The Kansas legislature recently passed legislation expanding eligibility for Kansas R&D tax credits to Kansas individuals and pass-through entities. The law goes into effect on July 1, 2022 and is effective for tax years beginning after Dec. 31, 2022. Read more about the significant changes to the Kansas R&D tax credit.
What qualifies for an R&D tax credit in Kansas?
Any individual or entity that is working on developing new or improved products or manufacturing processes may be eligible for the credit. To receive the Kansas credit, qualified R&D work and related expenses must be incurred in Kansas.
Tax credit increased for all
Kansas individuals or entities 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.
Reversal of policy for pass-through entities
Kansas had previously limited the R&D credit to C-Corporations. This new legislation allows R&D credits to be claimed by individuals and any entity regardless of classification (pass-through entities, and C- Corps). While all individuals and entities have been eligible for the federal R&D credit, taxpayers are required to review and document any qualified R&D projects/expenses within Kansas from 2020 to 2022 to establish the base for claiming a Kansas R&D credit for 2023.
New ability to transfer the credit for cash
Taxpayers without a Kansas tax liability may sell their R&D credit with the following caveats. The credit can only be transferred once, and the entire credit amount must be transferred.
A company that has $1 or more of Kansas tax liability and an R&D credit of any amount would not be able to transfer any portion of their credit since part of the credit could be applied to the tax liability, and thus the entire credit amount would not be available to be transferred.
In summary
Pass-through entities and individuals conducting qualified R&D work in Kansas may qualify for a Kansas R&D credit. Taxpayers should review and document their R&D projects and expenses since 2020 in order to maximize their 2023 Kansas R&D tax credit. Beginning in 2023 the credit is increased from 6.5% to 10% of qualified R&D costs.
If you have any questions about your situation or your R&D qualifications, contact Bruce Stubbs using the information below.
Senior Vice President
AGH Specialized Tax Solutions, LLC
Bruce Stubbs has more than 20 years of legal and tax consulting experience. His past 18 years have been devoted to research & development (R&D) tax credit services, cost segregation, and fixed asset tax issues, including the repair versus capitalization issues — also known as the repair regulations. He has more than 18 years of experience in public accounting providing tax consulting services to clients across all industries, including retail, hospitality and health care entities ranging from assisted living to full-service hospitals. Bruce’s practice also covers manufacturing applications including aircraft and aircraft components, plastics, electronics, custom job shops, industrial and commercial, and computer software development.
Bruce’s undergraduate degree is in accounting. He also earned his juris doctorate (JD) from Washburn University School of Law and his master of laws in taxation (LLM) from the University of Denver School of Law. Bruce is a frequent speaker for CPA and business groups about specialized tax topics such as research and development tax credits, cost segregation and the expensing versus capitalization regulations.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.