The Modernized Kansas Research and Development Tax Credit: An Expert Analysis of K.S.A. 79-32,182b

I. Executive Summary: The Essentials of K.S.A. 79-32,182b

K.S.A. 79-32,182b authorizes the Kansas Research and Development (R&D) Tax Credit, a crucial state incentive designed to promote technological investment within the state.

For taxable years commencing after December 31, 2022, the law allows a credit equal to 10% of the taxpayer’s current-year qualified R&D expenditures that exceed a calculated three-year rolling average base.1

A. Simple Statutory Meaning

K.S.A. 79-32,182b grants a non-refundable income tax credit for qualified research and development expenditures conducted within Kansas. The credit rate is 10% of a taxpayer’s current-year qualified expenses exceeding their rolling three-year average base.1

B. Key Post-2022 Enhancements and Strategic Value

The Kansas R&D tax credit underwent substantial legislative modification, effective for tax years commencing after December 31, 2022, transforming the statute from a narrowly available benefit into a broader economic stimulus tool.1 These changes were explicitly designed to increase the program’s utility and accessibility for a wider array of businesses engaged in innovation within the state.3

The most significant enhancements include:

1. Increased Credit Rate: The statutory credit rate increased from the previous 6.5% to a competitive 10% rate applied to the excess of qualified research expenses (QREs).4 This higher rate directly drives significant claims, particularly in Kansas’s key sectors such as agriculture, manufacturing, and technology.2
2. Expanded Eligibility: Prior to 2023, the credit was often limited only to C-corporations, excluding most pass-through entities (PTEs). The new legislation reversed this limitation, making the credit available to all income taxpayers, including individuals, partnerships, S corporations, and Limited Liability Companies (LLCs).3
3. Transferability: Perhaps the most revolutionary change is the introduction of transferability. Credits generated in tax year 2023 and thereafter are fully transferable to any person if the generating taxpayer does not have a current Kansas income tax liability.1

The combined effect of expanding eligibility to PTEs (such as many high-growth startups and small technology firms) and introducing transferability for non-taxable entities is a critical policy shift. High-growth firms often operate at a net loss in early years, meaning a non-refundable credit offers no immediate financial benefit. By allowing these companies to generate the credit (expanded eligibility) and then monetize it immediately through a single, full transfer 1, Kansas has effectively established a mechanism to convert future tax offsets into immediate operating capital. This strategic positioning aims to enhance Kansas’s attractiveness as a hub for technological and industrial investment.

II. Deep Dive into the Statutory Framework (K.S.A. 79-32,182b)

The operative language of K.S.A. 79-32,182b governs three key areas: calculation, qualification, and utilization. A thorough understanding of these subsections is essential for accurate compliance and claim maximization.

A. The Credit Calculation Methodology (Subsection (a))

K.S.A. 79-32,182b(a) mandates a specific formula for calculating the amount of the allowable credit. This methodology is based on rewarding year-over-year increases in investment, rather than simply subsidizing overall research activity.

The credit calculation is structured as follows: The taxpayer is allowed an income tax credit equal to 10% of the amount by which the expenditures in the current taxable year exceed the taxpayer’s average of the actual expenditures made in the current taxable year and the next preceding two taxable years.1

This calculation necessitates the determination of a three-year moving average base. To illustrate, for the 2025 tax year, the base is calculated using QREs from 2025, 2024, and 2023. The total of these three years is divided by three to establish the average. The current year’s QRE must then exceed this average for any credit to be generated. The statute explicitly limits eligible activities to those “conducted within this state”.1

The inclusion of the current year’s QRE in the three-year moving average calculation creates a sophisticated mechanism that demands careful tax planning. For a business with zero prior R&D history (a new startup), the base in Year 1 is calculated by taking the Year 1 QREs and dividing them by three.2 If this company were to maintain exactly the same spending level in Year 2, the base rises sharply because two years of positive spending now contribute to the average, making it significantly harder to generate “excess” QREs in Year 2 without substantial growth in spending. This structure incentivizes discontinuous, major investments over a steady-state level of spending to maximize the credit generated annually.

B. Defining Qualified Expenditures (Subsection (c))

The definition of “expenditures in research and development activities” is defined in K.S.A. 79-32,182b(c) through direct reference to federal tax law. This mandatory linkage simplifies state definition but significantly raises the requirement for technical documentation.

The statute dictates that qualifying expenditures must be expenses “allowable for deduction under the provisions of the federal internal revenue code of 1986, as amended”.1 This explicit tie-in requires taxpayers to satisfy the rigorous four-part test and definitions found in federal Internal Revenue Code Section 41.

The four essential federal requirements that Kansas QREs must satisfy are: the activity must be technological in nature; it must seek to eliminate uncertainty; it must involve a process of experimentation; and it must relate to a qualified purpose (the development of a new or improved business component).3

Exclusions and Ineligible Costs:

Certain expenditures are specifically excluded from the definition of qualifying R&D activities under Kansas law:

1. Subsidized Research: Expenditures paid for by moneys made available to the taxpayer via federal or state law are excluded.1
2. Specific Medical Procedures: Expenditures for the performance of any abortion (as defined in K.S.A. 65-6701) are excluded for tax years commencing after December 31, 2013.1
3. Eligible Costs: Eligible expenses generally align with federal Qualified Research Expenses (QREs), predominantly including wages paid for qualified services, the cost of supplies used in the conduct of research, and certain contract research expenses.3

The reliance on the federal IRC definition means that the legitimacy of a Kansas R&D credit claim is entirely dependent on sustained federal compliance. Any successful federal audit challenge that reclassifies the expenditures (e.g., finding the activities fail the Four-Part Test) will directly nullify the corresponding state credit. This emphasizes that federal substantiation is the foundation upon which the state claim rests. Furthermore, recent federal tax law changes requiring the capitalization of R&D expenses under IRC Section 174, though affecting federal cash flow management, do not eliminate the state’s ability to recognize these qualified amounts as “expenditures” for the purpose of the 10% credit calculation.7

C. Limitation and Indefinite Carryforward (Subsection (b))

K.S.A. 79-32,182b(b) governs the pacing of the credit utilization, effectively making the R&D credit a mechanism for long-term tax liability reduction.

The statute imposes a significant constraint on the immediate use of the credit: In any one taxable year, the amount of credit allowable for deduction from the taxpayer’s tax liability cannot exceed 25% of the total amount of such credit plus any applicable carry forward amount.1 This 25% utilization constraint applies annually to the total accumulated balance of the credit available.

Any unused portion of the calculated credit—the amount that exceeds the taxpayer’s current tax liability or which cannot be claimed due to the 25% annual limit—is granted an indefinite carryforward.1 The credit may be carried forward in 25% increments until the total amount is fully used.4

The 25% restriction immediately positions the Kansas R&D credit as a long-term deferred tax asset. For example, a credit generated for $\$100,000$ will take a minimum of four years to fully utilize, assuming the taxpayer has sufficient Kansas income tax liability (KTL) in each of those years to absorb the full $\$25,000$ limit. This extended realization period requires corporate finance and tax teams to carefully model the time value of money when evaluating the credit’s true economic worth and necessitates continuous tracking of the asset on the balance sheet.

III. Kansas Department of Revenue (KDOR) Guidance and Compliance Procedures

The Kansas Department of Revenue (KDOR) has established specific forms and procedures to manage the claiming, reporting, and, if applicable, the transfer of the K.S.A. 79-32,182b credit.

A. Claiming the Credit: Schedule K-53

To formally claim the research and development credit, a taxpayer must file Schedule K-53 (Research and Development Credit) with their annual Kansas income tax return.4

The K-53 form requires detailed reporting of qualified activities conducted within Kansas, including the breakdown of expenses by category (e.g., machinery, equipment, payroll, and other expenditures).9 Accurate documentation of the geographic allocation of QREs is vital, especially for multi-state businesses that must ensure only Kansas-apportioned expenses are included in the calculation of the credit base.2 Furthermore, the K-53 is the primary document used to substantiate the calculation of the three-year moving average base, the current credit generated, the application of the 25% annual limitation, and the calculation of the resulting carryforward amount.4

B. The Transfer Mechanism and Form K-260 (Subsection (d))

The transferability provision, effective for tax year 2023 and all subsequent years, provides a critical liquidity pathway for innovative companies that may not have immediate tax liability.1 This feature, however, is governed by stringent administrative requirements and limitations.

Requirements for Credit Transfer

The transferability is governed by several precise rules 1:

• Transferor Eligibility: The income tax credit may only be transferred by a taxpayer who is without a current Kansas income tax liability.1
• Transfer Limitation: Only the full credit generated may be transferred; partial sales or assignments are prohibited.4
• One-Time Rule: The credit may only be transferred once by the entity that originally earned it.4
• Transferee Claim and Limitation: The credit may be claimed by the transferee against their Kansas income tax liability in the year of the transfer. Crucially, the credit claimed by the transferee remains subject to the same limitations, specifically the 25% annual utilization constraint, that were in place when the credit was earned.1
• Non-Refundable Status: No person, including the transferee, is entitled to a refund for the transferred tax credit.1

Administrative Compliance: Form K-260

To document the transfer of the R&D credit, Form K-260 (Tax Credit Transfer Notification Form) must be jointly completed and submitted to the KDOR by both the transferor and the transferee.4

Form K-260 requires details regarding the transaction, including the date of the transfer agreement, the dollar amount of credits being conveyed, and the dollar amount received by the transferor in payment for the credits.10 This form acts solely as a notification mechanism for the KDOR, establishing a record of the change in ownership of the tax asset.10

It is essential that the transferor, the entity that earned the credit, also submits Schedule K-53 with their income tax return to document the credit that was generated and transferred, thus maintaining the audit trail for the original qualification.4 This requirement places a significant due diligence obligation on the transferee. Since the KDOR retains the right to audit the original qualification and calculation of the QREs, the transferee must ensure the transferor’s underlying research documentation and K-53 calculations are robust, as the transferred tax asset is only as defensible as the original compliance records.

IV. Practical Application and Numerical Modeling

A numerical example is critical to illustrating the interconnected mechanics of the calculation, the three-year base, the 25% annual limit, and the carryforward provisions of K.S.A. 79-32,182b.

A. Modeling Assumptions

We consider “KanTech Solutions,” a company focused on manufacturing process innovation in Kansas, starting R&D in 2023.

B. Calculation of Credit Generated (K.S.A. 79-32,182b(a))

The following table details the calculation of the excess QREs and the generated credit, demonstrating how the three-year moving average base increases each year, requiring greater growth to generate a positive credit.

Table Title: Calculation of Kansas R&D Tax Credit Generated (K.S.A. 79-32,182b(a))

This model confirms that even with continuous QRE growth (from $800k to $1.2M), the generated credit decreases significantly over time ($53,333 to $20,000). This illustrates that the three-year moving average formula inherently favors large, initial R&D investments or periods of exponential spending growth.

C. Utilization and Carryforward Schedule (K.S.A. 79-32,182b(b))

The next table demonstrates the utilization of the generated credit, showing how the 25% annual limitation dictates the long-term claim strategy, even when tax liability is high.

Table Title: Utilization and Carryforward Schedule (25% Limitation)

The results show that KanTech generated a total of $113,333 in R&D credits by the end of 2025. However, due to the mandatory 25% utilization constraint, the company was only able to use $68,333 of that credit over the four-year period (through 2026), despite having ample tax liability (KTL of $40,000 annually) to absorb much more.1

The remaining $45,000 in unused credit carries forward indefinitely.2 This clearly demonstrates that the credit is realized over a long period, potentially spanning five years or more to fully utilize the total amount generated, necessitating robust accounting and long-term financial projection capabilities.

D. The Transfer Scenario

If KanTech Solutions had been a startup operating at a net loss, resulting in a $0 Kansas tax liability (KTL) in 2023, the transfer provision would become immediately relevant.

Under this scenario, KanTech would generate the full $53,333 credit in 2023 but would be ineligible to claim it due to the non-refundable nature of the credit and lack of current liability. Because KanTech has no current KTL, it is eligible under K.S.A. 79-32,182b(d) to transfer the credit.1

KanTech would then enter into an agreement to sell the entire $53,333 credit to a third party (Transferee). KanTech would file the K-53 and jointly submit Form K-260 with the Transferee to document the sale.4

The Transferee would claim the credit against their own KTL in the year of the transfer. Crucially, the Transferee remains bound by the 25% limitation.1 Thus, if the transfer occurred in 2023, the Transferee could only utilize 25% of the transferred amount, or $13,333, in that first year, carrying the remaining $40,000 forward indefinitely against future tax liabilities. This liquidity mechanism benefits the transferor by converting a non-usable future asset into immediate cash, while the transferee acquires a discounted, long-term tax reduction asset.

V. Conclusion: The Strategic Importance of K.S.A. 79-32,182b

The modernized Kansas R&D tax credit, codified in K.S.A. 79-32,182b, represents a sophisticated and aggressive strategy by the state to promote innovation. The increase in the credit rate to 10% and the expansion of eligibility to all income taxpayers, including pass-through entities, broadens the applicability of the incentive across Kansas’s economic landscape.

However, maximizing the benefit of the credit requires comprehensive strategic and compliance planning. Taxpayers must meticulously track expenditures to meet the federal IRC Section 41 definition, given that the state claim is contingent on federal qualification. Furthermore, the inherent complexity of the three-year moving average base requires R&D budgeting that emphasizes consistent, substantial growth to overcome the rising base and generate significant excess QREs.

The most notable feature, transferability for non-taxable entities, provides a powerful tool for converting unused credits into immediate liquidity, offering significant relief to high-growth startups and small businesses. For both transferors and transferees, adherence to the KDOR’s strict administrative requirements, including the filing of Schedules K-53 and K-260, and understanding the enduring 25% annual utilization limitation, is paramount to ensure the validity and optimal realization of this long-term tax asset.

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