On May 5, 2018, the Iowa Tax Reform Bill was passed by the Iowa House and Senate and Governor Kim Reynolds signed the bill into law on May 30th. This bill contains tax law changes that begin to impact the 2018 tax year and continue to change the tax law up to 2023, depending on whether certain tax revenue triggers are met at the state level. Below is a summary of the changes:
- In 2019, the tax rates will be reduced with a top rate of 8.53%. (See Table 1)
- Iowa individual income tax laws generally conform to federal tax code beginning in 2019.
- Iowa decouples from the Federal SALT deduction limit of $10,000.
- In 2023, subject to revenue triggers, the following will be implemented:
- Brackets will consolidate to a four-bracket system and larger rate reductions will be implemented bringing the top rate to 6.5%.
- The income tax starting point will shift to federal taxable income, fully incorporating federal. itemized and standard deduction amounts.
- AMT will be eliminated.
- Pass-through deduction will be increased to full value of federal deduction.
- Iowa Corporate income tax rates decrease beginning in 2021 with the highest rate of 9.8%. (See Table 3)
- Corporate AMT will also be eliminated in 2021.
- Section 179 increases the expense limit to $70,000 in 2018 with a $280,000 phase-out and $100,000 in 2019 with a phase-out of $400,000.
- Iowa will continue to decouple from bonus depreciation.
- In 2019, taxpayers will be allowed to deduct 25% of their federal qualified business income deduction from their Iowa taxable income. This percentage increases to 50% in 2021 and increases again in 2022 to 75%. If the revenue triggers are met in 2023, the deduction percentage will become 100% of the federal deduction.
- In 2018, Iowa will temporarily decouple from the Federal repeal of like-kind exchanges (also impacts individuals). Iowa will partially couple with the federal rules in 2019 and will completely couple in 2020.
- Beginning in 2021, the Iowa capital gain deduction only will apply to net capital gain from the sale of real property used in a farming business if sold to lineal descendants or other certain relatives. Note that this change will only occur if the two revenue triggers are met.
- The geothermal energy systems credits are eliminated effective January 1, 2019.
- Retroactive modifications were made to the Research Activities Tax Credit for tax years beginning on or after January 1, 2017.
- The bill clarifies the base amount used to calculate the credit.
- The taxpayer must claim the federal research tax credit for the same research and during the same tax year.
- The taxpayer must be engaged in one of the following industries: manufacturing, life sciences, software engineering, and aviation and aerospace. Specific industries are explicitly excluded including agricultural production, finance, real estate, and transportation companies.
- Note: This bill was passed after the original passthrough and individual tax return deadlines for 2017 calendar year taxpayers. Due to this bill being retroactive, research activity tax credits reported on 2017 tax returns may no longer qualify or may need to be recalculated under the new modifications.
- The sales tax base is widen by charging sales tax on digital goods, ride sharing, and subscription services along with the full amount of hotel rooms and car rentals (including booking fees).
- Sales tax nexus will include economic nexus (activity to customers within a state) and click-through nexus (focuses on location of the computer purchasing rather than where the seller may be).
If you have any questions, feel free to contact us.
McGowen, Hurst, Clark, & Smith, P.C.