Individual income and franchise taxes
Flat individual income tax rate sooner than later
Senate File 2442 accelerates the state’s transition to a flat individual income tax. The flat tax, originally scheduled effective Jan. 1, 2026, will now apply to tax years beginning on or after Jan. 1, 2025. The flat tax rate is also lowered by 0.1% to 3.8%. The flat tax will replace the two tax brackets originally scheduled in 2025. Additionally, the legislation reduces next year’s ‘alternative tax’ from 0.1% to 4.3%.
Franchise tax deduction for investment subsidiary expenses
Senate File 2442 allows financial institutions to deduct expenses allocable to investment subsidiaries and to elect to include the income and expenses of an investment subsidiary on its franchise tax return. Income and expenses of the subsidiary must continue to be included on subsequent franchise tax returns as long as the subsidiary remains a subsidiary of the financial institution. The provision, previously eliminated from statute in 1995, is effective Jan. 1, 2025.
Gov. Reynolds signed Senate File 2442 on May 1, 2024.
Other tax legislation to note
House File 664 relates to the lease or rental of vehicles. The bill exempts vehicles leased between affiliates from the 5% fee for new registration imposed on vehicle leases. The bill also exempts vehicles rented between affiliates from the 6% state sales tax, plus 1% local option sales tax, as well as the 5% vehicle rental excise tax. In both cases, the registration fee must be paid by the affiliate who purchases the vehicle for subsequent lease or rental. An ‘affiliate’ is an entity that directly or indirectly controls is controlled with or by, or is under common control with another entity. A lease is an agreement for more than 60 or more days, and a rental is for agreements under 60 days. Note that the bill is retroactively effective to Jan. 1, 2015, but provides that refunds from that date to the enactment date are not allowed. Gov. Reynolds is expected to sign the bill.
House File 2636 provides a tax rate reduction for reinsurance premiums on captive insurance companies. The law keeps the rate brackets the same for the first and second $20 million in reinsurance premiums written, i.e., 0.2% and 0.125%, respectively. The rate for premiums written between $40 and $60 million is reduced from 5% to 0.045%, and a new bracket is established for premiums written above $60 million and imposing a rate of 0.02%. Gov. Reynolds signed House File 2636 on April 19, 2024.
House File 2649 provides an exclusion from the capital gains tax for the sale of cattle or horses, or the breeding of livestock when held by the taxpayer for more than 24 months if the taxpayer receives more than 50% of gross income from farming or ranching operations during the tax year. The exclusion is retroactively effective to Jan. 1, 2023. Gov. Reynolds is expected to sign the bill.
House File 2667 increases the maximum contribution to Iowa 529 and Iowa ABLE savings accounts to $5,500 per year effective Jan. 1, 2024, and provides an individual income tax exemption for 529 educational account transfers to Roth IRAs, conforming to the federal tax treatment, effective Jan. 1, 2024. Gov. Reynolds is expected to sign the bill.
Takeaways
Gov. Reynolds and the Iowa legislature have again demonstrated tax reform is a priority by enacting legislation reducing tax rates or base, even following several years of broad taxpayer-friendly structural changes to the code. Iowa has been one of the most active states in enacting tax laws. Businesses and individuals doing business in Iowa should continue to monitor legislative developments. Taxpayers should also be aware that regulations and guidance may be issued as a result of the new legislation.
Iowa taxpayers with questions about this year’s tax legislation should consult with their Iowa state and local tax advisers for more information.
