For many Iowa taxpayers and practitioners, this tax season has generated more than its usual amount of angst. Some faced the possibility of Iowa tax bills exceeding their expectations by thousands of dollars. That is because it looked doubtful in the first months of 2016 that the Iowa Legislature would pass “coupling” legislation to sync Iowa tax law with federal tax provisions enacted by the Protecting Americans from Tax Hikes Act of 2015 (the Path Act). Without this coupling legislation, several key Iowa tax breaks would have ended or faced severe curtailment. On March 15, Iowa legislators ended this 2015 uncertainty, passing HF 2433. The Governor signed the bill into law on March 21. This coupling legislation, which reportedly will cost Iowa $97.6 million, retroactively integrates most Path Act changes into the Iowa tax law. The lone exception is 50% bonus depreciation which is specifically excluded from Iowa law.
In the Path Act, enacted December 18, 2015, Congress permanently extended a $500,000 enhanced IRC § 179 deduction with a $2,000,000 annual dollar threshold. Absent this extension, this deduction was limited to $25,000 with a $200,000 annual dollar threshold. The Path Act also provided 50% bonus depreciation that will be phased out over a five-year period and a permanent five-year (instead of 10-year) period during which S Corporations must recognize built-in gain. Additionally, the Path Act made permanent a number of other popular tax breaks, including a $250 above-the-line deduction for teachers who purchase supplies for their K-12 classrooms, the option to allow taxpayers to claim state and local sales tax instead of state and local income tax as an itemized deduction, and an option for taxpayers ages 70.5 and older to make tax-free distributions from their IRAs to a qualified charity.
Although the Iowa Legislature has for the past five years coupled with federal tax extender legislation (except for bonus depreciation), It became apparent in early 2016 that the Governor and Iowa legislators were balking at incorporating any of the Path Act tax breaks into 2015 Iowa law. This meant, for example, that a farmer who had made a large equipment purchase in 2015 would not have had the benefit of the enhanced “Section 179” deduction in Iowa. Iowa’s “§179 deduction” was not only limited to $25,000, but was also subject to a dollar-for-dollar phase-out for purchases exceeding the $200,000 ceiling. Therefore, a farmer who put a $226,000 tractor into service in 2015 would have had no Iowa §179 deduction because of the $200,000 annual dollar threshold. He would have been left to depreciate the cost of the purchase more slowly over a period of years. Bottom line, because his 2015 income could not be immediately offset by the price of his tractor purchase, he would likely have faced thousands of dollars of additional income taxed at a rate of 8.98 percent. HF 2433, which integrated the Path Act provisions (with the exception of bonus depreciation) into Iowa law, prevents this result. Because of the enhanced “Section 179” deduction, the same Iowa farmer can immediately deduct the entire cost of his $226,000 tractor from his 2015 income, thereby incurring less 2015 Iowa tax liability. And those Iowa farm returns are not due until May 2 (the Monday following Saturday, April 30) because of an extension granted by the Iowa Department of Revenue on February 27.
And so the saga ends. But only for another year. While Congress made these tax breaks permanent on the federal side, HF 2433 was just a one-year extension. Some legislators have warned that taxpayers should not expect the same breaks in 2016. The legislation was part of a bipartisan compromise deal. Included in HF 2433 were provisions rescinding administrative rules that were to provide certain sales tax exemptions for items used in manufacturing. While taxpayers can hope that Iowa law is more settled next year at this time, they should not take any tax breaks for granted.
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.