Iowa Department of Revenue Issues Proposed Rules for Section 179

September 30, 2018
Kristine A. Tidgren

Last week, the Iowa Department of Revenue issued proposed rules for implementing changes to section 179, brought about by Iowa’s 2018 tax reform legislation (S.F. 2417, enacted May 30, 2018). The rules are open for public comment through October 17, 2018.  

Individual Taxpayers and Pass-through Entities

General Rules

Taxpayers electing to expense assets under federal IRC § 179 must also expense those assets for Iowa purposes. Likewise, taxpayers who do not take the federal section 179 expense deduction are not permitted to take a section 179 deduction in Iowa. Federal law dictates whether an asset qualifies for the Iowa section 179 deduction. Because during certain years the Iowa section limits are different, however, adjustments may be required for the Iowa deduction.

Iowa Limits

Generally, the Iowa deduction must equal the amount of the federal deduction taken for the same asset in the same year, subject to special Iowa limitations. For 2018 alone, the section 179 limitations for corporations are different from those for individuals and non-corporate entities. The limits for individuals,trusts and estates, and pass-through entities other than corporations or financial institutions are contained in this chart:

Note: The regulations do not specifically discuss the impact of these limitations on S Corporations, nor do they contain examples specifically referencing S Corporations. The 2018 limitation, however, does not distinguish between C corporations and S corporations. Thus, it appears that Iowa S corporations are unable to pass through more than $25,000 (with a reduction limitation of $200,000) of section 179 in 2018.

Excess Federal Deduction

Until 2020, the federal section 179 deduction may exceed the deduction allowed by Iowa law. Depending upon the source of the deduction, the excess is handled in different ways under new Iowa law. For assets placed into service by individual taxpayers or Iowa pass-through entities, the excess may be depreciated through the regular depreciation rules under IRC section 168. Bonus depreciation may not be applied.

Example: Jerry purchases $400,000 worth of qualifying section 179 assets and places them in service in 2018. Jerry claims a full $400,000 section 179 expense deduction on the 2018 federal return. In 2018, however, the Iowa section 179 deduction is phased out dollar for dollar for assets placed in service in excess of $280,000. It is fully phased out when assets total more than $350,000. Here, the cost of Jerry’s assets exceed the phase-out limit. As such, he cannot claim any Iowa Section 179 deduction, but he can depreciate the entire cost of the asset for Iowa purposes.

When the asset is placed into service by a pass-through entity, the limits apply to both the pass-through and the individual owner(s). Individual owners of pass-through entities receiving section 179 deductions from one or more pass-throughs that, in the aggregate, exceed the Iowa limitations may make a special election for tax years 2018 and 2019. This special election is detailed below.

Carryforward

As under federal law, section 179 deduction amounts that do not exceed the Iowa section 179 limits but do exceed a taxpayer’s business income may be carried forward to be claimed in future years. Any federal section 179 deduction claimed in excess of the Iowa limits, however, is not an Iowa section 179 deduction and cannot be carried forward to future years. Instead, these amounts must be recovered through depreciation or through the special election detailed below.

Basis

The differences between the limits for the Iowa and federal section 179 may cause taxpayers to have a different basis in the same asset for Iowa purposes than for federal purposes. In such cases, the proposed rules require that taxpayers must use forms made available on the Iowa Department of Revenue’s website to calculate and track these differences.

Special Election

For tax years beginning on or after January 1, 2018, but before January 1, 2020, an individual or entity, other than a corporation or an entity subject to the corporate income tax or franchise tax, that receives a section 179 deduction from one or more pass-through entities in excess of the Iowa deduction limitation for that tax year may elect to deduct the excess in future years. For tax year 2017, that excess is lost.

If the total Iowa section 179 deduction passed through to the individual or entity exceeds the federal section 179 deduction limitation for that year, the taxpayer may only use the amount up to the federal limitation. Any amount in excess of the federal limitation cannot be deducted for Iowa purposes.

An individual or entity that makes the special election may not claim an Iowa section 179 deduction for any assets the individual placed in service during the same year but must instead depreciate such assets using MACRS (and no bonus depreciation). To the extent the individual claimed a federal section 179 deduction on those assets, the Iowa depreciation deductions and any basis adjustments resulting from the difference in timing of the recovery between Iowa law and federal law are calculated and tracked on forms made available on IDOR’s website.

Example: John is a sole proprietor who places in service $20,000 worth of section 179 assets in tax year 2018 and claims the deduction for the full amount for federal purposes. John is also a partner in Partnership B, an out-of-state partnership with no Iowa filing obligation. Partnership B also places section 179 assets in service, properly claims a federal section 179 deduction, and passes a total of $100,000 of that deduction through to John. For federal purposes, John has a total of $120,000 in section 179 deductions. Because John has section 179 deductions from a pass-through that exceed the Iowa limitation for the year, John is eligible for the special election. John makes the special election and claims the maximum Iowa section 179 deduction of $70,000 on the amount passed through from Partnership B. Under the special election, John will be allowed to deduct the remaining $30,000 passed through from Partnership B over the next five years, using MACRS. However, because John made the special election, John will be required to depreciate the entire $20,000 cost of the assets he placed in service as a sole proprietor.

Calculating the Special Election Deduction

An eligible individual or entity electing to take advantage of the special election must first add together all section 179 deductions which the individual received from all relevant pass-through entities. The individual or entity must claim an aggregate Iowa section 179 deduction equal to the Iowa limit for the tax year. This amount must then be subtracted from the total. Whatever remains is the amount the individual or entity will be permitted to deduct in future years pursuant to the special election deduction. The excess amount is divided into five equal shares. The individual may then deduct one of the five shares in each of the next five years.

Special Election Deduction Carryforward

The dollar limitations and reduction limitations on section 179 deductions do not apply to special deduction amounts allowed over the five-year period. The special election deduction, however. does apply for purposes of the business income limitation. This amount is treated as a section 179 carryforward.

Example: Sue is an Iowa resident who is a partner in a partnership that does not do business in Iowa. In 2019, the partnership passes through a $600,000 federal section 179 deduction and does not recalculate the deduction for Iowa purposes, because the partnership has no obligation to file an Iowa return. Sue claims an Iowa section 179 deduction of $100,000 (the 2019 Iowa limitation) and elects the five-year carryforward for the rest, meaning that she will be allowed to take a $100,000 Iowa deduction in each of the next five years. In 2020, Sue is eligible for the $100,000 deduction carried forward under the election, but she only has $50,000 in business income. Because the deduction is limited to business income, Sue can only use $50,000 of the deduction in this year. However, she will be permitted to treat the excess $50,000 as a section 179 carryforward and use it to offset business income in future years until the deduction is used up.

Basis

The individual’s basis in the pass-through entity assets is adjusted by the full amount of the section 179 deduction passed through in the year that the section 179 deduction is received. It will, therefore, be the same for both Iowa and federal purposes.

This special election will no longer be in place when the Iowa section 179 limits fully conform to federal law.

Corporations and Entities Subject to Corporate Tax Rates

Limits

For 2018, the Iowa section 179 limit for corporations,entities subject to the corporate income tax, and financial institutions subject to the franchise tax is $25,000, as opposed to $70,000. Likewise, the reduction limitation for these corporate taxpayers is $200,000, not $280,000. The Iowa corporate limits for tax years 2019 and later coincide with the limits for individual taxpayers and other non-corporate entities.

Note: The 2018 limitation does not distinguish between C corporations and S corporations. Thus, it appears that Iowa S corporations are unable to pass through more than $25,000 (with a reduction limitation of $200,000) of section 179 in 2018.

Example: Taxpayer, a corporation, purchases a $100,000 piece of equipment and places it in service in 2018. Taxpayer claims a section 179 deduction of $100,000 for the full cost of the equipment on the 2018 federal return. Taxpayer is also required to claim a section 179 deduction of $25,000 on the 2018 Iowa return (the full amount of the federal deduction up to the Iowa limit for corporations for 2018). The taxpayer can depreciate the remaining $75,000 cost of the equipment for Iowa purposes.

Special Election

Corporations, like individuals, are eligible for a special election if they are allocated section 179 deductions from pass-through entities in excess of the Iowa limits during tax year 2019. Corporations are not eligible for this special election for tax years 2017 or 2018.

Special Election Mechanics

A corporation or entity subject to the corporate income tax that makes the special election may not claim an Iowa section 179 deduction for any assets the corporation placed in service during the same year but must instead depreciate those assets using MACRS (with no bonus depreciation). To the extent the corporation claimed a federal section 179 deduction on those assets, the Iowa depreciation deductions and any basis adjustments resulting from the difference in timing of the recovery between Iowa law and federal law are calculated and tracked on forms made available on the Iowa Department of Revenue’s website.

Example: A, Inc., a C corporation doing business in Iowa, places in service $20,000 worth of section 179 assets in tax year 2019 and claims the deduction for the full amount for federal purposes. A, Inc. is also a member of B, LLC, an entity that has elected to be taxed as a partnership for federal purposes and does not do any business in Iowa. B, LLC also places section 179 assets in service, properly claims a federal section 179 deduction, and passes a total of $150,000 of that deduction through to A, Inc. For federal purposes, A, Inc. has a total of $170,000 in section 179 deductions. Because A, Inc. has section 179 deductions from a pass-through that exceed the Iowa limitation for 2019, A, Inc. is eligible for the special election. A, Inc. makes the special election and claims the maximum Iowa section 179 deduction of $100,000 on the amount passed through from B, LLC. Under the special election, A, Inc. will be allowed to deduct the remaining $50,000 passed through from B, LLC over the next five years. However, because A, Inc. made the special election, A, Inc. will be required to depreciate the entire $20,000 cost of the assets A, Inc. placed in service in 2019.

Calculating the Special Election

The proposed regulations provide that a corporation electing to take advantage of the special election must first add together all section 179 deductions received from all relevant pass-through entities. The corporation must claim an aggregate Iowa section 179 deduction equal to the Iowa limit for the tax year. This amount must then be subtracted from the total. Whatever remains is the amount the corporation will be permitted to deduct in future years pursuant to the special election deduction. The excess amount is divided into five equal shares. The corporation may then deduct one of the five shares in each of the next five years.

Carryforward

The dollar limitations and reduction limitations on section 179 deductions do not apply to special deduction amounts allowed over the five-year period. The special election deduction, however, does apply for purposes of the business income limitation. This amount is treated as a 179 carryforward.

Conclusion

These proposed rules detail some key section 179 provisions implemented by S.F. 2417. Some questions, however, remain. The regulations will not become final until after the department has received and reviewed public comments. Stay tuned for futher updates.

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.

RSS​ Facebook Twitter