Changes to Iowa Composite Returns for Tax Year 2022 Onward
In 2021, Iowa Gov. Kim Reynolds signed Senate File 608, which made extensive changes to Iowa’s composite returns and nonresident withholding requirements for pass-through entities and their nonresident members.
For the tax years 2022 and later, pass-through entities with nonresident members will be required to file Iowa composite returns under Iowa Code Section 422.16B and pay Iowa income or franchise tax on behalf of their nonresident members on the nonresident members’ Iowa-source income from the pass-through entity. The composite return tax will be computed by multiplying each nonresident member’s Iowa-source income from the pass-through entity by the top Iowa tax rate applicable to that nonresident member. This new composite reporting applies to trusts, estates, partnerships, C corporations, S corporations, and financial institutions without a commercial domicile or situs in Iowa. Nonresident members will not be required to file an Iowa tax return if their distributive share of income from the pass-through entity is their only Iowa-source income. Nonresident members who are not individuals will still be required to file an Iowa income or franchise tax return.
The composite return tax payment will be due by the due date of the pass-through entity’s Iowa income tax return. For calendar-year filers, the tax year 2022 composite return tax payment will be due on May 1, 2023. Iowa will not require pass-through entities to make quarterly estimated composite tax payments. In addition, beginning in tax year 2022, pass-through entities are no longer required to additionally withhold and remit Iowa income tax on a nonresident member’s Iowa-source income from the pass-through entity because Iowa-source income is now subject to the mandatory composite return requirement described above. A nonresident member will receive a refundable credit for the Iowa income or franchise tax paid on the nonresident member’s behalf by the pass-through entity on the composite return. This refundable composite tax credit will be reported to the nonresident member by the pass-through entity and may be claimed on the nonresident member’s Iowa income, franchise, or composite tax return.
For tax year 2022, nonresident members who would normally be included on the pass-through entity’s composite may elect out of the composite if the nonresident members and pass-through entity complete and sign the 2022 Nonresident Member Composite Agreement. The agreement does not need to be filed but must be maintained and produced if the Iowa Department of Revenue (Department) asks. The nonresident member will be responsible for filing their own Iowa tax returns and making Iowa tax payments, including estimated tax payments, and will be subject to personal jurisdiction in Iowa for the purpose of the collection of Iowa income and franchise tax. The agreement is only valid for tax year 2022.
The Department will update the Iowa forms. The Department’s existing composite tax form, the IA 1040C, will be discontinued for tax year 2022.
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