Section 179 Expensing – Federal and Iowa Treatment for Tax Year 2016

With the Iowa Legislature adjourning April 22, 2017, the rules governing Iowa income tax for 2016 were officially finalized. During the legislative session we were informed that Iowa was not going to couple with federal law for 2016 as it had done for the 2015 tax year.  The Iowa Legislature followed through on this and decided not to couple Iowa tax law with the federal law for 2016.  One of the major differences between Iowa law and federal law relates to Internal Revenue Code Section 179 (Sec. 179) expensing allowances.

Congress enacted the PATH Act in December 2015, making a number of federal provisions permanent for the first time.  One of the major ones for businesses was the permanent expansion of the Sec. 179 expensing to $500,000. Under this provision, taxpayers can deduct from their federal income tax the cost of qualifying property used in a trade or business in the year the property is placed in service. This allows businesses to deduct the cost of qualifying tangible personal property purchased for business use in one year, rather than depreciating the cost of the property over a number of years.

Although this enhanced federal provision is now in place permanently the corresponding Iowa provision is much stingier. Although Iowa coupled with the enhanced amount in 2015, the Iowa Sec. 179 deduction is back to $25,000 with a $200,000 threshold for 2016 and beyond.

The Iowa Department of Revenue posted a FAQ section on their website concerning Sec. 179 expensing, including general questions, carryover questions and pass-through entity questions. Unfortunately, their answers were not taxpayer friendly.

For example, if a partner or S-corporation shareholder is allocated more than the Iowa limit of $25,000 in Sec. 179 deductions from pass-through entities, the partner or shareholder must adjust their Sec. 179 deduction on the Iowa tax return to comply with the Iowa limit. The partner or shareholder may not carry forward any amount of section 179 expensing passed through that exceeds the $25,000 Iowa limit. The excess deduction is permanently lost.

Our discussions with the Iowa Society of Certified Public Accountants as well as with the Iowa Department of Revenue have indicated that in order for the Iowa Sec. 179 rules to be changed, legislative action will be required.  Iowans concerned about this issue and the need for some change in the Iowa tax law should speak with their legislators.

CATEGORIES: Featured | Tax & Audit
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