On June 29, 2020, Iowa Gov. Kim Reynolds signed House File 2641, providing a number of amendments to the state’s tax laws including decoupling from the interest expense limitation, modifying treatment of global intangible low-taxed income and excluding loan forgiveness under the federal Paycheck Protection Program.
Interest expense limitation
For taxpayers filing corporate and individual tax returns, the bill decouples from interest deduction limitations in section 163(j) of the Internal Revenue Code. The decoupling does not apply for any year in which bonus depreciation under section 168(k) applies in computing net income for Iowa tax purposes. The change is effective for tax years beginning on or after Jan. 1, 2020.
Global intangible low-taxed income
For taxpayers filing corporate tax returns, the bill allows a subtraction for global intangible low-taxed income (GILTI) to the extent included in income. The new GILTI subtraction would apply to tax years beginning on or after Jan. 1, 2019. Additionally, certain Iowa Department of Revenue rules related to the apportionment sourcing of GILTI income for corporate income tax and franchise tax purposes are rescinded.
Payroll Protection Program conformity
For tax years beginning after Jan. 1, 2019 and ending after March 27, 2020, the state will conform to section 1106(j) of the Coronavirus Aid, Relief, and Economic Security (CARES Act) which excludes from income loans forgiven under the Payroll Protection Program (PPP). The exclusion applies to both individual and corporate taxpayers. Without this modification, Iowa’s rolling conformity to the IRC would have only allowed the loan forgiveness exclusion for tax years beginning on or after Jan. 1, 2020.
Iowa Small Business Relief Grant Program
For tax years ending after March 23, 2020, the state will allow a subtraction from income, to the extent included, the amount of any financial assistance grant provided under the Iowa small business relief grant program to provide financial assistance to an eligible small business impacted by the COVID-19 pandemic. This deduction applies to both corporate and individual taxpayers.
House File 2641 provides a number of other changes to the Iowa tax code. Selected provisions have been highlighted below:
- Modifies certain individual taxpayer net operating loss carryback provisions
- Enacts provisions pursuant to federal partnership audits and reporting federal changes
- For tax years beginning on or after Jan. 1, 2020, the bill expands the scope of the individual taxpayer credit for taxes paid in another state or foreign jurisdiction to include entity-level taxes paid by certain entities treated as a pass-through entity for federal income tax purposes or a regulated investment company
- Makes changes for both individual and corporate taxpayers to the treatment of the increased expensing allowance under section 179, as amended by the Tax Cuts and Jobs Act
- Provides that an individual may make a deductible contribution to an Iowa Educational Savings Plan for tax year 2019 by July 31, 2020
Sales and use taxes
The legislation also makes clarifying changes to the sales and use tax code as follows:
- Taxable services include the installing, maintaining, servicing, repairing, operating, upgrading or enhancing either specified digital products or software sold as tangible personal property
- Taxable bundled transactions exclude the sale of tangible personal property or specified digital product and a service, where the property or digital product is essential to the use of the service, provided exclusively in connection with the service and the true object of the transaction is the service
- ‘Computer peripherals’ are eligible exempt equipment when directly used in manufacturing, research and development, processing or storage of data for insurance companies, financial institutions or commercial enterprises, reprocessing of waste products and pollution control. Eligible peripherals include devices connected to the computer digitally, by cable, or other means, used to put information into or get information from a computer
The governor began the year proposing more significant tax reform following up on reforms undertaken in 2018. Her primary proposals included an increase of the sales tax rate, a reduction of the individual income tax rate and repeal of the water excise tax, among other provisions. However, as reported by the Iowa Legislative Service Agency, state tax revenue declined by 48% from March 19 through April 24 compared with the same period last year due to the COVID-19 pandemic and delayed filing and payment dates. The reduced tax revenue ultimately resulted in a revised budget.
Taxpayers doing business in Iowa should be aware of the tax changes in House File 2641. They come on the heels of an Iowa Department of Revenue announcement on June 1, 2020 that the state does not conform to federal tax law changes under the CARES Act for years beginning before Jan. 1, 2020. The section 163(j) changes are applicable for tax years beginning on or after Jan. 1, 2020. However, the PPP loan forgiveness provisions are effective for years beginning on or after Jan. 1, 2019. As significantly, the new law effectively excludes GILTI from Iowa taxable income for corporate income taxpayers. The amended treatment of GILTI income is effective for 2019 and may provide taxpayers with significant savings during the current filing season. Taxpayers with questions about recent Iowa tax reform should consult with their tax advisers for more information.