Iowa has issued guidance for taxpayers because it does not conform to IRC Sec. 965 for the 2017 tax year.
Does Iowa Allow the Sec. 965 Participation Exemption?
Iowa taxpayers cannot reduce their income using the “participation exemption.” The “participation exemption” is a deduction allowed under IRC Sec. 965.
Can Taxpayers Deduct Federal Taxes Paid on Sec. 965 Income?
Yes, taxpayers can deduct any federal taxes paid during the tax year on income from IRC Sec. 965 deemed repatriation.
What Adjustments Must be Made by Tax Type?
Taxpayers report IRC Sec. 965 income in different ways for federal purposes. The necessary Iowa adjustment will depend on tax type:
– individuals should not include the net §965 amount entered on federal form 1040 (line 21) on the IA 1040;
– trusts and estates should not include the net §965 amount distributed to beneficiaries entered on federal form 1041 (line 8) on the IA 1041;
– corporations should not need an adjustment to the amounts shown on the IA 1120 or IA 1120F;
– S corporations must subtract any §965 income on line 10 of the federal Schedule K from Iowa income on line 8 of the IA 1120S and add any §965 deduction on line 12d of the federal Schedule K to Iowa income on line 3 of the IA 1120S;
– partnerships must subtract §965 income on line 11 of the federal Schedule K from Iowa income on line 6 of the IA 1065 and add any §965 deduction on line 13d of the federal Schedule K must to Iowa income on line 3 of the IA 1065; and
– partners/shareholders/members should exclude income or deductions attributable to §965 included on any K-1 when entering amounts from any K-1 on the partner’s, shareholder’s, or member’s own Iowa income tax return.
Iowa Tax Reform Guidance: Deemed Repatriation of Deferred Foreign Income, Iowa Department of Revenue, October 23, 2018, ¶201-396