Did Kansas increase its research and development tax credit and who can claim it?

Plain-English summary

Kansas Notice 23-09 explains changes to the Kansas research and development (R&D) tax credit made by 2022 House Bill 2239 (Section 41), which amended K.S.A. 79-32,182b.

What the credit is. K.S.A. 79-32,182b gives a credit against Kansas income tax for expenditures on research and development conducted in Kansas. "Expenditures in research and development activities" means expenses deductible under the Internal Revenue Code. The credit is based on the amount by which the year's R&D spending exceeds the taxpayer's average R&D spending for that year and the two preceding years.

Bigger credit. For tax year 2023 and all years after, the credit rate increases from 6.5% to 10% of that excess amount.

Open to more taxpayers. The old law let only C corporations claim the credit. For 2023 and after, K.S.A. 79-32,182b(d) is amended so any Kansas income taxpayer -- individuals, partnerships, S corporations, LLCs, other pass-through entities, and C corporations -- may claim it.

Now transferable. New language in K.S.A. 79-32,182b(d) lets a taxpayer without a current tax liability transfer new credits (2023 and after) to any person, who claims the credit against their own Kansas income tax and may carry it forward until fully used. Important limits: a transferred credit is not refundable, only the full credit received may be transferred, and a credit may be transferred only one time. Carried-forward credits remain subject to the limitations in place when the credit was earned.

New paperwork. Because a credit can be transferred before it is claimed, taxpayers must now apply first using Form K-204 (Research and Development Credit Application), and report any transfer on Form K-260 (Kansas Tax Credit Transfer Notification Form).

What this means for you

Businesses and individuals doing R&D in Kansas

• Your Kansas R&D credit is now worth 10% (up from 6.5%) of qualifying spending above your three-year average, starting in tax year 2023.
• You no longer have to be a C corporation -- individuals, S corporations, partnerships, LLCs, and other pass-throughs can now claim it.
• File Form K-204 to apply before you claim the credit.

Taxpayers who cannot use the full credit

• If you have no current Kansas tax liability, you can transfer the credit once to another person, who can carry it forward until used. Report the transfer on Form K-260. The credit is not refundable and can only be transferred one time.

Common questions

How much is the credit now? 10% of the amount by which the year's Kansas R&D expenditures exceed the taxpayer's average for that year and the prior two years, starting in tax year 2023.

Who can claim it? Any Kansas income taxpayer for 2023 and after -- not just C corporations.

Can I sell or transfer it? Yes, but only once, only the full amount received, and it is not refundable.

What forms do I file? Form K-204 to apply for the credit and Form K-260 to report a transfer.

Citations and references

• House Bill 2239 (2022), Section 41 -- increased and made transferable the R&D credit.
• K.S.A. 79-32,182b -- Kansas research and development income tax credit; rate raised to 10%, opened to all income taxpayers, and made transferable for tax year 2023 and after.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 23-09

Original ruling text

Policy and Research
109 SW 9th Street Phone: 785-368-8222
PO Box 3506 Fax: 785-296-1279
Topeka KS 66601-3506 www.ksrevenue.gov
Mark A. Burghart, Secretary Laura Kelly, Governor

                                        NOTICE 23-09

                          RESEARCH AND DEVELOPMENT TAX CREDIT

                                    (SEPTEMBER 6, 2023)

   During the 2022 Legislative Session House Bill 2239 was passed and signed into law.

Section 41 of the Bill amended K.S.A. 79-32,182b to increase and make transferable the credit for
research and development activities.

   K.S.A. 79-32,182b provides a credit against Kansas income tax for expenditures in research

and development activities conducted in Kansas. The phrase "expenditures in research and
development activities" is defined in subsection (c) of the statute to mean expenses allowable for
deduction under the Internal Revenue Code. In accordance with subsection (a), for tax years prior
to 2023 the credit is equal to 6.5% of, "the amount by which the amount expended for such
activities in the taxable year of the taxpayer exceeds the taxpayer's average of the actual
expenditures for such purposes made in such taxable year and the next preceding two taxable
years".

  K.S.A. 79-32,182b(a) was amended to increase the research and development credit from

6.5% to 10% for tax year 2023 and all years thereafter.

   K.S.A. 79-32,182b(d) was amended to remove a limitation that allowed only C corporations

to claim the credit. For tax year 2023 and all years thereafter, any Kansas income taxpayer,
including individuals, partnerships, S corporations, limited liability companies, other pass-through
entities, and C corporations may claim the credit.

   Unlike prior years, taxpayers wishing to claim the credit must complete and submit an

application form prior to claiming the credit. This is because, as explained below, the credit is
now transferable, and the transfer may occur prior to the taxpayer claiming the credit. To apply
for the credit, complete form K-204 Research and Development Credit Application, which is
available from the Department's website at: www.ksrevenue.gov.

    New language added to K.S.A 79-32,182b(d) provides, effective for tax year 2023, and all

tax years thereafter, new credits may be transferred by a taxpayer without a current tax liability to
any person and be claimed by the transferee as a credit against the transferee's Kansas income tax
liability in the tax year when it was transferred. The credit claimed by the transferee may be carried
forward by the transferee until the credit is entirely used.

   However, that carry forward credit shall be subject to limitations and requirements in place

at the time the credit was earned.

A transferred credit is not refundable. Only the full credit received by the transferor may be
transferred to a transferee, and the credit may only be transferred one time. Documentation of any
credit acquired by transfer must be provided by the taxpayer or transferee in the manner
established by the Department of Revenue. Complete form K-260, Kansas Tax Credit Transfer
Notification Form which is available from the Department's website at: www.ksrevenue.gov/
pdf/k-260.pdf.

                                 TAXPAYER ASSISTANCE

 Additional copies of this notice, forms or publications are available from our web site,

www.ksrevenue.gov. If you have questions about this Notice, please contact:

                              Taxpayer Assistance Center
                             Kansas Department of Revenue
                             Scott Office Building, 1st Floor
                                    120 SE 10th Ave
                                     P. O. Box 3506
                                Topeka, KS 66601-3506
                                  Phone: 785-368-8222
                                   Fax: 785-291-3614