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 billed into law on May 30, 2018. While most provisions to the new tax policy are far off and contingent, it’s important Iowa agricultural producers understand what has changed and how it will impact them. Key provisions impacting the industry include:

Tax Year 2018 Highlights:

  • Iowa’s Section 179 deduction is increased from $25,000 to $70,000 for tax year 2018 for individual taxpayers. The phase-out threshold is increased from $200,000 to $280,000.
  • Iowa will continue to recognize deferred gain or loss for personal property exchanges, even though federal law does not.
  • Iowa will continue to not recognize bonus depreciation.
  • Iowa does not specifically couple with the federal repeal of the Domestic Production Activities Deduction (DPAD). Because Iowa law continues to point to the federal tax code as it existed on January 1, 2015, it appears that Iowa law will continue to recognize DPAD in 2018. How this would work is unknown and is still being investigated.

Tax Year 2019 Highlights:

  • The law sets Iowa’s Section 179 deduction at $100,000, with a phase-out threshold of $400,000.
  • Iowa will continue not to recognize bonus depreciation.
  • Taxpayers will be allowed to deduct 25% of their federal Section 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. This election will be useful for taxpayers who trade depreciated equipment for something newer and are faced with recognition of recapture income, absent of deferral treatment.
  • Provides that the federal $10,000 limit on the deduction for state and local taxes does not apply in computing taxable income for state tax purposes.
  • Corporate tax rates remain unchanged for 2019.
  • Although the Tax Cuts & Jobs Act has restricted a farmer’s federal net operating loss carryback to two years, the law allows a taxpayer engaged in trade or business of farming to carryback losses for five years.
  • Individual tax rates will be lowered, but not significantly. View the rates in our recent blog post.

Tax Year 2020 and Beyond:

  • Iowa’s Section 179 deduction will be equal to the federal limit. Currently the federal deduction is $1 million, with a $2.5 million 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 for years 2019-2022. View contingent income tax rates in our recent blog post.
  • Beginning with tax year 2023, the Iowa Capital Gain Deduction will apply only to net capital gain from the sale of real property used in a farming business if sold to lineal descendants or other certain relatives. This change will apply only when the two revenue targets stated below are met:
    • Actual general fund revenue must total at least $8.3146 billion in the previous fiscal year.
    • Actual net general fund revenue for the previous fiscal year must exceed the actual net general fund revenue level for the fiscal year immediately prior to the previous year by at least 4%.
  • With regard to Section 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.
  • 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.

Other Noteworthy Provisions:

  • The Innovation Fund is extended through 2023, but substantially scales back and narrows the applicability of the research credit.
  • Instead of eliminating or revising many other credits, the law authorizes the legislative council to initiate a study committee to evaluate tax credit available under Iowa law, including Iowa’s use of tax credits as a tool for promoting and supporting economic growth and development.
  • Law eliminates the geothermal tax credit allowed under Iowa Section 422.10A and the geothermal heat pump tax credit allowed under Iowa Section 422.11I, beginning in 2019.
  • The law did not increase funds for the Beginning Farmer Tax Credit. As such, it remains capped at $6 million.
  • The 2018 Iowa Tax Reform Bill includes modifications of the Research Activities Credit (R&D credit) for individual and corporate income tax. For tax years beginning on or after January 1, 2017 businesses must meet both of these requirements to be eligible for the Iowa credit:
    • The business must claim and be allowed a federal R&D tax credit for the same research for the same taxable year, and
    • The business must be engaged in of the following industries:
      • Manufacturing
      • Life sciences
      • Software engineering
      • Aviation and aerospace
    • The business cannot be engaged in agricultural production or be an agricultural cooperative and qualify for the Iowa R&D tax credit.
    • Per guidance given on the Iowa Department of Revenue website, if a business already filed a credit claim for a prior tax year and is no longer eligible, the business should file an amended return to add back the amount the Iowa R&D tax credit claimed. The amended return should be filed by October 31, 2018.

We will continue to keep you abreast of these provisions and will be further analyzing the impact on agricultural producers. Contact your BerganKDV advisor with questions.

Source: Tidgren, Kristine A. “Iowa Tax Law Makes Some Changes Now, But Others are Far Off and Contingent.” The Ag Docket. Iowa State University Center for Agricultural Law and Taxation, 30 May, 2018.

 

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