On May 30, 2018, Iowa Gov. Kim Reynolds signed Senate File 2417. This bill included changes to Iowa’s individual and corporate income tax codes, made changes to several tax credits and expanded Iowa’s sales and use tax base.
Corporate Income Tax
Internal Revenue Code (IRC) Conformity
For tax years beginning before 2019, the existing code conformity date of January 1, 2015, applies. For tax years beginning during the 2019 calendar year, Iowa adopts the IRC in effect on March 24, 2018. For tax years beginning on or after January 1, 2020, Iowa becomes a rolling IRC conformity state, meaning it conforms to the IRC “as amended.”
Beginning in the 2021 tax year, the corporate tax rate range is lowered to 5.5 to 9.8 percent from the current tax rate range of 6 to 12 percent.
Increased expensing pursuant to IRC Section 168(k) will not be allowed for the purpose of computing Iowa taxable income.
Federal Tax Deduction
The 50 percent deduction currently allowed for federal income taxes paid is repealed for tax years beginning on or after January 1, 2022.
For tax years beginning on or after January 1, 2019, but before January 1, 2020, Iowa limited to the IRC §179 deduction to $100,000. For tax years beginning on or after January 1, 2020, the increased IRC §179 deduction is allowed.
Alternative Minimum Tax (AMT)
The Iowa AMT is repealed for tax years beginning on or after January 1, 2021.
Individual Income Tax
The same IRC conformity updates made for the previously noted corporate income tax also will apply for the individual income tax.
Note that for the 2018 tax year, a taxpayer who elects to itemize deductions for state tax purposes is allowed to take the deduction for state sales tax in lieu of the deduction for state and local income taxes. However, this is only applicable if the taxpayer elected to deduct state sales and use taxes in lieu of state income taxes for federal income tax purposes.
For tax years beginning on or after January 1, 2019, Iowa requires an addback and subtraction to taxable income related to the IRC §199A deduction. The modifications to Iowa taxable income are illustrated in the following table:
Effective for the 2019 tax year, the highest individual income tax rate is lowered from 8.98 to 8.53 percent.
For tax years beginning on or after January 1, 2017, a taxpayer must claim the federal research credit to claim the Iowa research credit. In addition, the credit is limited to businesses conducting research in the manufacturing, life sciences, software engineering or aviation and aerospace industries.
Sales & Use Tax
Tax Base Expansion
Beginning January 1, 2019, the following items and services are subject to sales tax in Iowa:
- Specified digital products, such as digital audio works, digital books and electronically transferred digital audio-visual works
- Personal transportation
- Streaming video
- Information services
- Software as a service
- Storage of tangible or electronic files, documents or other records
Definition of Manufacturer
Purchases of machinery and materials primarily used in processing by a manufacturer are exempt from Iowa sales and use tax. The definition of a manufacturer was updated to “a business that primarily purchases, receives, or holds personal property of any description for the purpose of adding to its value by a process of manufacturing with a view to selling the property for gain or profit.”
On or after January 1, 2019, a retailer is subject to Iowa sales and use tax reporting if it receives gross revenue from Iowa sales equal to or exceeding $100,000 for the preceding calendar year or the current calendar year, or the retailer makes Iowa sales in 200 or more separate transactions during the preceding calendar year or the current calendar year.
For more information, contact Jim or your trusted BKD advisor.