
3. Strategic Utilization of Transferability: Eligible, early-stage taxpayers experiencing tax losses should strongly consider utilizing the post-2022 credit transferability feature.4 This option allows for the immediate monetization of the full 10% credit amount, providing critical capital for further investment, circumventing the indefinite carryforward and the 25% annual usage limitation that would otherwise apply.3
4. Adherence to QRE Definitions: Ensure that only wages, supplies, time-sharing costs, and 65% of contract research costs, as defined by IRC §41, are included in the Kansas QRE base. Careful itemization and retention of these records are required, as KDOR reserves the right to request this information.17

By treating the Kansas R&D credit as a direct extension of the federal credit and ensuring that all research activities meet the high bar set by the “Technological in Nature” standard, Kansas businesses can effectively leverage this significant state incentive to drive sustained innovation and growth.

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/