State Tax Roundup
Mid-year update that no one wanted.
With Congress attempting to make sweeping changes to the federal tax code for the last several months, it is easy to miss changes made at the state level. While there have been several near misses regarding other bills that were introduced and would change specific programs that eventually died, today’s issue will examine three such changes that impact the research and development tax credit for Minnesota and Texas, and the historic tax credit for Kansas.
Photo by Polina.
Minnesota’s R&D Credit
Minnesota recently passed a tax bill that partially modified the state’s R&D credit, making it partially refundable. While this is good news for taxpayers, they should be aware of some critical figures.
Refundability of the tax credit is available for tax years after December 31, 2024.
The rate is 19.2% for tax years between December 31, 2024, and January 1, 2026.
The rate is 25% for tax years between December 31, 2025, and January 1, 2028.
For tax years beginning after December 31, 2027, the rate is the lesser of 25% and the projected rate based on the prior year’s claims to prevent more than $25 million in refunds from being issued. This projected rate must be issued by December 27th each year starting in 2027.
The refund rate is applied against the credit amount exceeding the taxpayer’s liability.
Texas’s R&D Credit
Texas completely revamped its R&D tax credit by extending the program permanently, which was due to expire at the end of this year. While renewing expiring tax credits is not abnormal, Texas has discarded its R&D credit before.
Next, the credit rate increased from 5% to 8.72% of the base amount (50% of the average of the prior three years). If the taxpayer works with a Texas university, the amount jumps to 10.9%. Startups with no base period expenses use a flat rate of 4.36%, or 5.45% if working with a university.
However, it is not all good news. Taxpayers can now only utilize the credit against the state’s franchise tax; using the credit against sales and use tax is no longer an option. The credit can only offset 50% of the franchise tax, and can be carried forward for 20 years. However, the tax credit is refundable for veteran-owned businesses with no franchise tax.
Kansas’ Historic Tax Credit
Earlier this year, Kansas passed a bill that changed how the state’s Historic Tax Credit works. The credit is based on whether the property is in a city with a population of more than 50,000.
If the population is less than 50k, the credit amount is 40% of the qualified expenses.
If the population is more than 50k and the qualified expenses are less than $50,000, the credit amount is 25%. In the same area but with more than $50,000 in expenses, the credit jumps to 40%.
If the property is owned by a 501(c)(3) organization and not producing income, the credit rate is 40% regardless of location.
These changes apply to property placed in service after July 1, 2025.
Final thoughts
None of these changes are seismic, but each can potentially expand the tax credit's impact for the right taxpayer. These changes also indicate that states continue to use incentives to attract taxpayers and activities they deem valuable. While “nothing can be... certain, except death and taxes,” it does seem inevitable that incentives will continue to be part of states’ strategy to advance their goals.
Wrap-up
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The content of this article is for informational purposes only and should not be taken as tax, legal, benefits, financial, or HR advice. I am a lawyer, but receiving this newsletter does not mean I am your lawyer. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for specific guidance.