I am sure you have heard of all the changes made to the federal tax law, but did you know that Iowa also passed an Iowa Tax Reform Bill? It was signed into law on May 30, 2018 by Governor Kim Reynolds. Here are a few of the highlights and when to expect the changes.
Most of the changes do not take effect until 2019 and the changes will continue to 2023. I am going to share the changes that are already in effect retroactively from the Bill and what will go into effect starting with 2018.
Research Activities Tax Credit
The change that is retroactive to tax years beginning on or after January 1, 2017 is the changes to the Research Activities Tax Credit. This bill clarifies the base amount used to calculate the credit, requires the taxpayer to claim the federal research tax credit for the same research and same tax year and limits the industries that are eligible for the credit. The following industries are allowed: manufacturing, life sciences, software engineering, aviation and aerospace. Industries that are specifically excluded are: agricultural production, finance, real estate and transportation companies.
Since this bill passed after the deadline for companies and individual tax returns, it may be necessary for those affected to recalculate and amend their tax returns to reflect these changes.
Section 179 Depreciation Changes
In 2018, the Section 179 depreciation expense limit increases from $25,000 to $70,000 with the phase out increasing to $280,000 from $100,000. This is a great benefit to businesses in Iowa. In 2019, it will increase to $100,000 with a phase out of $400,000.
Iowa will continue to not allow bonus depreciation.
For 2018, Iowa will decouple from the Federal repeal of the like-kind exchange rules that disallow all like-kind exchanges except real estate. In 2019, Iowa will partially couple with federal like-kind rules and by 2020, Iowa will be completely couple with federal rules which means only real estate transactions will be available for like-kind exchanges.
Geothermal Energy System Credit
2018 is the last year this credit will be available. This credit will be eliminated effective January 1, 2019.
Individual Tax Rate Changes
The top individual tax rate will be reduced to 8.53%
Conformity With Federal Tax Code
Iowa will generally conform to federal tax rules beginning in 2019. One exception will be the federal tax deduction limit for state and local taxes of $10,000 which Iowa will not limit.
Qualified Business Income Deduction
Taxpayers will be allowed to deduct 25% of their federal qualified business income deduction from their Iowa income. This increases to 50% in 2021, and to 75% in 2022. The deduction percentage will increase to 100% in 2023 if Iowa revenue figures are met.
Capital Gain Deduction
Beginning in 2021, the Iowa Capital Gain Deduction will only apply to net capital gain from the sale of real property used in a farming business if sold to lineal descendants or other certain relatives.
Future Reductions in Tax Rates
In 2023, the top tax rate will drop to 6.5%.
Alternate Minimum Tax (AMT)
In 2023, AMT will be eliminated.
Coupling With Federal Tax Rules
The income tax starting point for Iowa tax return will shift to federal taxable income and Iowa will fully couple with federal tax rules regarding itemized and standard deduction amounts if certain revenue triggers are met.
As you can see, there are not many changes in 2018, but in the next 5 years, Iowa tax law will make major changes if revenue triggers are met. We will just have to wait to see if Iowa businesses can meet these triggers that are set by the Bill. Keep in touch!
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