On June 16, 2021, Iowa Gov. Kim Reynolds signed into law Senate File 619, making various changes to the state’s tax code. Some of these changes are significant including reductions in the personal income tax, a phase out of the state’s inheritance tax and an exemption for cancellation of indebtedness income under the federal Paycheck Protection Program. The governor signed the measure after it passed with broad support in both chambers of the legislature.
Individual and corporate income tax – triggers removed
Senate File 619 removes certain revenue triggers that, if achieved, were to enact a number of individual and corporate income tax changes effective Jan. 1, 2023. The previous law had provided that the changes would occur only if the state's net general fund revenue equaled $8.3146 billion for the fiscal year ending June 30, 2022, and equaled at least 104% of net general fund revenue for the fiscal year ending June 30, 2021. The state was not projected to meet the percentage growth target. Without the revenue contingencies, the changes are automatically effective on Jan. 1, 2023. A highlighted summary of some of the provisions include the following:
- Individual income tax rate brackets will transition from nine to four. This includes a reduction of the top rate from 8.98% to 6.5%
- Individual taxpayers will begin to use federal taxable income, after deductions and adjustments, to calculate their state income taxes. The state currently requires taxpayers to use federal adjusted gross income
- The capital gains deduction is generally repealed except for the sale of real property used in a farming business under certain conditions
- The deductibility of federal income taxes is eliminated. Iowa was one of only a few states that allowed a deduction for any portion of federal income taxes paid
- Under current law for corporate taxpayers, the starting point for calculating the corporate income tax and franchise tax is federal taxable income before the net operating loss (NOL) deduction because NOLs are calculated at the state level. Corporate taxpayers will no longer separately calculate NOLs and instead calculate ‘net income’ as computed for federal income tax purposes. An addback is required for any federal NOL deduction carried over from a prior taxable year, but taxpayers may deduct any remaining Iowa NOL from a prior taxable year
- A number of Iowa adjustments and deductions used in calculating net income and taxable income are also eliminated
All of the changes described above are effective Jan. 1, 2023.
Senate File 619 phases out the state’s inheritance tax. Iowa is one of six states still imposing a tax on certain beneficiaries of an estate. The law reduces the inheritance tax in five stages by reducing the tax rate by 20% per year over four years until it is eliminated completely on Jan. 1, 2025, for deaths on that date or later.
Miscellaneous other tax provisions
The new law allows taxpayers who received loans under the federal Paycheck Protection Program (PPP) to claim, consistent with federal law, a cancellation of debt (COD) income tax exclusion and associated expense deduction for any tax year ending after March 27, 2020. Under current law, for tax years beginning on or after Jan. 1, 2020, Iowa allows both the COD income exclusion and the associated expense deduction. However, only the PPP COD income exclusion relief is provided for certain tax years beginning before Jan. 1, 2020.
Additionally, the bill retroactively conforms to federal bonus depreciation provisions for capital assets, such as equipment, that were placed into service on or after Jan. 1, 2021. Federal bonus depreciation is currently available at 100% of the asset cost. Federal bonus depreciation is currently scheduled to phase down to 20% by tax year 2026 and then be eliminated for tax year 2027. Finally, the state retains its position of decoupling from section 163(j), the federal interest deduction limitation provisions, by eliminating existing references that limited the interest decoupling to tax years in which the state did not allow businesses to use bonus depreciation. The revised interest expense deduction provisions are also effective Jan. 1, 2021.
Credits and incentives activity
Senate File 619 also makes changes to the several credit and incentive programs. It reduces the maximum amounts of annual tax credits that the Iowa Economic Development Authority may issue in a year for the High Quality Jobs Program (from $105 million to $70 million a year) and the Renewable Chemical Production Tax Credit Program (from $10 million to $5 million a year). The law however increases the maximum amount of tax credits allowed under the Workforce Housing Tax Incentives Program from $25 million to $40 million a year. The law also extends the Redevelopment Tax Credit, which was scheduled to expire in 2021, for 10 years and establishes an annual aggregate credit level of $15 million.
This is at least the third major tax bill from Gov. Kim Reynolds in the last four years. Tax reform was a significant focus point for the administration and was partially delayed due to the timing of the pandemic in 2020. Taxpayers should be cognizant that with the removal of the revenue triggers, a number of significant tax changes are scheduled to occur in 2023.
Iowa businesses operating through pass-through entities and individuals subject to tax in the state should be aware of the rate and inheritance tax changes resulting from the new law. All businesses subject to Iowa taxing jurisdiction should be aware of the various changes to the credit and incentive laws as well as to the new PPP rules. Iowa taxpayers are encouraged to discuss these changes with their state and local tax professional for more information.