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Iowa’s sweeping tax law lowers corporate and individual income tax and expands the reach of sales and use tax.

Tax strategies

Iowa Legislation Includes the Largest Tax Cut in State History

  • Dan Kidney
  • Alicia Miller Buchel
  • 8/20/2018

Iowa Governor Kim Reynolds recently signed S.F. 2417 into law, which enacts sweeping tax legislation for the state of Iowa. This legislation reduces the individual income tax rates for all brackets, effective for tax years beginning on or after January 1, 2019, and includes further rate and bracket reductions for tax years beginning on or after January 1, 2023. The bill also enacted a new sales tax economic nexus standard, in light of the U.S. Supreme Court’s recent decision in South Dakota v. Wayfair, which it will begin enforcing on January 1, 2019.

Internal revenue code conformity

For purposes of its individual income, corporate, and franchise taxes, Iowa currently conforms to the U.S. Internal Revenue Code (IRC) as of January 1, 2015, well before the December 2017 enactment of federal tax reform under the Tax Cuts and Jobs Act (TCJA).

For tax years beginning on or after January 1, 2019, Iowa adopts the code as of March 24, 2018, and for tax years beginning on or after January 1, 2020, Iowa adopts the IRC without reference to a specific date. As a result, while Iowa does not appear to adopt any of the tax reform changes enacted under the TCJA until the 2019 tax year, the state will automatically adopt all changes made to the code starting with tax year 2020 unless it takes action to decouple from them. This is called rolling conformity. However, Iowa did make several changes that will be effective for the 2018 tax year.

Changes effective for the 2018 tax year

For tax years beginning on or after January 1, 2018, Iowa made the following updates:

Individual income tax

Business income tax

  • Research Activities Tax Credit: limitation enacted on businesses eligible for the credit (effective for tax years beginning on or after January 1, 2017)
  • Like-kind exchange allowed for certain personal property (available to individuals for exchanges during tax years beginning on or after January 1, 2018, and before January 1, 2020)
  • Section 179 deduction increase (not for bonus depreciation): the phase-in begins in tax years beginning on or after January 1, 2018, for individuals and entities other than corporations
  • Transitional rule for individuals with multiple pass-through interests with Section 179 expensing: available for tax years beginning on or after January 1, 2018, but before January 1, 2020

Changes effective for the 2019 tax year

For tax years beginning on or after January 1, 2019, Iowa made the following changes:

Individual income tax

  • All individual income tax rates are reduced, and the top rate becomes 8.53 percent
  • Iowa generally conforms to the federal tax reform provisions of the TCJA, except for the TJCA’s $10,000 cap on the state and local tax deduction
  • The school tuition organization tax credit annual cap is increased
  • The geothermal tax credit is repealed

Business income tax

  • Iowa generally conforms to the federal tax reform provisions of the TCJA
  • Iowa’s phase-in of conformity to the TJCA’s qualified business income deduction under IRC Section 199A runs from tax years beginning on or after January 1, 2019, through January 1, 2022. Specifically, Iowa requires a 75 percent add-back of the federal deduction claimed in tax years 2019 and 2020, a 50 percent add-back in 2021, and a 25 percent add-back for tax years beginning on or after January 1, 2022
  • Section 179 deduction increase (not for bonus depreciation): the phase-in is effective in tax years beginning on or after January 1, 2019, for corporations

Changes effective for the 2020 tax year

Individual income tax

  • Rolling conformity to the IRC begins

Business income tax

  • Rolling conformity to the IRC begins
  • Section 179 deduction increase (not for bonus depreciation): the federal TCJA limits are fully phased in
  • Like-kind exchange allowed for certain personal property (available to individuals for exchanges during tax years beginning on or after January 1, 2018, and before January 1, 2020)

Changes effective for the 2021 tax year and beyond

Individual income tax: all effective for tax years beginning on or after January 1, 2023

  • The number of brackets is further reduced to four, with the top rate dropping from 8.53 percent to 6.5 percent
  • Federal deductibility repealed
  • Federal taxable income becomes the starting point for calculating Iowa income taxes

Business income tax

  • All corporate rates reduced, top rate becomes 9.8 percent (effective 2021)
  • Corporate alternative minimum tax and AMT credit repealed (effective 2021)

Iowa sales and use tax expanded to digital goods, ride sharing services, and more

In addition to the vast changes made to Iowa’s income tax regime, S.F. 2417 also updated Iowa’s sales and use tax laws by expanding them to include digital goods. The law also added enumerated services and enacted an economic nexus standard for sales tax collection.

Effective January 1, 2019, the following digital goods and services will be subject to sales and use tax in Iowa:

  • Digital audiovisual works
  • Digital audio works
  • Digital books
  • Other digital products such as greeting cards, images, video or electronic games, or entertainment
  • The storage of tangible electronic documents, files, or records
  • Computer software applications

There is a special exemption for sales of digital goods to businesses using the items within a “commercial enterprise.” Purchases of these items by qualifying for-profit businesses will remain exempt from sales tax in Iowa.

Also effective January 1, 2019, the following services will be subject to sales and use tax in the state:

  • Subscription services
  • Software as a service (cloud-based software)
  • News or information services
  • Ride sharing services such as Uber or Lyft
  • Online travel services
  • Video game services
  • Services related to enhancing, installing, maintaining, operating, repairing, servicing, or upgrading specific digital products

Economic nexus standard for remote sellers effective January 1, 2019

If either of these two conditions are met, the seller must collect sales tax on every taxable sale delivered to the state — even if the seller has no physical presence in Iowa.

Finally, S.F. 2417 will require remote sellers to register and collect Iowa sales tax on taxable sales to the state if they meet either of these conditions:

  • Gross revenue of $100,000 or more from Iowa sales, or
  • 200 or more Iowa sales transactions

The Iowa Department of Revenue has issued guidance indicating that it will not enforce its economic nexus statute before the January 1, 2019, effective date, but will require remote sellers meeting one of the conditions to register and begin to collect sales tax on that date.

How we can help

CLA’s tax professionals are here to help Iowans like you plan for these tax changes. Our Wayfair checkup assessment can help you understand if you must register and collect Iowa sales tax under S.F. 2417. If you are, CLA’s sales tax compliance outsourcing team can manage the filings on your behalf. We can also examine how Iowa’s research and development law intersects with the federal research and activities credit to explore your eligibility for additional tax savings. You may also want to consider the income, estate, and gift tax considerations of 529 plan updates. No matter your tax issue, our individual and business tax professionals are here for you.