The Iowa Senate has passed significant tax reform legislation. While similar to Iowa Gov. Kim Reynolds’ tax reform legislation, the bill, as passed, contains significant differences.
2018 Income Tax Changes
Changes that would affect the 2018 tax year include:
- the earned income tax credit and teacher expense deduction would tie to the Internal Revenue Code (IRC) as in effect on January 1, 2016; and
- changes made by the federal Tax Cuts and Jobs Act regarding small business accounting methods, the termination of partnerships, beneficiaries of small business trusts, S corporation conversions, repeal of a special rule permitting recharacterization of Roth IRA conversions, and extended rollover period for qualified plan loans.
2019 Income Tax Conformity
The bill would permanently couple with the IRC for personal and corporate income tax. However, it would decouple from the federal “bonus depreciation” allowance. Taxpayers would have to addback amounts claimed on federal returns. Taxpayers could then deduct the depreciation amounts according to state law.
Personal Income Tax
The starting point for computing Iowa individual income tax is changed. Currently it is federal adjusted gross income before the net operating loss deduction. It would now be federal taxable income, including all deduction and adjustments taken at the federal level. This includes:
- the standard deduction or itemized deductions; and
- the new qualified business income deduction allowed for certain income earned from a pass-through entity.
Because of the change in income starting point, the bill repeals:
- the Iowa alternative minimum tax;
- the married filing separately filing status on a combined return; and
- the ability to deduct federal income taxes, except for a one-year phase out in 2019.
The bill keeps the:
- deduction for military pension income or military active duty pay; and
- the general pension exclusion available under current law.
For tax years beginning after January 1, 2022, the bill repeals the deductions for:
- contributions to the Iowa 529 plan;
- Iowa ABLE plan;
- first-time homebuyer savings account;
- social security retirement benefits
- -ertain payments received for providing unskilled in-home health care
- contributions to an individual development account
- certain amounts received from the veterans trust fund
- victim compensation awards;
- biodiesel production refunds;
- certain wages paid to individuals with disabilities or individuals previously convicted of a felony;
- for certain organ donations, but only for tax years beginning before January 1, 2022.
The personal income tax rate would change. The proposed rate on taxable income of:
- $0 but not over $6,000 would be 5.00%;
- $6,000 but not over $15,000 would be 5.25%;
- $15,000 but not over $30,000 would be 5.50%;
- $30,000 but not over $75,000 would be 6.00%; and
- $75,000 or more would be 6.60%.
The top rate would drop from 6.60% to 6.50% in 2020, to 6.40% in 2021, and to 6.30% in 2022 and beyond.
Finally, the Iowa Educational Savings Plan and Iowa ABLE Savings Plan are amended. Some changes include:
- 529 plan withdrawals could be used for elementary or secondary school tuition;
- changes the definition of “higher education costs” and “qualified education expenses.”
The changes would apply retroactively to January 1, 2018.
2019 Corporate Income Tax
The state level net operating loss calculation is repealed. Thus, taxpayer are required to addback any federal net operating loss deduct carried over from a tax year before January 1, 2019. However, taxpayers could deduct any remaining Iowa net operating loss from a previous year.
The alternative minimum tax, and most deduction and exclusions are repealed. The ability to deduct federal income tax would have a 1 year phase-out in 2019 for taxes paid or refunds. The deduction for some wages paid to individuals with disabilities or individuals previously convicted of a felony would continue through 2021.
The corporate tax rate would change to:
- $0 but not over $25,000 would be 6% (2019 and 2020) and 5.5% after;
- $25,000 but not over $100,000 would be 8% (2019 and 2020) 5.5% after;
- $100,000 but not over $250,000 would be 10% (2019), 8% (2020), 5.5% after; and
- $250,000 and more 10% (2019), 8% (2020) and 7% after.
The state moneys and credits tax on credit unions would be repealed. Credit unions and agricultural credit associations would be subject to the state franchise tax on financial institutions. The state franchise tax would not apply to financial institutions exempt from federal income tax. The state franchise tax rate is changed from 5% to:
- 2% on the first $7.5 million of net income; and
- 4% on all net income exceeding $7.5 million.
The bill would make changes to, or repeal, the following tax credits:
- taxpayers trust fund tax credit;
- angel investor tax credit program;
- workforce housing tax incentive program;
- high quality jobs program;
- agricultural asset transfer tax credit;
- career education program;
- targeted jobs withholding credit pilot project;
- historic preservation tax credits;
- research activities tax credits;
- school tuition organization tax credits;
- tuition and textbook tax credit;
- volunteer fire fighter and volunteer emergency medical services personnel member tax credit;
- reserve peace officer tax credit;
- geothermal tax credit;
- geothermal heat pump tax credit;
- farm to food donation tax credit;
- ethanol promotion tax credit; and the
- solar energy system tax credits.
Sales and Use Tax Provisions
The Senate bill also proposes sales and use tax changes for:
- digital goods;
- pay television;
- photography and retouching services;
- ride sharing services;
- information services; and
- property used in agricultural production.
The bill would also modify the requirement of marketplace providers to collect and remit the state sales and use taxes and the local option sales tax. Hotel and motel excise taxes along with automobile rental excise taxes would also be amended. If enacted, these changes would go into effect January 1, 2019.
S.F. 2383, as passed by the Iowa Senate on February 28, 2018