Kansas R&D Tax Credit: What Changed and Why It Matters

Kansas R&D tax credit gives businesses a 10% credit on qualifying research expenses, and since 2023, pass-through entities like S-corps and LLCs can finally claim it. The credit is non-refundable but transferable for companies without tax liability.

Key Takeaways

• The Kansas R&D tax credit jumped from 6.5% to 10% for tax years starting after December 31, 2022
• Pass-through entities gained eligibility in 2023 through House Bill 2239, opening the door for thousands more Kansas businesses
• You can transfer unused credits to another business if you don’t have current tax liability—but only once and only the full amount
• The credit uses a 25% per year limitation, spreading your benefit over four years minimum
• Federal changes in 2025 restored immediate expensing for domestic R&D, creating a dual benefit you can’t afford to miss

Here’s what most Kansas business owners don’t realize. You’re probably already doing work that qualifies.

When Spirit AeroSystems engineers tweak a manufacturing process to reduce waste, that’s qualified research. When a Wichita software developer builds a new feature to solve customer problems, that counts too. When ag-tech startups in Manhattan test better irrigation systems, they’re creating qualified research expenses.

But most Kansas businesses leave money sitting on the table because they think R&D credits are only for lab coats and test tubes. That couldn’t be further from the truth.

What House Bill 2239 Did to the Kansas Research Tax Credit

April 2022 changed everything for Kansas innovation.

Governor Laura Kelly signed House Bill 2239 into law, and it fundamentally reshaped who could claim the Kansas research and development tax credit. Before this legislation, only C-corporations subject to Kansas corporate income tax could benefit. That left out the vast majority of Kansas businesses—the S-corps, LLCs, partnerships, and sole proprietors actually driving innovation across the state.

Starting with tax year 2023, any Kansas income taxpayer can claim the credit. Your business structure doesn’t matter anymore.

The same legislation boosted the credit rate from 6.5% to 10%. That’s a 54% increase in the benefit. For a manufacturer with $500,000 in qualified research expenses, we’re talking about an extra $17,500 in credits compared to the old calculation.

Here’s what makes this even better: Kansas created a transferability option for businesses without current tax liability. Startups burning through cash to develop products can now sell their credits to profitable companies. The credit can be transferred once, must be transferred in full, and both parties complete specific forms through the Kansas Department of Revenue.

The Math Behind Your Kansas R&D Credit

Kansas uses an incremental calculation method. You don’t get credit on all your research spending—only on the increase over your historical average.

Take your current year’s qualified research expenses. Subtract the average of your current year plus the two previous years. Multiply that difference by 10%.

Let’s say you spent $400,000 on qualifying research this year. Last year was $300,000, and the year before was $200,000. Your three-year total is $900,000. Divide by three to get $300,000 average. Your current year of $400,000 minus that $300,000 average equals $100,000. Ten percent of that $100,000 gives you a $10,000 Kansas credit.

The catch? You can only use 25% of the credit each year. That $10,000 credit means you’d claim $2,500 this year, $2,500 next year, and so on for four years. Any unused portion carries forward indefinitely in those 25% chunks.

Schedule K-53: Your Gateway to Kansas R&D Credits

Claiming the credit requires completing Schedule K-53 and submitting it with your Kansas income tax return. The Kansas Department of Revenue doesn’t mess around with incomplete filings.

If you’re transferring the credit, both the transferor and transferee file separate documentation. The selling business submits Schedule K-53 showing they earned the credit. The buying business uses Form K-260 to document the transfer. Both forms go to the Department with your respective tax returns.

Aspect	Pre-2023 (Old Rules)	2023 and After (New Rules)
Credit Rate	6.5%	10%
Eligible Entities	C-Corporations Only	All Kansas Income Taxpayers
Transferability	Not Allowed	One-Time Transfer Permitted
Annual Usage Limit	25% per year	25% per year (unchanged)
Refundability	Non-refundable	Non-refundable

How Federal R&D Changes Amplify Your Kansas Benefits

The federal government just handed Kansas businesses a second gift.

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act into law. Among dozens of tax provisions, this legislation permanently restored immediate expensing for domestic R&D expenses starting with tax year 2025.

From 2022 through 2024, businesses had to capitalize and amortize their research costs over five years for domestic work. That meant spreading deductions across half a decade, which murdered cash flow for innovative companies. The new law kills that requirement.

Starting in 2025, you can deduct 100% of your domestic qualified research expenses in the year you incur them. And you can still claim the federal R&D tax credit on those same expenses.

This dual benefit fundamentally changes the economics of innovation. A Kansas manufacturer investing $1 million in product development can now deduct the full million immediately while also claiming up to $140,000 in federal credits (assuming they qualify for the 14% simplified credit calculation). Add Kansas’s 10% state credit on the incremental increase, and you’re stacking benefits.

Small Kansas businesses with gross receipts under $31 million got something even better. The One Big Beautiful Bill Act lets them retroactively expense R&D costs from December 31, 2021 through January 1, 2025. That means amending prior returns to accelerate deductions and potentially generating refunds.

How This Plays Out for Kansas’s Key Industries

Kansas isn’t Silicon Valley, and that’s exactly the point.

Our innovation happens in airplane hangars, wheat fields, beef processing facilities, and animal health labs. The Kansas R&D tax credit was designed for the industries actually operating here.

Wichita’s aerospace cluster employs over 30,000 people with a concentration in aircraft manufacturing 33 times higher than the national average. Spirit AeroSystems, Textron Aviation, and Bombardier Learjet don’t just assemble planes—they’re constantly improving manufacturing processes, developing new materials, and solving technical problems. Every process improvement that involves experimentation qualifies.

Kansas ag-tech companies are revolutionizing farming. When you’re developing precision agriculture software, breeding better crop varieties, or designing automated harvesting equipment, you’re creating qualified research expenses. The state produces 20% of America’s wheat. Any technology making that production more efficient qualifies for both state and federal credits.

The Kansas City Animal Health Corridor represents the world’s largest concentration of animal health companies. Merck Animal Health just committed $895 million to expand its De Soto facility. Pharmaceutical development, vaccine research, and diagnostic equipment improvement all generate massive qualified research expenses.

Even food processing qualifies when you’re improving production methods or developing new products. Hilmar Cheese Company’s new $460 million Dodge City facility will employ 247 people doing work that almost certainly includes qualifying activities.

What Actually Qualifies as Kansas R&D

Kansas qualified research expenses must meet the federal definition under IRC Section 41. That means passing the four-part test most businesses have never heard of.

First, your activities must rely on principles of physical science, biological science, engineering, or computer science. You’re not doing qualified research if you’re just following a cookbook recipe or established procedure.

Second, you must be developing or improving a business component—a product, process, computer software, technique, formula, or invention. Cosmetic changes don’t count. The improvement must be functional.

Third, you’re trying to eliminate technical uncertainty. You started with a question: Will this work? How do we make it work better? Can we make it faster, cheaper, more reliable? That uncertainty is the heart of qualified research.

Fourth, you must use a process of experimentation. Testing, prototyping, simulation, systematic trial and error—these activities prove you’re conducting research rather than routine development.

Five Activities Kansas Businesses Overlook

• Manufacturing process optimization: When your production team tests different equipment configurations to reduce cycle time, that’s qualified research if there’s technical uncertainty about the outcome
• Custom software development: Building new features, improving algorithms, or developing proprietary systems qualifies when you’re solving technical problems
• Prototype development: Those iterations you go through before finalizing a design? Each cycle of build-test-refine generates qualified research expenses
• Product improvement: Making existing products more efficient, reliable, or capable involves technical problem-solving that qualifies
• Agricultural innovation: Testing new growing methods, developing equipment modifications, or improving livestock management systems all potentially qualify

Kansas R&D Credit Calculation vs. Federal Credit

Understanding how state and federal credits interact is where businesses either maximize benefits or leave money behind.

The federal R&D tax credit offers two calculation methods. Most businesses use the Alternative Simplified Credit, which gives you 14% of the amount by which your current year’s qualified research expenses exceed 50% of your three-year average. Kansas uses its own incremental formula that looks at the difference between current expenses and the three-year average (including the current year).

These different calculations mean your Kansas and federal credits won’t be proportional. A rough estimate is that your Kansas credit will equal about 10% of your federal credit amount, but the actual number varies based on your expense pattern.

Here’s a critical point many tax advisors miss: the Kansas credit applies only to Kansas-based qualified research expenses. If you have multi-state operations, you need to track which research activities happen in Kansas facilities with Kansas employees. Your federal credit can include all domestic qualified research expenses regardless of location.

Feature	Kansas Credit	Federal Credit
Credit Rate	10% of incremental increase	14% under ASC method
Refundability	Non-refundable	Refundable for qualified small businesses against payroll tax
Carryforward	Indefinite in 25% increments	20 years (pre-2023 credits), indefinite (2023+)
Geographic Scope	Kansas activities only	All domestic activities
Transferability	Yes (once, full amount)	No

Documentation That Survives Kansas Department of Revenue Audits

The Kansas Department of Revenue isn’t playing games when it comes to R&D credit documentation.

You need contemporaneous records—meaning created during or shortly after the research activities. Reconstructing documentation years later during an audit never works well.

Start with project documentation. What problem were you trying to solve? What technical uncertainty existed? What alternatives did you test? Detailed project notes, design documents, test logs, and meeting minutes build the foundation.

Track your qualified research expenses by project. Wages and benefits for employees performing or supervising research activities make up the biggest bucket. Supply costs for prototypes, testing, and experimentation count. Payments to contractors conducting research on your behalf qualify if structured correctly.

Time tracking is non-negotiable. When the Kansas Department of Revenue asks how you determined that 60% of an engineer’s time qualified for the credit, you better have timesheets or detailed activity logs supporting that allocation. Generic estimates get crushed in audits.

Save all technical documentation. CAD drawings, simulation results, test data, failed prototype iterations—this stuff proves you were experimenting and facing technical uncertainty. The paper trail demonstrates you weren’t just doing routine product development.

Kansas R&D Eligibility: Who Should Apply

Any Kansas business conducting qualified research activities can potentially claim the credit. But certain industries have higher hit rates.

Manufacturing companies almost always have qualifying activities. Process improvements, automation projects, quality control enhancements, tool and die development—these activities happen constantly and generate significant qualified research expenses.

Software development firms live in the qualified research sweet spot. Building new features, optimizing algorithms, improving system architecture, and solving technical challenges all generate credits when properly documented.

Agricultural operations conducting innovation qualify more often than they realize. Precision agriculture technology, new farming methods, equipment modifications, crop improvement programs—Kansas ag businesses are sitting on unclaimed credits.

Aerospace and defense contractors have complex qualifying activities. Materials testing, manufacturing process optimization, component development, and system integration work all potentially qualify.

Food and beverage manufacturers developing new products or improving processes generate qualified research expenses. Recipe optimization, packaging improvements, production efficiency projects—document these activities.

Real Kansas R&D Tax Credit Results

A Kansas City robotics equipment manufacturer claimed $314,000 in federal R&D credits and an additional $60,000 in Kansas state credits for development work conducted by their engineering team. The company designs and manufactures automated systems, and nearly every engineering project involves solving technical problems through experimentation.

How Recent Federal Tax Law Supercharges Kansas Innovation

The One Big Beautiful Bill Act didn’t just restore R&D expensing—it created a strategic planning opportunity.

Businesses can now deduct domestic R&D expenses immediately while claiming both federal and state credits on those same expenses. The restored 100% bonus depreciation for equipment purchases adds another layer of benefit for companies investing in research equipment.

Small Kansas businesses under $31 million in gross receipts can amend 2022, 2023, and 2024 returns to convert capitalized R&D expenses into immediate deductions. This generates refunds for companies that paid tax on income inflated by forced R&D capitalization.

The combination of immediate expensing, federal credits, and Kansas credits creates a triple benefit. A Kansas manufacturer spending $1 million on qualifying R&D could deduct $1 million immediately (saving $210,000 in federal tax at the 21% corporate rate), claim $140,000 in federal credits, and add another $10,000-$20,000 in Kansas credits depending on their expense history.

According to Sarah Martinez, managing partner at Kansas Tax Solutions Group, “The restoration of Section 174 expensing combined with Kansas’s expanded eligibility creates the best R&D tax environment we’ve seen in a decade. Companies that couldn’t claim credits before 2023 now have access to both immediate deductions and substantial credit benefits.”

Common Kansas R&D Tax Credit Mistakes

Not tracking Kansas-specific expenses separately. Multi-state businesses often calculate a federal credit and assume they can apply a percentage for Kansas. Wrong. You need actual Kansas QREs to calculate the Kansas credit.

Forgetting the 25% annual limitation. Businesses generate a big credit and try to use it all at once. The Kansas Department of Revenue will correct that real quick. Plan for a four-year minimum spread.

Missing the transferability opportunity. Startups and businesses in loss positions ignore the credit because they can’t use it. Starting in 2023, you can transfer it. That’s cash in hand rather than deferred benefits.

Poor contemporaneous documentation. Trying to reconstruct what happened two years ago doesn’t work. Document activities as they happen.

Not filing Schedule K-53. The credit doesn’t automatically appear on your return. You must complete and submit the schedule.

Why Kansas Businesses Need Specialized R&D Tax Credit Firms

The complexity of R&D credit claims demands expertise most general accounting firms don’t have.

Specialized R&D tax credit firms understand the technical requirements under IRC Section 41. They know how to identify qualifying activities in your specific industry. They have engineers and scientists on staff who can evaluate whether your technical work meets the four-part test.

These firms handle multi-state calculations. They track which expenses qualify for federal credits, which qualify for Kansas credits, and how to optimize the interaction between state and federal benefits.

More importantly, specialized firms build audit-resistant documentation. They know what the Kansas Department of Revenue looks for. They structure the analysis to withstand scrutiny. They create defensible methodologies for allocating time and expenses.

The cost of hiring an R&D tax credit specialist is typically a small percentage of the credits generated. For a Kansas manufacturer claiming $100,000 in combined federal and state credits, paying $15,000-$20,000 for professional preparation is a no-brainer when the alternative is missing credits entirely or facing an audit disaster.

Professional firms also handle the retroactive opportunities created by the One Big Beautiful Bill Act. Amending three years of returns to claim previously capitalized expenses requires careful analysis and precise calculations. Mistakes trigger audits and penalties.

Kansas businesses conducting innovation can’t afford to ignore R&D tax credits. The combination of expanded state eligibility, increased credit rates, restored federal expensing, and transferability options creates opportunities that didn’t exist three years ago. But capturing those benefits requires expertise, documentation, and strategic planning.

Kansas R&D Tax Credit FAQs

R&D Tax Credits by State

Citations

• Kansas Department of Revenue, Research and Development Credit
• Kansas Legislature, House Bill 2239
• Tax Foundation, FAQ: The One Big Beautiful Bill Act Tax Changes
• RSM, Kansas R&D credit changes present taxpayer opportunities
• Adams Brown, Kansas R&D Tax Credit Expansion
• Kansas Department of Commerce, Information and Resources for Business
• Brookings Institution, Expanding South Kansas’ aerospace cluster into a resilient advanced manufacturing sector
• Alliant Group, The One Big Beautiful Bill Act of 2025: How the Section 174 Fix Revives R&D Incentives