Iowa's Tax Treatment of COVID Relief
On February 4, 2021, the Iowa Department of Revenue issued guidance on its nonconformity with the Consolidated Appropriations Act of 2021. Because Iowa generally has rolling conformity with federal tax law beginning with tax years 2020, the nonconformity guidance specifically applies to taxpayers with tax years that began in 2019. Legislation has been introduced to provide these taxpayers the same treatment as those with tax years beginning on or after January 1, 2020. We will be watching for updates from Des Moines.
The COVID-Related Tax Relief Act of 2020 (part of the Consolidated Appropriations Act of 2021) clarified the following federal tax treatment for forgiven Paycheck Protection Program loans and EIDL Advances.
Sections 276(a) and 278(a) of Division N of the federal Consolidated Appropriations Act, 2021, enacted on December 27, 2020, provide in part that no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the income exclusion for forgiven PPP loans. If forgiven, PPP loan proceeds are excluded from gross income and related deductions are allowed. Additionally, partners and S corporation shareholders will increase their basis in the entity by the amount of the forgiven loan proceeds, thereby preserving the tax-free nature of the proceeds at the owner level.
Section 278(b) of Division N of the federal Consolidated Appropriations Act, 2021, provides in part that certain Economic Injury Disaster Loan (EIDL) Grants under CARES Act section 1110(e) and Targeted EIDL Advances under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Title III of Division N of the federal Consolidated Appropriations Act, 2021) shall not be included in the recipient’s gross income, and no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of that income exclusion.The CARES Act had not excluded these advances from gross income (as it did forgiven PPP loan proceeds). The CAA provides similar tax treatment for loan subsidy payments authorized by section 1112(c) of the CARES Act and for grants to shuttered venue operators.
Student Emergency Financial Aid Grants
“Qualified emergency financial aid grant” provided to a student after March 26, 2020, are excluded from gross income.
On January 19, 2021, IRS issued Notice 2021-06, exempting from information reporting these relief payments. As such, taxpayers will not receive a 1099 reporting these amounts. No such relief applies to other business grants provided through CARES Act funds.
Issue for 2019 Fiscal Year Taxpayers
The guidance, however, provides that while forgiven loan proceeds are excluded from income for tax year 2019 (fiscal-year filers), the related expenses are not deductible. These taxpayers (unless the Iowa Legislature acts to change the rule) must add back business expenses to their IA 1010 Nonconformity Adjustments form, line 12, for tax year 2019. The guidance states:
Iowa is conformed with the income exclusion for forgiven PPP loans, but is not conformed with the deductibility of qualifying expenses or other tax benefits provided in sections 276(a) and 278(a). In other words, taxpayers who have their PPP loan forgiven and properly excluded from federal gross income in tax year 2019 will also qualify for the exclusion from income in tax year 2019 for Iowa tax purposes, but those taxpayers will not be eligible to deduct business expenses in tax year 2019 that were paid using forgiven (or expected to be forgiven) PPP loans or to otherwise rely on sections 276(a) and 278(a). These Iowa taxpayers must follow the guidance set forth in IRS Notice 2020-32, Rev. Rul. 2020-27, and Rev. Proc. 2020-51, without regard to Rev. Rul. 2021-2.
Legislation has been introduced to override this rule and make business expenses deducible for 2019 fiscal year filers in the same way they are for taxpayers with tax years beginning in 2020.
Because of rolling conformity, Iowa has also conformed to federal tax law for any tax year beginning on or after January 1, 2020, with respect to the income exclusion and allowability of related business deductions for EIDL Grants and Targeted EIDL Advances. In other words, for tax year 2020 and beyond, a taxpayer’s income tax treatment of EIDL advances and related expenses should be the same on their Iowa tax return as it is on their federal tax return.
For tax years beginning in 2019, however, Iowa does not conform to the CAA. As such, EIDL advances are currently included in Iowa income for these businesses. Related expenses would generally remain deductible since the grant is included in income. Again, the Iowa Legislature would have to act to conform the Iowa law to federal law for this narrow category of taxpayers.
Taxation of Iowa CARES Act Grants and the Iowa Small Business Relief Grant
On January 19, 2021, the Iowa Department of Revenue issued guidance on the Iowa Small Business Relief Grant program. This guidance clarifies that House File 2641, in part, exempts from the Iowa income and franchise tax only grants under the Iowa Small Business Relief Grant Program. It does not exempt from state taxation CARES Act grants administered by the Iowa Economic Development Authority and the Iowa Department of Agriculture and Land Stewardship.
Absent a specific legislative exclusion, COVID-19 relief received by businesses is generally included in gross income under both federal and state law. If the relief if excluded from federal gross income in 2020, it should generally be excluded from Iowa gross income as well. Iowa generally conforms with new federal tax provisions to the extent they affect Iowa income taxes for tax years beginning on or after January 1, 2020. Although the Iowa Small Business Relief Grant is taxable under federal law, HF 2641 excludes it from Iowa taxation.
On March 23, 2020, Governor Reynolds unveiled the Iowa Small Business Relief Grant Program. Designed to assist small businesses impacted in the early days of the COVID-19 pandemic, this program offered grants ranging from $5,000-$25,000. The application window for this program closed March 31, 2020, and funds were exhausted.
On June 29, 2020, Governor Kim Reynolds signed 2020 Iowa Acts, House File 2641. That law (sections 118-121) exempts from Iowa income and franchise tax the following:
The amount of any financial assistance grant provided to an eligible small business by the economic development authority under the Iowa small business relief grant program created during 2020 to provide financial assistance to eligible small businesses economically impacted by the COVID-19 pandemic.
On August 25, 2020, Governor Reynolds announced that she was allocating $100 million of Iowa CARES Act relief funds to new agricultural programs created to offset the impact of COVID-19 on farmers and renewable fuel businesses. Several of these programs were administered by the IEDA and the others were administered by the Iowa Department of Agriculture and Land Stewardship. These included the following programs administered by the IEDA: the Iowa Livestock Producer Relief Fund, the Iowa Beginning Farmer Debt Relief Program, and the Iowa Biofuels Relief Program.
Questions arose as to whether grants awarded under these programs were also covered by the legislative exemption from state taxation.
On January 19, IDOR issued guidance confirming that they are not. With respect to the legislative exemption, the guidance states:
Only grants labeled as an “Iowa small business relief grant” and issued by the Iowa Economic Development Authority under the Iowa Small Business Relief Grant Program will qualify for the exemption.
Addressing the tax treatment of other grants, the guidance continues:
The Iowa Economic Development Authority, Iowa Finance Authority, Iowa Department of Agriculture & Land Stewardship, and other state agencies also provide economic relief to persons affected by COVID-19 through a number of other relief programs, funds, and grants that do not qualify for the tax exemption. These non-qualifying programs, funds, and grants include but are not limited to the movie theater relief grants, the county fair relief fund, the residential utility disruption prevention program, the eviction and foreclosure prevention program, the small business utility disruption prevention program, the COVID-19 business disruption relief program, the beginning farmer debt relief fund, the livestock producer relief fund, the biofuels relief program, the nonprofit recovery fund, the targeted small business sole operator fund, the meat processing expansion and development program, the local produce and protein program, the Iowa renewable fuel retail recovery program, the “pack the pantry” program, the Iowa disposal assistance program, the beef up Iowa program, and the “pass the pork” program.
Federal Treatment of Other COVID Relief for Businesses
Grants to businesses are generally taxable under federal law. IRS has stated specifically with respect to CARES Act grants:
The receipt of a government grant by a business generally is not excluded from the business's gross income under the Code and therefore is taxable.
Thus, absent a legislative exclusion, grants to assist businesses during the pandemic are included in the gross income of the business. If a grant is included in federal income, it will also be included in Iowa income, absent a specific legislative exclusion (such as HF 2641).
Claiming the Iowa Small Business Relief Grant Deduction
The Iowa Small Business Relief Grant is not excluded from federal income, but, as noted above, the Iowa Legislature has excluded this specific grant from state taxation. With respect to claiming the exemption, the IDOR guidance states that the exemption applies only to the extent the eligible grant is included in federal income, and only for eligible grants received during a tax year that ends on or after March 23, 2020.
The guidance states that the Iowa deduction for the amount of the Iowa small business relief grant originally included in income on the Iowa tax return is claimed as follows:
- Individuals: On the IA 1040, line 24, using code “ll”
- Trusts & Estates: On the IA 1041, line 8
- Corporations: On the IA 1120, Schedule A, line 16
- S-Corporations: On the IA 1120S, line 7
- Partnerships: On the IA 1065, line 6
- Financial Institutions: On the IA 1120F, Schedule D, line 7
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