Brief ⁽¹⁾

HB 2055 would provide a permanent income tax credit for business research and development. The bill would authorize a 6.5 percent credit for research and development expenditures in Kansas, based on the amount by which such expenditures exceed the business' actual expenditures for that purpose in the taxable year and the two preceding taxable years. In any taxable year, the maximum deduction from tax liability would be 25 percent of earned credit plus carryover amounts. Any amount by which the allowed portion of the credit exceeds the business' total Kansas tax liability in a given tax year could be carried forward.

Any expenditures that would be eligible for a Kansas research and development tax credit also could be eligible for a federal itemized income tax deduction or, for an expanded level of research activity, a federal research tax credit. However, if the business received a federal or state grant and used grant proceeds for research and development expenditures, that taxpayer could not claim a state credit for those expenditures.

Background

The same research and development tax credit proposed in HB 2055 was statutorily authorized to begin in tax year 1988 and expire after tax year 2000. The research for which expenditures would be eligible for the Kansas income tax credit would be considered "qualified research," as defined in the Internal Revenue Code. Such expenditures must be paid or incurred in connection with the taxpayer's trade or business. Qualified research must be technological in nature, involve a process of experimentation, and relate to the development of a new or improved business component. Specifically, the research activity must be related to the development of a new or improved product, process, computer software, technique, formula, or invention. The federal tax credit was first enacted in 1981, and was most recently extended to 2004. It allows businesses to earn a tax credit of 20 percent for qualified research and development expenditures in excess of a calculated base amount.

In the House Committee on New Economy, the bill was supported by: Representative Kuether; the Director of Taxation and Small Business for the Kansas Chamber of Commerce and Industry; and a spokesperson for Boeing. There were no opponents.

In the Senate Committee, the bill was supported by a representative of the Kansas Chamber of Commerce and Industry. The Senate Committee amended the bill to make the income tax credit permanent as opposed to renewing it through tax year 2005.

The Division of the Budget estimates that the credit would reduce State General Fund revenues by $1.33 million in FY 2002. This estimate is based on the five-year average of research and development tax credits used in tax years 1994 through 1998. The Senate Committee's amendment would result in a permanent extension of the fiscal impact of HB 2055.

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/fulltext.cgi