Iowa Legislature Will Not Couple for 2016
On February 10, 2017, Iowa Department of Revenue issued helpful documents to help preparers contend with nonconformity.
Faced with a $118 million budget shortfall, Iowa legislators have decided to not conform Iowa tax law with federal tax law for 2016. That means, for some, Iowa taxable income will look very different from federal taxable income, and some Iowans will have much higher tax liability. It also means that tax preparers will have a large headache as they try to sort out the difference and balance two sets of books for different provisions.
"No coupling" means that Iowa references to the Internal Revenue Code are to the Internal Revenue Code in effect on January 1, 2015. Consequently, federal income tax changes made by Congress in 2015 and 2016 are not part of Iowa tax law for 2016 or beyond.
Congress enacted the Path Act on December 18, 2015. This landmark legislation permanently extended many popular tax provisions, including an enhanced “Section 179” deduction for 2015 and beyond. For 2016, farmers and small businesses can immediately deduct up to $500,000 of the tax basis of certain business property or equipment placed into service that year, rather than depreciating that equipment over a period of years. Once qualifying purchases reach a threshold of $2,010,000, the amount of the deduction is reduced, dollar-for-dollar for each dollar above the threshold. In 2017, the federal deduction increases to $510,000 with a threshold of $2,030,000. Section 179 applies to new or used equipment, as well as to single purpose agricultural structures.
Although this enhanced federal provision is now in place permanently (meaning unless or until Congress chooses to rescind it) the corresponding Iowa provision is much stingier. Although Iowa coupled in 2015, the Iowa Section 179 deduction is back to $25,000 with a $200,000 threshold for 2016 and beyond. Since 2010, Iowa has always synced the amount of the Iowa Section 179 deduction to that of the federal deduction through coupling legislation. This coupling has allowed Iowa to offer other popular tax breaks as well, such as:
- the $250 above-the-line deduction for teachers who purchase supplies for their K-12 classrooms,
- an option for taxpayers ages 70.5 and older to make tax-free distributions from their IRAs to a qualified charity,
- A qualified tuition and fees deduction for higher education
- An election to deduct state sales/use tax as an itemized deduction instead of state income tax
- Allowing a deduction for private mortgage insurance premiums
- a five-year (as opposed to a 10-year) lookback period for S corporations to recognize built-in gain once they’ve converted from a C corporation.
Iowa has not coupled with federal law as to any of these provisions for 2016 or beyond. Although the PATH Act extended federal bonus depreciation for five years, Iowa has excluded this tax break from previous coupling legislation.
Coupling for the 2015 tax year was not without controversy. In early 2016 it also looked as though no such legislation would pass. On March 15, 2016, the Iowa Legislature passed HF 2433, which integrated key PATH Act tax breaks into Iowa law for one year only. Some legislators at the time warned taxpayers not to expect the same tax breaks in 2016. And now it appears that is the case.
Iowans concerned about this issue and the need for some permanence in Iowa tax law should speak with their legislators. We are working with the Iowa Department of Revenue to resolve some procedural questions related to the nonconformity. We'll keep you posted!
These bills appeared to have been DOA: Senate Study Bill 1013, introduced on January 19, 2017, would retroactively and permanently couple Iowa tax law with federal provisions in place as of January 1, 2017, except for bonus depreciation. Senate Study Bill 1014 would retroactively and permanently couple with current federal tax extender provisions, except for Section 179 and bonus depreciation.
