Iowa Legislature Finishes - Update on Tax Provisions

The Iowa General Assembly completed its 2009 session in the early morning hours of April 26.  It will be a memorable session - one that included significant questions being raised about the extent of public input on a tax issue and the failure to take action to either legitimize homosexual marriage or clarify existing Iowa law concerning its illegitimacy.  The legislature also approved a massive budget (the largest in Iowa history) of $6.258 billion and $765 million in new borrowing.  Here's a rundown on the most important tax issues the legislature dealt with:

• SF 483
  • Contains a tax increase on corporations in the form of disallowing such entities from carrying back net operating losses (NOLs) to prior years so as to offset income from those years.  Under the bill, NOLs can only be carried forward.  This provision was made retroactive to corporate NOLs occurring in tax years beginning on or after January 1, 2009 (the carryforward period is limited to 20 years).  The effect of the legislation is an increase in the overall effective tax rate, over time, on businesses, but it's especially harsh on those that are struggling economically and go out of business.  The provision amends Iowa Code Sec. 422.35.
  • Caps (at $185 million annually) the amount of certain types of corporate welfare tax credits awarded on or after July 1, 2009.  The cap is not applicable to either the ethanol or wind industry.  The provision creates new Iowa Code Sec. 15.119.
  • Allows the Iowa Department of Revenue to keep tax refunds longer (by an extra month) without the need to pay interest to either an individual or corporate taxpayer.  This provision applies retroactively to tax years beginning on or after January 1, 2009.  The provision amends Iowa Code Secs. 422.25 and 422.91.
  • Places an annual limit of $6 million on the agricultural assets transfer tax credit ("beginning farmer" tax credit).  This provision is effective to agreements entered into or tax credits awarded on or after July 1, 2009.  The credits are available on a first-come, first-served basis.  The provision amends Iowa Code Sec. 175.37.
• SF 456
  • Allows more wind projects to be able to utilize "renewable" energy tax credits by permitting private colleges and universities, community colleges, Iowa Board of Regents-controlled institutions, K-12 schools, and public hospitals to generate power for on-site use and to qualify for the existing credit of one-cent per kilowatt hour.
  • Relaxes restrictions on the type of facilities that can qualify for the credits, and allows the credits to be sold to other entities (non-related parties). 
  • The maximum amount of nameplate generating capacity of all wind energy conversion facilities the Iowa Utilities Board may approve is not to exceed 330 MW.
• SF 478
  • Disallows any Endow Iowa contribution as an Iowa itemized deduction, caps the Endow Iowa Tax Credit at $3 million plus a percentage of gaming revenues, and increases the credit to 25 percent of the value of the endowment gift.  These provisions are effective January 1, 2010.
  • Pegs the underpayment of estimated tax penalty (for corporations) based on 100 percent of the current year tax.  This provision is effective January 1, 2009.  
  • Eliminates the Livestock Production (cow-calf) Credit effective for refund claims filed on or after November 1, 2008.  Thus, no refund claims will be honored on returns filed for 2008 and later years.
• SF 389
  • Requires the Iowa Department of Revenue to create income tax forms that will allow taxpayers to indicate the presence or absence of health care coverage for each dependent child for whom an exemption is claimed.  A separate provision requires state income tax filers to report on the tax return either the presence or absence of health care coverage for each dependant child for whom an exemption is claimed.  If a taxpayer indicates on the return that a dependent child does not have health care coverage, and the taxpayer's income does not exceed the highest level of income eligibility standard for the medical assistance program under Iowa Code Sec. 249A or Iowa Code Sec. 514I, the Department of Revenue is required to send a notice to the taxpayer indicating that the dependent may be eligible for medical assistance and the taxpayer must submit an application for medical assistance with 90 days of receipt of the enrollment information.  These provisions are effective for tax returns filed for tax years beginning on or after 2010.
• SF 322
  • Specifies that for married taxpayers, both spouses must claim itemized deductions if either spouse itemizes.  This provision is applicable to tax years beginning on or after 2009.

The legislature took no action to conform with the most recent federal extender provisions (such as the educator expense tax deduction, the tuition deduction or enhanced expense method depreciation) for 2009.  Also the legislature did not pass a proposal that would have allowed counties and municipalities to enact their own income taxes.  In a significant move, the legislature failed to pass a provision that would have eliminated deductibility on the state income tax return for federal taxes paid.