On May 30, 2018, the Iowa Legislature passed S.F. 2417, a significant overhaul of the Iowa tax code. Federal tax reform implemented by the Tax Cuts & Jobs Act set the stage for this legislation. Although most changes are prospective, or at least retroactive to January 1, 2018, the law made certain changes and clarifications to Iowa's Research Activities Credit that are effective January 1, 2017. Iowa issued guidance explaining the changes on July 23, 2018.
Eligibility for the Credit
For tax years beginning on or after January 1, 2017, taxpayers must meet two eligibility requirements to be eligible for the credit:
- Claim and be allowed a Federal Research Credit under IRC section 41 for the same taxable year.
- Be engaged in one of the following industries:
- Life Sciences
- Software Engineering
- Aviation and Aerospace
Significantly, the taxpayer cannot be engaged in the following industries to be eligible for the credit:
- Agricultural production or agricultural cooperatives
- Contractors, subcontractors, builders or contractor-Retailers engaged in commercial and residential installation / repair including but not limited to:
- HVAC installation/repair
- Plumbing and pipe fitting
- Security system installation
- Electrical installation/repair
- Collection agencies
- Finance or investment companies
- Publishing companies
- Real estate companies
- Transportation companies
Clarification as to How the Credit is Calculated
The guidance states that the new law also "clarifies" the definition of "base amount" used to calculate the Iowa Research Activities Credit. Base amount means the product of the fixed-based percentage multiplied by the average annual gross receipts of the taxpayer for the four taxable years preceding the taxable year for which the credit is being determined-but in no event shall the base amount be less than 50 percent of the qualified research expenses for the credit year. Because this is a clarification of an existing law, it applies to all tax years - past and present.
The IDOR guidance states that if a business already filed a credit claim for a prior tax year and is no longer eligible, the business should file an amended return to add back the amount of the Research Activities Credit claimed. The business should file an amended return by October 31, 2018, in order to avoid receiving a notice of assessment from the Department. If a business has not yet claimed the credit, but is eligible under the new limitations, the business should complete the return and include a copy of the new 2017 IA 128 or IA 128S form. If the business already claimed the credit on a tax return, and is still eligible under the new law, no further action is needed.