With Gov. Kim Reynolds’ (R) signature last week on S.F. 2417, Iowa has updated its conformity to the 2017 federal tax act (Pub. L. No. 115-97) for taxpayers in the state for tax years beginning in 2019. Although the sweeping bill also contains systematic changes to Iowa’s sales and use tax regime as well many other changes for Iowa individual taxpayers, of equal importance are the key changes that impact corporate taxpayers.
For tax years beginning on or after Jan. 1, 2021, Iowa has changed its tax rates for corporate taxpayers, lowering the statutory rate for taxpayers with taxable income up to $100,000 to 5.5 percent. For taxable income between $100,000 and $250,000, the new rate is 9 percent, and for taxable income over $250,000, the maximum rate has been lowered to 9.8 percent. For tax years prior to 2021, Iowa’s corporate income tax rate ranges from 6 percent to 12 percent.
For corporate income tax purposes, Iowa has partially coupled to the increase in the I.R.C. § 179 enhanced asset expensing deduction but has substituted its own limitations for 2019. For tax years beginning only in 2019, Iowa taxpayers are effectively limited to a $100,000 expense deduction, but have a phase-out beginning at $400,000 of qualifying property placed into service. There is no corresponding limitation for tax years beginning after 2019, and Iowa will be fully coupled to the federal deduction as modified by the tax act.
Despite the changes to the base I.R.C. § 179 deduction described above, Iowa has implemented an alternative election for corporate taxpayers that are allocated I.R.C. § 179 deductions from partnerships or limited liability companies in excess of the Iowa limitations. A taxpayer may elect to deduct the excess of the allocated I.R.C. § 179 deductions evenly over five years beginning with the following tax year.
However, a taxpayer making this election in a given tax year is prohibited from taking a deduction under I.R.C. § 179 for its own property that was placed in service in the same year. Instead, the taxpayer is required to depreciate that property under applicable federal rules without regard to bonus depreciation. The election is only binding for a single tax year giving taxpayers with significant pass-through income the flexibility to maximize their I.R.C. § 179 deduction from year to year.
For corporate tax years beginning in calendar year 2019, Iowa has adopted a static conformity date of March 24, 2018. However, for tax years beginning on or after Jan. 1, 2020, Iowa adopts the Internal Revenue Code, as amended. Iowa will also repeal its alternative minimum tax effective Jan. 1, 2021 and the associated tax credit for tax years beginning on or after Jan. 1, 2022.
In addition, Iowa amended its definition of net income to clarify that Iowa corporate taxpayers are required to add back amounts deducted for federal purposes as a federal net operating loss carryover, but Iowa net operating loss carryovers continue to be deductible.
Though all of the changes described above are important for corporate taxpayers, Iowa did not specifically address a number of important topics including how Iowa law implements changes made to foreign income, especially those under I.R.C. § 250 and I.R.C. § 951A.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Does Iowa’s legislation adequately address federal tax reform as it applies to corporate taxpayers?
For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.
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