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Iowa Tax Law Changes

May 31, 2018 | BerganKDV Team

BLOG: Tax Reform Impact on Manufacturing Companies

Blog: Tax Reform Impact on Iowa Agribusiness

On May 5, 2018 the Iowa Legislature passed S.F. 2417, which provides a substantial change to the tax code of Iowa.  The Governor signed the bill into law on May 30, 2018.

Changes Beginning with the 2018 Tax Year:

  • Iowa’s Section 179 deduction is increased from $25,000 to $70,000 and the phase-out threshold for the deduction is increased from $200,000 to $280,000.
  • Amounts in excess of the Iowa limit that individuals are allocated from pass-through entities (S corporations and/or partnerships) are to be amortized equally over a five-year period beginning with the following tax year. Under prior law, this excess amount was unable to be deducted at all.
  • If an individual places assets into service themselves either through their Sch C or their Sch F and their allocated Section 179 amount from pass-through entities is greater than the Iowa limit, the taxpayer must depreciate the cost of their Sch C or Sch F assets using the appropriate MACRS convention.
  • The Iowa tax law will conform to federal law and allow taxpayers age 70 ½ and older to make tax-free distributions from their IRAs to qualified charities.
  • If taxpayers elected to deduct their sales and use tax as an itemized deduction on their federal return, they will now be allowed to take that same deduction on their Iowa return.
  • Taxpayers will be allowed to calculate their Iowa income using the accounting method changes made possible by the recent federal tax reform changes.
  • Elementary and secondary school teachers will be allowed a deduction of up to $250 on their Iowa return for out-of-pocket expenses.
  • Iowa will continue to recognize like-kind exchanges for personal property even though federal law does not.
  • Iowa will continue to not recognize bonus depreciation.
  • Iowa will continue to recognize the domestic production activities deduction even though for federal tax purposes this deduction has been repealed.

Changes Beginning with the 2019 Tax Year:

  • The Iowa tax law will couple with the federal tax law as of March 24, 2018, with some exceptions. Currently the Iowa tax law is coupled with the federal law as it existed on January 1, 2015, with some exceptions.
  • Due to the fact that Iowa law will conform with federal law as of March 24, 2018, the built-in-gain period for Iowa tax purposes will become five years vs. the current rule of ten years.
  • Iowa’s Section 179 deduction is increased to $100,000 and the phase-out threshold for the deduction is increased to $400,000. The other two bullet points above that discuss Section 179 changes would remain in place (five year amortization, and Sch C/F issues).
  • Iowa will continue to not recognize bonus depreciation.
  • Taxpayers would be allowed to deduct 25% of their federal Sec. 199A “qualified business income” deduction from their Iowa taxable income.
  • Iowa law will be coupled with federal law in terms of not allowing like-kind exchanges for personal property. However, for Iowa tax purposes an election will be available whereby taxpayers can choose to have like-kind exchanges apply to personal property.
  • Individual tax rates will be lowered, but not significantly. Following is a chart showing the rates (table is copied from the Legislative Services Agency Fiscal Note regarding SF 2417).

  • The federal $10,000 deduction limit placed on state and local taxes (or sales tax) does not apply in computing taxable income for Iowa purposes.
  • Taxpayers engaged in the business of farming will be allowed to carryback losses for five years even though for federal tax purposes these losses will only be allowed to be carried back two years.
  • Iowa’s sales and use tax base will be expanded to include items such as information services, digital goods and services (such as Netflix and Uber), online sellers, and online marketplaces.

Changes Beginning with the 2020 Tax Year and Beyond:

  • Iowa’s Section 179 deduction will be equal to the federal limit. Currently the federal deduction is $1,000,000 with a $2,500,000 phase-out threshold.  Both figures will be indexed for inflation.
  • Bonus depreciation will continue to not be allowed.
  • Iowa’s like-kind exchange law will be the same as the federal law. Like-kind exchanges will only be allowed for real property.
  • Iowa’s individual income tax rates will remain the same as the chart above for years 2019 through 2022. If revenue targets are met, beginning in 2023, the following would represent Iowa’s individual income tax rates (table is copied from the Legislative Services Agency Fiscal Note regarding SF 2417):

  • If the revenue targets are met, the ability for individuals to deduct their federal taxes paid on their Iowa return would be eliminated.
  • If the revenue targets are met, beginning in 2023 the Iowa capital gain deduction would only apply to net capital gain from the sale of real property used in a farming business if sold to lineal descendants or other certain relatives. Iowa’s current law allows net capital gain from the sale of real property used in a trade or business to be deducted from Iowa income if the ten-year ownership and material participation rules are met.
  • With regard to the Sec. 199A “qualified business income” deduction:
    • In 2020, Iowa will allow 25% of the Sec. 199A deduction on the Iowa return.
    • In 2021, Iowa will allow 50% of the Sec. 199A deduction on the Iowa return.
    • In 2022, Iowa will allow 75% of the Sec. 199A deduction on the Iowa return.
    • In 2023 through 2025 if the revenue targets are met, Iowa will allow 100% of the Sec. 199A deduction on the Iowa return.
  • Beginning in 2021, the following would represent Iowa’s corporate income tax rates (table is copied from the Legislative Services Agency Fiscal Note regarding SF 2417):

  • Corporate AMT would stay in place through 2020 even though it has been eliminated under federal law. Iowa’s corporate AMT would be eliminated in 2021.
  • Corporations would not be allowed to deduct federal income taxes paid starting January 2021.

Tax Credit Changes:

  • The Innovation Fund Tax Credit which was set to expire on June 30, 2018 is extended to June 30, 2023.
  • The School Tuition Organization Tax Credit annual cap is increased by $1,000,000 to $13,000,000.
  • The Geothermal Heat Pump Tax Credit and the Geothermal Tax Credit are to be eliminated beginning in 2019.
  • The Research Activities Tax Credit would restrict the types of industries eligible for the credit and require that the taxpayer claim a federal research tax credit for the same research and the same tax year. These changes would be retroactive to tax year 2017.
    • The businesses must be engaged in manufacturing, life sciences, software engineering, or the aviation and aerospace industry.
    • The following would be considered non-qualifying industries:
      • Agricultural production as defined in Iowa Code Section 423.1
      • Contractor, subcontractor, builder, or contractor-retailer that engages in commercial and residential repair and installation, including but not limited to heating or cooling installation and repair, plumbing and pipe fitting, security system installation, and electrical installation and repair.
      • Finance or investment company
      • Retailer
      • Wholesaler
      • Transportation company
      • Publisher
      • Agricultural cooperative associated as defined in section 502.102
      • Real estate company
      • Collection agency
      • Accountant
      • Architect
    • The Taxpayer Trust Fund Tax Credit is eliminated beginning in tax year 2018.

Questions? Please contact your BerganKDV Advisor.

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