Executive summary: Kansas research and development credit more favorable for 2023
On Sept. 6, 2023, the Kansas Department of Revenue released Notice 23-09, explaining recent legislative changes to the state research and development (R&D) program effective in 2023, including an increase in the credit amount, removal of the limitation of credit claims to C corporations and the ability to transfer the credit. The Kansas R&D credit and the recent changes outlined in the notice are summarized below.
Kansas research and development credit becomes more attractive in 2023
The Kansas research and development (R&D) credit provides an income tax credit for taxpayers making expenditures in R&D activities conducted within the state. R&D expenditures are those that would be allowable under the federal Code, i.e., expenses for activities intended to discover information that eliminates uncertainty concerning the development or improvement of a product. A product qualifies as a process, technique, formula, or invention.
For tax years beginning before Jan. 1, 2023, the credit amount is 6.5% of the difference between the actual qualified R&D expenses for the year and the taxpayer’s average of the actual expenditures made during the year and the two previous tax years. That amount is increased to 10% for tax years beginning Jan. 1, 2023 and after. The credit allowed in any tax year is limited to 25% of the credit plus any carryforward. The amount of the credit that exceeds the taxpayer’s tax liability may be carried forward until the total amount of the credit is used.
Beginning in 2013, the credit became available solely to corporations subject to the Kansas corporate income tax. That limitation has been eliminated for tax year 2023 and after. Accordingly, the credit is available for any Kansas income taxpayer, including individuals, various flow-through entities and C corporations with qualifying expenditures beginning in 2023.
Also new for tax year 2023, R&D tax credits may be transferred by a taxpayer without a current tax liability. Credits can be transferred to any person and be claimed by the transferee as a credit against the transferee’s income tax liability in the tax year it was transferred. Importantly, no refund is available for the transferred tax credit (but it can be carried forward), only the full credit may be transferred, and the credit may only be transferred one time.
An application must be completed to apply for the credit beginning in tax year 2023 due to the new transferable nature of the R&D credit. The procedure to claim the credit on the income tax return remains unchanged.
The 2023 Kansas R&D tax credit changes may make the credit more attractive for some taxpayers conducting research and development activities. R&D tax credits can provide significant tax savings, although some taxpayers are unaware their business activities may qualify. Taxpayers in manufacturing, certain agricultural businesses, life sciences and technology often have R&D expenditures. Eligible tax credits may be available for businesses incurring expenses related to developing new or improved products and manufacturing processes, increasing automation, designing tools and dies, developing production equipment, and developing new or improved software, among many other activities. Even taxpayers not claiming the federal credit should consider whether the expanded eligibility, increased credit amount and new opportunity to transfer the credit present a good opportunity to re-evaluate the state-level credit.
State and federal R&D tax credit recipients should also be aware of the recent changes to section 174 and how they may affect both federal and state compliance. Effective in 2022, and enacted by the Tax Cuts and Jobs Act, section 174 requires organizations to capitalize and amortize R&D expenses over five years instead of immediate expensing. Not all states conform to section 174. Additionally, taxpayers should be aware that the IRS recently released initial rules for section 174 expenditures.
Finally, taxpayers with multistate R&D expenses may also consider an R&D tax credit study to identify available expenses eligible at the federal level and various states as the state R&D tax credits may operate remarkably different from each other. Taxpayers with questions about the Kansas R&D credit or other federal and state credits should reach out to their credits and incentives advisers.