Iowa Legislature Sends Significant Tax Bill to the Governor
Update: On June 16, 2021, Governor Reynolds signed this bill into law.
After several late-night, homestretch sessions, the Iowa Legislature passed a sweeping tax bill, SF 619, which is expected to be signed into law by Governor Reynolds shortly. The bill would modify Iowa’s income tax and property tax law in key ways. Several provisions, including the exclusion from income for COVID-19 grants and the fix for fiscal year entities receiving PPP loans, impact current returns. Beginning in 2021, the bill would allow bonus depreciation and an expanded Beginning Farmer Tax Credit. Other provisions, such as lower tax rates and a phase-out of the Iowa inheritance tax, will not be fully implemented for several years.
Exclusion from Income for COVID-19 Grants
The bill exempts from Iowa corporate and individual income tax liability the proceeds of COVID-19 grants received by taxpayers through COVID-19 assistance programs administered by the Economic Development Authority, the Iowa Finance Authority, and the Department of Agriculture and Land Stewardship. Although these grants are generally subject to federal taxation, the bill exempts from Iowa taxation those grants issued between March 17, 2020, through December 31, 2021, and applies to tax years through 2023. Applicable grants include, among many others, those made available through the Iowa Livestock Producer Relief Fund and the Iowa Beginning Farmer Debt Relief Fund.
Fix for Fiscal-Year PPP Recipients
The bill allows those who received a PPP loan during a tax year beginning in 2019 to deduct expenses paid by forgiven proceeds in the same way as other taxpayers.
Bonus Depreciation and Interest Deduction
The bill couples Iowa tax law with federal bonus depreciation for qualified equipment and other capital assets purchased on or after January 1, 2021. Current federal law provides for a phase-out of bonus depreciation over the next five years. Iowa law, which currently disallows bonus depreciation, will now align with the federal provisions:
- Through 2022 100 percent
- 2023 80 percent
- 2024 60 percent
- 2025 40 percent
- 2026 20 percent
- 2027 None
The bill would also allow taxpayers to remain not subject to the federal business interest deduction limitation for state purposes, even if they take bonus depreciation.
Beginning Farmer Tax Credit
The bill would also expand the existing Beginning Farmer Tax Credit Program. Currently, those landowners who enter into a qualifying lease with a beginning farmer are eligible for an Iowa tax credit. For an agreement which requires a fixed cash rent, the tax credit amount equals 5 percent of the gross amount paid to the taxpayer under the agreement. For an agreement requiring rent payable on a commodity share basis, the tax credit amount equals 15 percent of the amount the taxpayer would receive as a rent payment from the sale of his or her share of the crop in each harvest year. This amount is based upon an equation using data compiled by USDA. For a flexible-rent arrangement under which the taxpayer receives a fixed payment, but also shares some risk, the tax credit amount equals 5 percent of the fixed amount and 15 percent of the amount paid as a percentage of the gross value of the commodity. The program is subject to a cap of $12 million per calendar year, although usage has not reached this cap in past years. Last year, for example, $6.5 million in credits were used.
The bill would enhance the credit by including buildings as eligible agricultural assets. In other words, land does not need to be leased along with the building to be eligible for the credit. The bill would also increase the maximum participation in the program from 10 years to 15 years. Taxpayers could also enter into agreements with multiple beginning farmers, instead of just one. Similarly, taxpayers could earn up to $50,000 in credits per year, per agreement, instead merely $50,000 per year.
Remove Contingencies for Lower Tax Rates
Iowa’s 2018 tax reform legislation, SF 2417, provided that in 2023, if two revenue contingencies were met, Iowa’s individual income tax rates would be significantly restructured and lowered. The number of tax brackets would be reduced from nine to four, and the rates would be lowered from a top rate of 8.43 percent to 6.5 percent, as detailed in this table from the Legislative Services Agency:
The revenue contingencies included:
- Actual general fund revenue must total at least $8.3146 billion in the previous fiscal year
- Actual net general fund revenue for the previous fiscal year must exceed the actual net general fund revenue level for the fiscal year immediately prior to the previous year by at least 4 percent.
When it became clear that these targets would not be met, legislators opted to remove the contingencies and implement a specific date of enactment for the tax cuts. SF 619 eliminates the target revenue requirements and specifies that on January 1, 2023, the new rates will be effective.
Also in 2023, the new law would activate the 2018 provision calling for the end of federal deductibility for individuals when rates are lowered. Under this provision, Iowans will not be allowed to deduct from Iowa income federal income tax payments made after 2022. Iowa law already provides that corporations will not be allowed to deduct federal tax payments made in 2021 or later. Iowa corporations presently deduct 50 percent of these payments from their Iowa income.
Also going into effect in 2023 would be those future changes made by the 2018 law (modified in 2019) restricting the Iowa capital gain deduction to the sale of real property used in a “farming business,” provided that the taxpayer “materially participated” in the farming business for at least 10 years, held the real property for at least 10 years, and sold the real property to a “relative.”
Inheritance Tax Phase-out
Under current law, no inheritance tax is due on shares passing to spouses or lineal ascendants and descendants. An inheritance tax ranging from 5 – 15 percent, however, is imposed upon property passing to non-exempt beneficiaries. The current inheritance tax rate tables are here.
Beginning with those dying on or after January 1, 2021, the bill phases out the effective inheritance tax rate by 20 percent each year over the course of four years, eliminating the tax completely for deaths occurring on or after January 1, 2025.
Early Childhood Development Credit and Child and Dependent Care Credit Expansion
Beginning January 1, 2021, the bill increases the maximum net income amount used in determining eligibility for Iowa’s Early Childhood Development Credit (ECDC) and Child and Dependent Care Credit (CDCC) from $45,000 to $90,000. The ECDC is 25 percent of the first $1,000 in early childhood development expenses the taxpayer pays for dependents, ages three through five. The CDCC, which is a refundable credit, has ranged from 75 percent of the federal credit[i] for taxpayers with net income of less than $10,000, to 30 percent of the federal credit for taxpayers with net income of $40,000 to $44,999. The bill provides that taxpayers with income up to $90,000 will be eligible for a CDCC equal to 30 percent of the federal credit.
Mental Health and Disability Services Funding / Property Tax Replacement Payments
The bill also makes significant changes to the property tax law, in part by shifting the source of funding for mental health services from county property taxes to a state fund. The county’s mental health levies would be phased out over a two-year period.
The bill would also end the “backfill” payments implemented as part of Iowa’s 2013 property tax reform law. This provision reduced commercial property taxes, but promised funds to local governments to help make up the difference. The bill would phase out these “replacement tax” payments over a period of four or seven years, beginning in 2023. The length of the phase-out would be based upon the pace of the growth of the tax base. School district tax replacement payments would be eliminated beginning in 2023.
The bill includes a host of other provisions, including the following:
- School Foundation Percentage
- Elderly Property Tax Credit
- Real Estate Transfer Tax to Housing Trust Fund
- High Quality Jobs Program Day Care Centers
- Telehealth Parity
- Economic Development Authority Annual Tax Credit Limits
- High Quality Jobs Program Eligibility Requirements
- Manufacturing 4.0
- Alternate Energy Revolving Loan Fund
- Workforce Housing Tax Credits
- Redevelopment Tax Credit
- Downtown Loan Guarantee Program
- Disaster Recovery Housing Assistance Program and Fund
- Promotional Play Gambling Tax
- Targeted Jobs Withholding Pilot Project
- Food Bank Sales Tax Exemption
- Volunteer Firefighter, EMS, and Reserve Peace Officer Tax Credits
- Individual Income Tax Checkoffs
[i] The federal credit is equal to 35 percent of child and dependent care expenses.
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