The R&D Tax Credit Aspects of Kansas Innovation



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Kansas-Innovation
        Tax incentives in Kansas present significant opportunities for innovative local businesses of all sizes. Traditionally, Kansas has been a state driven by agriculture and manufacturing,  however recently, a diverse mix of innovative industries has been growing. Advanced manufacturing, aerospace, and bioscience are now common industries in the state and to a large extent, are driven by innovations made at corporate facilities and local universities.

        The state is one of the nation’s fastest growing bioscience hubs thanks to the under construction National Bio and Agro-Defense Facility and the Kansas City Animal Health Corridor, a region that houses the world’s largest concentration of animal health interests. Kansas has also emerged as a leader in wind energy and other forms of renewable energy, food processing, and distribution.

        The state has a significant small business presence as well, as more than forty percent of working Kansas residents are employed by small businesses. The growth of small businesses in Kansas is at an annual rate of six percent – higher than the national average and higher than the growth in any neighboring states.  In the 2013 tax year, more than 8,600 first time, small business filers invigorated the state’s economy with more than $486 million in new income.  

        Many of these businesses, both large and small perform significant research and development activities, which contrary to conventional intuition, involves much more than just white lab coat activity.


The Federal R&D Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On December 18, 2015, President Obama signed the bill making the R&D Tax Credit permanent. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against up to $250,000 per year in payroll taxes.

 

Kansas R&D Tax Credit

        Enacted in 1987, Kansas offers a credit equal to 6.5 percent 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. Eligible expenditures made for research and development parallel that of the Federal R&D tax credit.   


Kansas Industry and Innovation

        Key industries in Kansas include advanced manufacturing, bioscience, professional services, renewable fuels and bioenergy, and wind energy.  These industries are discussed as presented by the Kansas Department of Commerce on their website .  

Advanced Manufacturing
        Advanced manufacturing, including aviation and aerospace, is an important driver in the Kansas economy. Wichita, the “aviation capital of the world” produces more than thirty percent of the world’s general aircraft. An estimated fifty-three percent of Wichita’s manufacturing jobs are in the aviation and aerospace industry. Kansas is home to many large aviation companies, including Spirit AeroSystems, Cessna, Beechcraft, and Bombardier Learjet.

        General Motors and its suppliers also have a significant presence in Kansas City, where GM manufactures its Chevrolet and Buick products. Kansas is also a leader in the composites and advanced materials sector and the state is already seeing significant development in Wichita and Kansas City.

Bioscience
        Bioscience is also one of Kansas’ top target industries. The state currently employs more than 16,000 people in the bioscience industry and has implemented a strategy to build on established and emerging strengths. Animal health is one of the state's leading bioscience areas and the Kansas City Animal Health Corridor is convenient to the city’s metropolitan area. This corridor is home to the world’s largest concentration of animal health interests and accounts for a significant portion of total sales in the global animal health market.

        Kansas is also investing resources in an effort to become a national leader in biosciences by funding research, development and commercialization. This effort is aimed at helping build a dynamic bioscience industry to stimulate job growth, attract venture capital, and increase research and business investment.  

Professional Services
        Kansas is also as a leader for professional service companies, including finance, accounting, IT, and architectural design. In recent years, Kansas has seen unprecedented success in recruiting new service related companies such as J.P. Morgan, U.S. Bank, Cerner Healthcare, Fishnet Security and Netsmart Technologies.  These companies all have new facilities in Kansas and many of them perform research and development which is becoming increasingly common in the financial services sector.   

Renewable Fuels and Bioenergy
        Kansas is traditionally strong in agricultural and abundant in natural resources, positioning the state to be a leader in renewable energy production. Kansas ranks high in biomass production, allowing companies to benefit from economical access to feedstock for bio-based fuels and proximity to feed used for animals which results from biofuel byproducts. With three million cattle in southwest Kansas, biofuel plants can benefit from the cost savings of sending wet grain byproducts to nearby feedlots.

Wind Energy
        Kansas is the second most potential state for wind energy and is one of the top ten states for wind farms. Thousands of megawatts of additional wind energy are currently under development across the state. Wind energy in Kansas is very attractive due to the cost effectiveness and high productivity factors. Because of the state’s advantages, over 40% of the wind energy produced in Kansas has been purchased by out of state utilities. According to a 2013 Annual Wind Market Report, Kansas ranks one of top ten in the following categories:

  • #8 in wind power capacity installations (2967 MW)
  • #2 in wind power capacity additions during 2013 (254 MW)
  • #3 in wind energy as percent of total state generation (19.4%)
  • #7 in fastest growing states for wind generation (82% annual growth)
  • #6 in total generation from wind power (9.43 million Mwh).

        Situated in the nation’s wind corridor, Kansas is an ideal location for wind turbine manufacturing. Its central location and transportation infrastructure make the greatest wind energy region even more convenient.


Kansas State University

        Kansas State University (KSU) is a major innovator in the state. In 2014, KSU had over $180 million research expenditures and over 200 active patents.  Examples of companies launched out of Kansas State University incubators and accelerators include:

  • MeltPoint Environmental - Caldwell, KS, Provides a hospital waste management service to reduce surgical bluewrap waste.
  • NMotion UAS - Hesston, KS, Creates UAV drones for emergency first responders and public services to gain situational awareness on the job.
  • Radiation Detection Technologies Inc. - Manhattan, KS, Creates new radiation detection equipment.
  • Tikitum Sensory Learning Lab - Mirriam, KS, Creating new learning and socializing experiences by integrating all five senses into the learning experience.
  • VeriQuik Consulting and Services - Shawnee, KS, Provides a proactive platform where users can quickly establish, authentic, validate, and verify their identity; or send a request to someone else so they can verify themselves prior to meeting for the first time.


Kansas State Olathe Innovation Accelerator

        Kansas State University operates the Olathe Innovation Accelerator - a university center designed to support industry by overcoming resource limitations within companies. Operating on its own campus, it seeks to provide technical or business expertise, capital or human resources. The accelerator helps members meet to understand their businesses and products and the various hurdles to overcome in bringing them to market and succeed. The ultimate goal is to rapidly solve industry challenges and expand economic development.


Kansas Local Accelerators and Incubators

        Kansas has several technology and business incubators, including:

  • ThinkBig Partners - Kansas City, MO, Providing support services for startups, including advisement, funding, professional services, networking, and continuing innovation support.
  • BetaBlox - Kansas City, MO, Provides hands-on mentorship, classes, access to investor networks, and legal education.
  • SparkLabKC - Kansas City, MO, A mentor-driven accelerator program that assists and educates startups in business and product strategy, prototype development, demonstration, and networking with investors.
  • Kaufmann Labs - Kansas City, MO, Sponsors multiple programs in entrepreneurship education and conducts research to develop in-depth understanding of innovation drivers and improving academic achievement.

        Each of these programs provides some kind of assistance or networking for entrepreneurs with the aim to develop their businesses and products. Some programs are intense and temporary but offer strong and rewarding services once companies are selected.


Conclusion

        The Kansas State economy is home to many technical and innovative businesses.  Companies of all sizes are heavily investing in research and development activities, making both the Federal and Kansas R&D credits lucrative to pursue. Companies in technological industries creating highly innovative products and processes should be working closely with their tax professionals to build in documentation processes to their current R&D activities.
 

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.


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