Boosting Innovation & Growth: Expanding R&D Tax Credits in Kansas
HELPING YOU FOSTER INNOVATION
Kansas is taking steps to encourage businesses to invest more in research and development (R&D) by expanding its tax credit program. The new legislation is effective for tax years beginning after Dec. 31, 2022 and will benefit all eligible taxpayers, including individuals, that engage in R&D activities by providing them with tax credits to offset their expenses. In 2022 and prior tax years, a Kansas credit was not available to individuals, partnerships, S corporations, limited liability companies and other pass-through entities. Kansas will also start allowing taxpayers without a current tax liability to transfer the credit.
Where the R&D is Applicable
You may qualify for R&D tax credits if your company or operation:
- Creates new processes, products, apps or software.
- Improves or automates processes, products or software.
- Develops prototypes, designs, models or other simulating tools.
- Designs tools, molds or equipment.
- Evaluates alternative materials or approaches.
- Hires outside consultants to do any of the above.
How to Qualify for a R&D Tax Credit
To qualify for the R&D tax credit, the activity must meet all four requirements:
- Be technological in nature.
- Identify a specific goal or objective.
- Seek to eliminate uncertainty.
- Follow a process of experimentation.
Eligible costs include employee wages, cost of supplies, cost of testing, and contract research expenses.
Kansas Expands R&D Tax Credit
The R&D tax credit has been in place in Kansas for many years, but it was limited in scope and did not provide much of an incentive for businesses to invest in R&D. The new legislation expands the tax credit and makes it more attractive for companies to invest in innovation.
Under the new legislation, Kansas companies with qualified R&D activities within Kansas are now eligible to receive a 10% tax credit instead of the previous 6.5% credit. Application of the credit remains the same as prior years, with the credit being spread over the current and following three tax years. Usage of the credit is limited to 25% of the credit per year. For all taxable years commencing after Dec. 31, 2022, the credit is 10% of the difference between the actual qualified research and development expenses for the year and the average of the actual expenditures made during the year and the two previous tax years. Kansas will have its’ own calculation on form K-53, but as a rough estimate 10% of federal credit amount will now be allowed as a Kansas credit.
Taxpayers without a Kansas tax liability may sell their R&D credits, which may be transferred 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.
Several industries are eligible to receive R&D tax credits, but the main innovative industries in Kansas include farming, advanced manufacturing, bioscience, professional services, renewable fuels, bioenergy and wind energy. These companies typically generate an average of $500,000 per year in qualified research expenditures and an average of $59,000 federal credit per year.
Positive Impact for Kansas
Expanding the R&D tax credit program in Kansas is expected to impact businesses operating in the state positively. By providing businesses with a financial incentive to invest in R&D activities, the state hopes to encourage innovation and economic growth.
One of the main benefits of the R&D tax credit program is that it helps businesses offset innovation costs. R&D activities can be expensive and time-consuming, and many companies may be hesitant to invest in them if they do not have a clear return on investment. The tax credit helps to alleviate some of this financial burden, making it easier for businesses to justify their R&D expenses.
In addition to helping businesses offset innovation costs, the R&D tax credit can also help them remain competitive. By investing in R&D activities, companies can develop new products and services, improve existing ones and stay ahead of the competition. The tax credit program makes it easier for businesses to invest in R&D activities and remain competitive in their industries.
Expanding the R&D tax credit program in Kansas is also expected to attract new businesses to the state. Companies that conduct R&D activities may be more likely to set up operations in Kansas if they know they can receive a tax credit for their expenses. This, in turn, could lead to job creation and economic growth in the state.
Taxpayers should review and document their R&D projects and expenses since 2020 to maximize their 2023 Kansas R&D tax credit. Contact an Adams Brown advisor if you have any questions about R&D qualifications.