Iowa Coupling Provisions Enacted

April 28, 2011 | Joe Kristan and Roger McEowen

 

On April 12, Governor Branstad signed into law legislation that finally settle Iowa’s tax law rules for 2010. By line-item vetoing the parts of SF 512 he found unacceptable (particularly the portion of the bill that would have allowed the Governor to transfer funds among agencies), the Governor was able to approve the rest of the bill, including the “code conformity” provisions for Iowa’s tax law. Here are the key points:

  • Iowa conforms to the $500,000 federal expense method depreciation limit for 2010 and 2011.
  • Iowa adopts federal tax computation rules in effect as of 1/1/2010 through 2011, including things like the educator expense deduction that have been a problem in other years. That means the coupling provisions apply to 2010 returns.
  • Iowa DOES NOT adopt federal bonus depreciation for 2010 or 2011. However, there is separate legislation that, if passed and signed into law, would couple Iowa with 100 percent “bonus” depreciation for 2011 (but not 2010). The bill number that contains this provision is SF 209.

On April 19, Governor Branstad received SF 209. As noted above, the bill reinstates bonus depreciation for use on Iowa returns for tax years beginning on or after January 1, 2011. Iowa last coupled with federal bonus depreciation in 2005. On April 21, Governor Branstad signed SF 209 into law, but line-item vetoed the bonus depreciation provision contained in the bill citing the need for comprehensive state tax reform. So, as of the present time, bonus depreciation is still not available on Iowa returns. It remains to be seen whether the legislature will override the veto.

The coupling provisions of SF 512 (which has been enacted) will impact Iowa 2010 returns in numerous ways, including the following:

  • Earned Income Tax Credit (EITC) with the refundable Iowa credit being 7 percent of the federal EITC;
  • Disallowance of the deduction associated with the credit for health insurance premium costs of small businesses;
  • Start up expenditures increase to $10,000;
  • Certain expenses of teachers are deductible up to $250;
  • No tax (via no inclusion in income) on distributions of up to $100,000 from an IRA to qualified charities;
  • A choice can be made to either take an itemized deduction for state and local income taxes or general sales taxes;
  • Deduction for qualified tuition and fees.

For those clients that have already filed their 2010 Iowa returns, it may not be the best idea to begin amending returns.  The Iowa Department of Revenue (IDOR) is presently working on a proposal for the legislature to consider that would basically allow certain 2010 items (particularly expense method depreciation, the educator deduction and the tuition and fees deduction) to be taken on the 2011 return in addition to what would otherwise be allowed on the 2011 Iowa return.  IDOR is trying to find a way to deal with the need to handle thousands of amended returns for 2010, and there is precedent for IDOR to use this type of an approach - they did it in 2005 when late-enacted legislation caused a similar problem.  Another possibility is that they will try to streamline the amended return process for 2010 by producing a form that can be filed with just those items impacted by the late-enacted coupling legislation.  So, it may be a good idea to wait to see what happens.  There might be another update soon.