As of this writing, it is difficult to predict whether the Iowa Legislature will eventually decide to retroactively integrate federal tax extenders from the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) into Iowa law for the 2015 tax year. It is certain, however, that the lack of certainty has caused great angst, primarily among preparers and farmers.
As most readers are aware, Congress permanently extended several key tax breaks at the end of 2015. In the PATH Act (see our summary article of this law here), Congress permanently extended a $500,000 enhanced IRC § 179 deduction and provided for 50% bonus depreciation that would be phased out over a five-year period. Also included in this extenders package was a permanent extension of a number of other other important tax breaks, including a reduced five-year period during which S Corporations must recognize built-in gain, a $250 deduction for teachers who purchase supplies for their K-12 classrooms, and the option to allow taxpayers to claim state and local sales tax instead of state and local income tax as an itemized deduction.
While these changes are in the books for the 2015 tax year with respect to federal tax returns, Iowa has not enacted legislation to apply these changes to Iowa tax returns. Consequently, none of the 2015 federal tax extenders apply to Iowa tax returns. For the 2014 tax year, Iowa was coupled with federal tax law with respect to the enhanced IRC § 179 deduction and most other federal provisions. Iowa did not, however, adopt the 2014 federal bonus depreciation provisions. This was true in prior years as well. While 2015 coupling appeared dead just a week ago, it now appears there remains a chance for a change in Iowa law, however slim that may be. Nonetheless, the Iowa Department of Revenue announced this week that it will not extend the March 1 deadline for farmers to file their income tax returns to avoid an underpayment of estimated taxes penalty. If a coupling law is passed, those filing returns by March 1 will have to file amended returns to take advantage of the new provisions.
Currently, Iowa has a $25,000 §179 deduction with only a $200,000 annual dollar threshold. This means not only that the deduction is limited to $25,000, but also that the deduction begins a dollar-for-dollar phaseout for purchases exceeding the $200,000 limit. In other words, a farmer with a 2015 purchase of $225,000 in equipment is currently entitled to no Iowa §179 deduction. If Iowa were to couple with federal law, the farmer would be entitled to deduct the entire amount of the purchase from his income. This is because the federal law allows a $500,000 deduction with a $2,000,000 annual dollar threshold. The noncoupling of this federal provisions alone will result in thousands of dollars of additional tax liability for farmers or small businesses that made large purchases in 2015. Practitioners must also double check that their software is calculating the Iowa tax correctly. Although most problems have been resolved, early versions of popular software were not correctly calculating the Iowa deduction.
On February 4, a proposed coupling bill, Senate Study Bill 3107, was introduced in the Iowa Senate. This bill, which is the Iowa Department of Revenue's proposed bill, is dramatically different from HF2092, which passed the Iowa House on January 28.
HF2092 would couple with most federal PATH Act provisions for 2015, including the enhanced $500,000 IRC § 179 deduction. The House bill would explicitly decouple with respect to bonus depreciation (as has been the case in prior years). It would also allow the deduction for state sales and use tax but only if "the taxpayer elected to deduct the state sales and use taxes in lieu of state income taxes under section 164 of the Internal Revenue Code. The deduction for state sales and use taxes [would not be] allowed if the taxpayer has taken the deduction for state income taxes or claimed the standard deduction under section 63 of the Internal Revenue Code."
For 2015, SSB 3107, on the other hand, would couple with federal PATH Act changes only with respect to the research activities credit and the alternative simplified research activities credit. Aside from that, under SSB 3107, Iowa would not adopt any Path Act provisions, including the enhanced $500,000 IRC § 179 deduction. This means that Iowa would recognize only a $25,000 IRC § 179 deduction.
For 2016, the senate study bill would make most 2015 federal PATH Act provisions applicable to Iowa, but it specifically decouples with certain federal bonus depreciation AND IRC § 179 provisions. Specifically, the senate study bill would limit the Iowa § 179 deduction to $25,000 and eliminate bonus depreciation entirely. While Iowans are now accustomed to Iowa not recognizing federal bonus depreciation provisions, the decoupling of the enhanced IRC § 179 deduction would be new.
On February 9, 2016, another Senate Bill, SF 2137, was introduced. This bill mirrors HF2092 and would couple with federal provisions (except bonus depreciation) beginning with the 2015 tax year. Despite the bill's introduction, it appears that action on any such bill is currently stalled.
For 2015, Governor Branstad initially proposed no coupling with federal provisions. His proposals do include state coupling with some federal provisions beginning with tax year 2016. The Governor's current position on coupling is unclear.
We will continue to keep you posted as these developments unfold.
CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.