On May 19, 2021, the Iowa Legislature closed this year’s session by passing a 60-page tax bill consisting of 28 divisions addressing a plethora of topics, resulting in an estimated cut in taxes of $1 billion over the next eight years. This article does not attempt to cover each of the upcoming tax changes; however, it does highlight the key provisions that could most likely affect your business or you individually. The bill has been awaiting the signature of Governor Reynolds, which occurred on June 16, 2021. The Governor’s press release can be found here.
Elimination of 2018’s Tax Reform Triggers.
The 2018 Iowa tax reform laws contained tax revenue “triggers” that the state was required to meet to initiate certain tax changes beginning in 2023. This 2021 tax legislation repealed the triggers so now these tax changes now take effect on January 1, 2023 regardless of whether state general fund revenue targets are met. For individuals, this primarily means:
- The number of tax brackets will be reduced from nine to four with the top rate reduced to 6.5%;
- Federal deductibility will be repealed, meaning Iowans will no longer be able to deduct federal income tax payments from Iowa taxable income;
- Federal taxable income becomes the starting point for Iowa income taxes rather than federal adjusted gross income – meaning there should be more consistency between federal and Iowa tax treatment; and
- Iowa capital gain deduction will apply only to net capital gain from the sale of real property used in a farming business and meeting other requirements (previously, this deduction was available for the sale of certain non-farming businesses as well).
For businesses, this means certain changes to the net operating loss deduction and carryforwards.
COVID-19 Related Changes. Basically, the new legislation addressed the income tax treatment of certain COVID programs implemented to ease its impacts on Iowans and Iowa businesses.
- Individual & Corporate Income Tax – COVID-19 Related Grants. The legislation excludes from Iowa individual and business income tax grants received by an individual or business that are related to COVID-19 and were administered by the Iowa Economic Development Authority (IEDA), Iowa Finance Authority, or Iowa Department of Agriculture and Land Stewardship. This income tax exclusion applies retroactively to March 17, 2020.
- Federal Paycheck Protection Program. Those that filed for Paycheck Protection Program (PPP) loans and were previously excluded from deducting business expenses for which the loan proceeds were used are now allowed to take those business expense deductions related to forgiven PPP loan proceeds. This change should now fully conform with federal tax law.
- Downtown Loan Guarantee Program. The COVID-19 pandemic had a drastic effect on downtown area businesses within the State. To encourage downtown economic reinvestment and the reopening of businesses, the bill creates a Downtown Loan Guarantee Program to be administered by the IEDA. Generally, the program guarantees the repayment of loans up to certain thresholds to encourage businesses and banks to invest in new or existing businesses located in downtown areas.
- For loan amounts less than or equal to $500,000, the loan guarantee cannot exceed 50% of the loan, while for loans greater than $500,000, the loan guarantee may not exceed $250,000. The program requires the loan to be secured by a mortgage against the property, requires the lender to pay an annual fee, and prohibits the loan guarantee from being transferred upon sale or transfer of the property.
- Numerous conditions apply for a loan to qualify under the program, including the following: the loan finances an eligible downtown resource center community catalyst building remediation grant project or main street Iowa challenge grant within a designated district; the loan finances a rehabilitation project, or finances acquisition or refinancing costs associated with the project; at least 25% percent of the project costs are used for construction on the project or renovation; the project includes a housing component; the loan is used for construction of the project, permanent financing of the project, or both; a federally insured financial lending institution issued the loan; the loan does not reimburse the borrower for working capital, operations, or similar expenses; and the project meets downtown resource center and main street Iowa design review.
- Loan guarantees are limited to five years, but the IEDA may extend the loan guarantee for an additional five years if an underwriting review finds that an extension would be beneficial. In the event of a default or loss, the loan guarantee proportionally pays the guarantee percentage of the loss to the lender.
Iowa Taxation Relating to Federal Taxation.
- Bonus Depreciation. Iowa tax law will now conform (or couple) to federal law’s Code Section 168(k) bonus depreciation, applying retroactively for qualified assets purchased on or after January 1, 2021.
- Interest Deduction. Additionally, Iowa law will remain exempt (or decoupled) from the federal business interest expense deduction limitation found in Federal law Code Section 163(j).
Repeal of State Inheritance Tax. Over four years, beginning for estates of decedents passing on or after January 1, 2021, the tax rate is reduced ultimately eliminating the inheritance tax for deaths on or after January 1, 2025.
Changes in and Updates to Certain Tax Credit Programs.
- Beginning Farmer. The Legislature broadened the definition of agricultural assets and expanded the Beginning Farmer Tax Credits Program by allowing participation for up to 15 years. The program now allows taxpayers to enter into agreements with multiple beginning farmers. It also expands the amount of tax credits available by only limiting each agreement to $50,000 per year, rather than a total of $50,000 per year. These changes are to become effective on January 1, 2022.
- High Quality Jobs and Renewable Chemical Production. The Legislature reduced the maximum amount of tax credits available for the High Quality Jobs Program from $105 million to $70 million. This takes effect for the fiscal year beginning July 1, 2021 and each fiscal year thereafter. The Legislature also reduced the Renewable Chemical Production Program’s available tax credits from $10 million to $5 million for the fiscal year beginning July 1, 2021 and each fiscal year thereafter.
- Workforce Housing. The Legislature increased the amount of tax credits for the Workforce Housing Tax Incentives Program to $35 million from $25 million. It also increased the amount of money that reserved specifically for qualified housing projects in small cities for the fiscal year beginning July 1, 2021.
- Brownfields and Grayfields. The Legislature extended this program until June 30, 2031 and expanded the amount of available tax credits from $10 million to $15 million.
Commercial and Industrial Property Tax Replacement Payments. Negotiations between the governor, the Senate, and the House led to an agreement to replace potential losses in revenue for local governments of up to $152.1 million per year. In 2013, a property tax bill was passed that capped commercial, industrial, and railway properties at 90% of their assessed value. Previously, those classifications of property were largely taxed at 100% of assessed value. The legislation begins the phase-out of property tax replacement dollars to local authorities over periods of four to seven years depending on the corresponding tax base growth rates.
New Manufacturing Technology Investment Program. The Legislature created a new program called the Manufacturing 4.0 Technology Investment. It creates a fund meant to assist investments relating to the use of smart technologies in existing manufacturing operations located in Iowa. The fund will be administered as a revolving fund and may consist of any moneys appropriated by the general assembly. Awards may be made up to $75,000. A manufacturer must meet certain criteria to be eligible for the award including but not limited to, demonstrating the ability to provide matching financial support for the investment on a one-to-one basis and deriving a minimum of 51% of gross revenue from the sale of manufactured goods.