iowa individual and corporate income tax and franchise taxboston stock exchange v. state tax comm.,...

IOWA INDIVIDUAL AND CORPORATE

INCOME TAX AND FRANCHISE TAX

Michael Mertens, Legal Counsel Legislative Services Agency

In General

Individual Income Tax (1934): Imposed individuals, estates, and trusts

Corporation Income Tax (1934): Imposed on corporations

Franchise Tax (1970): Imposed on financial institutions (banks, trust companies, savings and loan associations, etc.)

Net Tax Revenues by Fiscal Year

2,673 2,855

2,710 2,654 2,855

3,034

3,441 3,201

3,460 3,542

326 346 264 192 250 426 429 389 463 377

33 34 28 27 35 30 39 30 37 42 0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2016

Mill

ions

Individual

Corporate

Franchise

Collection of Taxes: “pay as you go”

Income tax withholding Percentage of Iowa wages Percentage of certain non-wage or irregular income (pensions, annuities, gambling

winnings, commissions) Income to nonresidents subject to withholding unless nonresident elects with Department of

Revenue to make estimated tax payments to Iowa. Certain nonresident film, emergency response, and electric utility workers, and certain agricultural

commodity payments to nonresidents are exempt from withholding Payments remitted to Department of Revenue on a periodic basis

Estimated tax payments Individuals with other non-wage income required to remit quarterly estimated tax

payments if tax from those sources expected to be $200 or more for the tax year. Certain farmers and fishermen exempt from payment of estimated taxes.

Corporations and financial institutions required to remit quarterly estimated tax payments if payable tax is expected to be more than $1,000 for the tax year.

Taxpayers receive tax credit for withheld amounts and estimated tax payments when they file tax returns.

Federal Tax Conformity

Iowa uses Federal Internal Revenue Code (IRC) as basis (starting point) for all three taxes.

IRC update bill

Changes made by Congress to IRC don’t automatically apply to Iowa law

Mechanism to adopt changes is IRC update bill

Conformity is retroactive

During 2016 Iowa legislative session, conformed to several federal IRC changes made in 2015 for 2015 Iowa tax year ONLY. Iowa taxes for 2016 will be calculated using IRC in effect on 1/1/15, unless Iowa

legislature acts to conform to IRC changes made in 2015 and 2016.

Taxation of Business Income

2 methods to tax business income: 1. Entity-level taxation: Subject business entity to tax, then tax owners on dividends and distributions they

receive 2. “Pass-through” taxation: business entity not subject to tax. Instead, owners subject to tax on their

distributive share of the entity’s income and loss, whether received or not. Tax Entity Types 1. Sole Proprietorship (Pass-through taxation)

Single-owner business, including single-member Limited Liability Company (LLC) May choose to be taxed as C-corporation for federal tax. This election not recognized by Iowa.

2. Partnership (Pass-through taxation) Includes multi-member LLCs by default

3. C-Corporation (Entity-level taxation) Includes partnerships, LLCs, and other business entities electing to be taxed as C-corporation

4. S-Corporation (Pass-through taxation) Must meet certain requirements

Domestic corporation Only individual (and certain estates and trusts) owners No more than 100 owners Only 1 class of stock Certain types of companies prohibited (certain financial institutions, insurance companies, etc.)

State Taxation—Constitutional Constraints

Federal Constitution Equal Protection Clause, First Amendment, Import-Export Clause, Duty-of-Tonnage Clause,

Supremacy Clause, Privileges and Immunities Clause, Due Process Clause, Commerce Clause

Iowa Constitution Tax Distinctly Stated, Art. 7, §7: “Every law which imposes, continues, or revives a tax, shall distinctly

state the tax, and the object to which it is to be applied; and it shall not be sufficient to refer to any other law to fix such tax or object.” Tax is distinctly stated when the amount, rate or factors from which the rate is computed are included in the Act.

Motor Club of Iowa v. Department of Transportation, 265 N.W.2d 151 (1978)

Equal Protection, Art. 1, §6: “All laws of a general nature shall have a uniform operation; the general assembly shall not grant to any citizen, or class of citizens, privileges or immunities, which, upon the same terms shall not equally belong to all citizens.” Racing Ass’n of Central Iowa v. Fitzgerald, 675 N.W.2d 1 (Iowa 2004), U.S. Supreme Court found rational

basis for differing tax rates, no 14th amendment violation; Iowa Supreme Court found no rational basis under Iowa Equal Protection Clause

Home Rule, Art. 3, §38A, 39A: Cities and counties granted home rule power and authority, not inconsistent with the laws of the general assembly, to determine their local affairs and government, except that they “shall not have power to levy any tax unless expressly authorized by the general assembly.”

State Taxation—Constitutional Constraints Due Process Clause, U.S. Const. amend. XIV, §1 No state may “deprive any person of life, liberty, or

property without due process of law.” Requires “some definite link, some minimum connection,

between a state and the person, property or transaction it seeks to tax”, Miller Bros. Co. v. Maryland, 347 U.S. 340, (1954)

Physical presence not required. Satisfied by purposeful direction of activities toward state, or towards benefits of economic market in state. Quill v. North Dakota, 504 U.S. 298 (1992)

State Taxation—Constitutional Constraints Commerce Clause, Art. 1, §8, cl. 3: Congress has the

power “to regulate commerce with foreign nations, and among several states, and with the Indian tribes.”

Dormant Commerce Clause: limit on states from discriminating against, or unduly burdening, interstate commerce in the absence of Congressional approval.

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) four-prong test to evaluate tax under dormant commerce clause. The tax:

1. Must be applied to activity with a substantial nexus in the state

2. Must be fairly apportioned 3. Must not discriminate against interstate commerce 4. Must be fairly related to services provided by the state


Must be applied to activity with a substantial nexus in the state Level of connection taxpayer must have with state before being subject to taxation. Physical presence required for imposition of sales and use taxes. Quill Corp v. North Dakota, 504

U.S. 298 (1992) Other taxes…economic presence? Examples:

Earning income from the licensing of intangible property (trademarks) for use in state creates nexus. Geoffrey v. S.C. Tax Com’n, 437 S.E.2d 13 (1993)

Earning income from Issuance and servicing of credit cards to residents creates nexus, despite having no property, employees, or independent contractors located in state. Capital One Bank v. Commissioner of Revenue, 899 N.E.2d 76 (Mass. 2009).

Must be fairly apportioned State may not tax value earned outside its border Separate accounting for multistate income is complicated Unitary business principle

A state need not isolate a unitary business’s in-state activities from the rest of the business, but may tax an apportioned share of the entire unitary business

A state may not tax an out-of-state corporation’s income that is derived from an unrelated business activity which constitutes a discrete business enterprise

Unitary business in Iowa: “business carried on partly inside Iowa and partly outside Iowa, where the portion carried on in Iowa depends on, or contributes to, the business outside Iowa.”

Largely fact-based analysis. Courts look at functional integration, centralization of management, economies of scale, flow of value, operational v. investment function


Must not discriminate against interstate commerce Tax must not impose greater burdens on out-of-state goods, activities, or enterprises than on

in-state ones. Tax can be invalided through discriminatory purpose or discriminatory effect Explicit discrimination almost always unconstitutional Discriminatory tax must be shown to advance a legitimate local purpose that cannot be

adequately served by reasonable nondiscriminatory alternatives. (high bar) Even non-discriminatory law may be unconstitutional if the burden on interstate commerce is

clearly excessive in relation to the local benefits (low bar) Examples of discriminatory taxes: NY statute imposing transfer tax on securities, but offering reduced rates for transfers

occurring through NY stock exchanges. Boston Stock Exchange v. State Tax Comm., 429 U.S. 318 (1977)

Tax exemption from Hawaii excise tax on sale of liquors for locally-produced alcoholic beverages. Bacchus Imports v. Dias, 468 U.S. 263 (1984)

NY Corporate franchise tax credit for portion of franchise tax attributable to US exports shipped from NY. Westinghouse Electric Corp. v. Tully, 466 U.S. 388 (1984)

Must be fairly related to services provided by the state Closely connected to nexus requirement Measure of tax must be reasonably related to the extent of taxpayer’s contact with state

Calculating Taxes

1. Net income calculation (total income for Iowa tax purposes)

2. Taxable income calculation (Apportionment of income, additional deductions)

3. Calculation of tax (apply taxable income to tax rates)

4. Application of tax credits

Iowa Corporate Income Tax

Application

Applies to each corporation doing business in this state, or deriving income from sources within this state “Doing business”: includes all activities or transactions conducted in Iowa for the purpose of

financial or pecuniary gain or profit “Deriving income from sources within this state”: income from real, tangible, or intangible

property having a situs in this state” Tangible personal property: situs in Iowa if habitually present in Iowa or maintains fixed or

regular route through Iowa Intangible property: situs in Iowa if corporation’s commercial domicile is in Iowa, or property

has become integral part of some business activity occurring regularly in Iowa Economic nexus: KFC Corporation v. Iowa Dept. of Revenue, 792 N.W.2d 308 (2010)

KFC, a DE corp. with principal place of business in KY, licensed trademarks and other intellectual property to franchisees operating independently owned Kentucky Fried Chicken restaurants in Iowa. KFC had no property or payroll in Iowa. Iowa imposed income tax on KFC because of its use of trademarks in Iowa.

Held: physical presence not required under Dormant Commerce Clause for Iowa to impose income tax on revenue earned by out-of-state corp. arising from the use of intellectual property by franchisees within Iowa when out-of-state corp. receives “benefit of an orderly society within this state” for the production of income.

Application—Exempt Entities

Financial institutions (subject to franchise tax) Insurance companies (subject to gross premiums tax) Nonprofit IRC §501(c)(3) tax-exempt organizations

Application—Exempt Activities Following activities by foreign corp. (not organized under laws of Iowa) will not subject it to Iowa tax:

Holding meetings of board of directors or shareholders or holiday parties or employee appreciation dinners Maintaining bank accounts Borrowing money, with or without security Utilizing Iowa courts for litigation Owning and controlling a subsidiary corporation which is incorporated in or which is transacting business in Iowa

where the holding or parent company has no physical presence in Iowa with respect to ownership or control of subsidiary

Recruiting personnel where hiring occurs outside Iowa Training employees or educating employees, or using facilities in Iowa for such purpose Utilizing distribution facility in Iowa if not more than 10% of shipments made to Iowa customers, and retail sales at

facility don’t happen more than 12 days per year. Storage of goods in Iowa warehouse for 60 days or less provided goods not shipped to Iowa customers Performance of disaster or emergency-related work during a disaster response period by qualifying out-of-state

business Soliciting orders of tangible personal property that are approved and filled outside the state. 15 U.S.C.

§381. Protection only applies to taxes on, or measured by, net income, and to sales of tangible personal

property “Solicitation” includes activities explicitly or implicitly proposing a sale or that are entirely ancillary to

sale Not “entirely ancillary” if activity serves independent business function apart from solicitation, or

if business has independent reason to perform activity regardless of sale.

Net Income Calculation

Starting Point: federal taxable income without deduction for net operating loss

Several adjustments made to determine net income

Net Income Calculation—Subtractions

Interest and dividends from federal securities

States generally prohibited from taxing federal securities (treasury bonds, treasury notes, other obligations of U.S., see list at Iowa Admin. Code 701-40.2). 31 U.S.C. §3124

50% of federal income taxes paid or accrued during year, reduced by any refund received

Amounts by which federal taxable income was increased by the federal work opportunity credit, alcohol fuel credit, and employer social security credit, and the Iowa biodiesel production sales tax refund

65% of wages paid by taxpayer to hired individuals convicted of felony, on parole, probation, or work release, or in case of small business, also includes individuals with mental or physical disability.

Small business: generally, 20 or fewer full-time employees, $3 million or less in gross revenues, and not owned by large business, and does not practice profession

Income from sale of state & local bonds of Iowa if specifically exempt by statute

Income from involuntary conversion of property due to eminent domain

Foreign dividend income. Codification of ruling in Kraft v. Iowa Dept. of Revenue, 505 U.S. 71 (1992)

Net Income Calculation—Additions

Iowa income taxes Amounts deducted as charitable contribution if made to tax-

exempt organization for deposit into Iowa College Savings Plan (529 plans) and taxpayer designated any part of the contribution be used for direct benefit of dependent or of a shareholder or other person designated by shareholder

Interest and dividends from foreign and state securities, except Iowa securities specifically exempt under Iowa law Market participant exception to Dormant Commerce Clause:

applies when state goes beyond regulation and participates in market and performs public function Issuance of debt to pay for public projects is a quintessentially public

function. Department of Revenue of Ky. v. Davis, 553 U.S. 328 (2008)

Net Income Calculation—Additions Iowa securities exempt from Iowa tax (from Iowa Code §422.7(2))

Vision Iowa program bonds pursuant to section 12.71, subsection 8. School infrastructure program bonds pursuant to section 12.81, subsection 8. Iowa jobs program revenue bonds pursuant to section 12.87, subsection 8. Iowa utility board and Iowa consumer advocate building project bonds pursuant to section 12.91, subsection 9. Iowa finance authority beginning farmer loan program bonds pursuant to section 16.64, subsection 2. Water pollution control works and drinking facilities financing program bonds pursuant to section 16.131, sub. 5. Iowa prison infrastructure revenue bonds pursuant to section 12.80, subsection 3, and section 16.177, subsection 8. Quad cities interstate metropolitan authority bonds pursuant to section 28A.24. Iowa finance authority E911 program bonds pursuant to section 34A.20, subsection 6. Soil and water conservation subdistrict bonds pursuant to section 161A.22. Community college residence hall and dormitory bonds pursuant to section 260C.61. Community college bond program bonds pursuant to section 260C.71, subsection 6. Higher education loan authority bonds pursuant to section 261A.27. State board of regents bonds pursuant to sections 262.41, 262.51, 262.60, 262A.8, and 263A.6. Interstate bridges bonds pursuant to section 313A.36. Aviation authority bonds pursuant to section 330A.16. County health center bonds pursuant to section 331.441, subsection 2, paragraph “c”, subparagraph (7). Rural water district bonds pursuant to section 357A.15. Urban renewal bonds pursuant to section 403.9, subsection 2. Municipal housing project bonds pursuant to section 403A.12. Comprehensive petroleum underground storage tank fund bonds pursuant to section 455G.6, subsection 14. Honey creek premier destination park bonds pursuant to section 463C.12, subsection 8.


Increased expensing allowance (IRC §179 deduction) Federal law allows up to $500,000 deduction for cost of purchased eligible business

property in lieu of normal scheduled depreciation. Deduction reduced dollar for dollar for when total purchases exceed $2 million. (total phase-out at $2.5 million

of eligible business property purchases)

Federal PATH Act of 2015 made permanent these deduction amounts and indexed for inflation

“Bonus” depreciation Federal law allows additional depreciation deduction for business property placed in

service in 2015 but before 2020. Depreciation rate is generally 50% of cost of property for property placed in service in 2015-2017, but

reduced to 40% in 2018, and 30% in 2019.

Iowa has disallowed (decoupled) bonus depreciation every available tax year except for assets placed in service between 5/5/03 and 1/1/05.

Iowa impact: coupled with PATH Act (decoupled from bonus depreciation) for 2015 tax year ONLY

2015 tax year: §179 deduction ($500,000 max/$2 million limit), bonus depreciation (none)

2016 tax year and beyond (absent future Iowa legislation): §179 deduction ($25,000 max/$200,000 limit), bonus depreciation (none)

Taxable Income Calculation—Allocation and Apportionment

Business vs. Nonbusiness Income Business Income (Iowa Code 422.32(1)(b)): “[I]ncome arising from transactions and activity in the regular course of the taxpayer’s trade or business; or income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations; or gain or loss resulting from the sale, exchange, or other disposition of real property or of tangible or intangible personal property, if the property while owned by the taxpayer was operationally related to the taxpayer’s trade or business carried on in Iowa or operationally related to sources within Iowa, or the property was operationally related to sources outside this state and to the taxpayer’s trade or business carried on in Iowa; or gain or loss resulting from the sale, exchange, or other disposition of stock in another corporation if the activities of the other corporation were operationally related to the taxpayer’s trade or business carried on in Iowa while the stock was owned by the taxpayer. A taxpayer may have more than one regular trade or business in determining whether income is business income. (1) It is the intent of the general assembly to treat as apportionable business income all income that may be treated as apportionable business income under the Constitution of the United States.”

Business income is apportioned between states Nonbusiness income is allocated: specifically assigned to proper state


Nonbusiness income allocation Intangible property: Allocated to Iowa if corp.’s commercial domicile here Real property: Allocated to Iowa if property located here Tangible property: Generally allocated to Iowa to extent located or utilized here or if

situs here at time of sale, but fully taxed in Iowa if commercial domicile here and not taxable in other utilized states

Federal income taxes and other related expenses attributable to nonbusiness income allocated with the income

Business income apportionment (Business Activity Ratio) Single Sales Factor

Tangible property sales: percentage of goods delivered to customer in Iowa Services gross receipts: percentage of services for which recipient receives benefit of

service in Iowa (market-based sourcing) Also included: Investment business income from intangible property if integral part of Iowa

business activity Other investment “business income”: included if so elected by taxpayer Special apportionment considerations for certain industries

Alternative apportionment method can be requested of Director of Revenue if taxpayer feels Iowa method would unreasonably attribute income to Iowa


Single sales factor constitutional? Iowa’s single factor apportionment doesn’t violate Due Process or Dormant Commerce

Clause. Moorman Manufacturing Co. v. Bair, 437 U.S. 267 (1978) “States have wide latitude in the selection of apportionment formulas and that formula-produced

assessment will only be disturbed when the taxpayer has proven by ‘clear and cogent evidence’ that the income attributed to the state is in fact ‘out of all appropriate proportions to the business transacted…in the state’…or has ‘led to a grossly distorted result’”

Apportionment formulas in other states 3 factor apportionment (still used by majority of states)

Sales in state, property in state, payroll in state (variation among weight assigned to each factor) Cost-of-performance sourcing of services

gross receipts assigned to state if income producing activity is performed there Throw-back and Throw-out rules

Throw-back rule: sales into states with no nexus or income tax are added back and considered in-state sales (increases in-state sales compared to total sales)

Throw-out rule: sales into states with no nexus or income tax are completely removed from apportionment formula (decreases total sales compared to in-state sales)

Combined Reporting Method of computing tax which requires an affiliated group of corporations with unitary business

relationship to compute tax using activities of all members, not just those subject to tax in the state

Net Operating Loss

Net operating loss: Iowa taxable income is negative amount

May be carried forward up to 20 tax years (used as a deduction to offset future income) Before 2009, net operating losses eligible to be

carried back 2 years (3 if farming or disaster area)

Calculation of Tax—Regular Tax

Calculation of Tax—Alternative Minimum Tax (AMT)

Ensures a minimum amount of tax is paid by certain taxpayers who reap large savings from certain tax deductions and exemptions

Alternative Minimum Taxable Income (AMTI) Start with taxable income Add back certain “preference items” (from federal AMT tax) Adjustments to intangible drilling costs, depreciation and amortization, mining

costs, long-term contracts, pollution control facilities, adjusted basis, alcohol fuel credit, merchant marine capital construction funds, farming and passive activity losses, net operating losses, adjusted current earnings (ACE) adjustment

Subtract an exemption amount of $40,000 Exemption amount reduced by 25% of amount that AMTI exceeds $150,000

(exemption fully phased out at AMTI of $310,000) Multiply AMTI by 7.2% (60% of highest corporate tax rate of 12%) AMT imposed to the extent it exceeds regular tax AMT may be claimed as tax credit in future years to extent regular

tax exceeds AMT for that year

Calculation of Tax—UBIT

Unrelated business income tax (UBIT) Unrelated business income: income from trade or

business that is not substantially related to an organization’s exempt purpose or function. Determined for federal tax purposes.

Nonprofit corporations exempt from Iowa income tax subject to regular tax on apportioned share of unrelated business income

Iowa Franchise Tax

Application

Applies to financial institutions for the privilege of doing business in Iowa Includes: state banks, national banking associations, trust

companies, savings and loan associations, savings banks, a financial institutions chartered by Federal Home Loan Bank Board, and production credit associations

Excludes: credit unions (subject to separate moneys and credits tax) Entity-level tax on financial institution, even if organized as

“pass-through” company Franchise tax credit available to “pass-through” owners based on

pro-rata share of franchise tax paid by financial institution Tax calculations are identical to corporate income tax except

for a few differences…

Net Income Calculation—Differences from Corporate Income Tax

All interest and dividends from federal, state, and local securities are included in net income (corporate income tax excludes federal securities and Iowa securities) 31 U.S.C. §3124 prohibits state taxation of federal securities, but makes

exception for “nondiscriminatory franchise tax” No deduction for federal income taxes (corporate income tax

allows 50% deduction) Deduction allowed for expenses related to earning of federally

tax-exempt interest (federal and Iowa corporate tax disallows) No deduction for investment subsidiary expense Difference in taxation of securities creates incentive to move certain

interest-producing assets to subsidiary, causes loss of franchise tax revenue

Iowa disallows deduction of financial institution’s expenses equal to proportion that investment subsidiary investments equal total financial institution investments

Taxable Income Calculation—Differences from Corporate Income Tax

Business Income Apportionment (Business Activity Ratio) subject to special rules: Loan receipts attributable to Iowa if borrower located in Iowa Service charges and fees from credit cards attributable to Iowa if individual

holder resides in Iowa or if corporate holder has commercial domicile in Iowa Receipts from fiduciary services attributable to Iowa if services are principally

performed in Iowa Receipts from management services attributable to Iowa if recipient of services is

located in Iowa Income from securities attributable to Iowa if commercial domicile in Iowa, but:

If income is used to maintain federal and state reserve deposit requirements, it’s attributable to Iowa in proportion that Iowa deposits bear to all deposits

If income is held by public official or pledged to secure public funds in a bank, it’s attributable to Iowa if the office that issued them is located in Iowa

Receipts from travelers checks and money orders attributable to Iowa if issuing office is located in Iowa

Fees for financial services attributable to Iowa if customer located in Iowa or account maintained in Iowa

Tax Calculation—Differences from Corporate Income Tax

Regular Tax: flat rate of 5% AMT:

federally tax-exempt securities included in AMTI calculation (not included for corporate income tax)

AMT tax rate is 3% (60% of 5% flat rate)

Iowa Individual Income Tax

Application

Application: Residents of Iowa Nonresidents earning income from sources in Iowa Estates and Trusts earning income from sources in Iowa

Only applies to taxpayers with income above certain thresholds

Importance of residency status Affects method of apportioning income Affects tax return filing requirement

Application: Residency Status

Resident: 2 ways to qualify 1. Individual domiciled in Iowa

Domicile largely matter of one’s intention to permanently reside in Iowa and return to Iowa whenever absent Rebuttable presumption of domicile created under certain circumstances (maintain

a home, claim homestead tax credit, registered to vote, maintain driver’s license, more time lived in Iowa than any other place)

Can be changed by abandonment of former domicile, actual removal to and physical presence in new domicile, and bona fide intention to remain there

2. Individual maintains permanent place of abode in Iowa Maintenance of home for significant period of time to create connection Rebuttable presumption in Iowa created when person maintains a home in Iowa

and spends more than half the year in Iowa (183 days) Part-year resident

Individual who does not maintain permanent place of abode in Iowa but was domiciled in Iowa for less than the entire year

Nonresident Individual who is not classified as “resident” or “part-year resident”

Application: Residency Status

Estates and Trusts Categorized according to “situs”, i.e. legal location Situs of estate generally follows residency of its decedent Situs of inter vivos trust (created during lifetime) depends on

several factors, including residence of owner or trustees, location of principal office or assets, location of court having jurisdiction over trust

Situs of testamentary trust (created at death) generally follows decedent’s residence at death, but can change after jurisdiction of court in which trust proceedings are pending is terminated

Situs in Iowa = resident Situs outside Iowa = nonresident Situs in Iowa part of year = part-year resident

Application: Filing Status

Single: unmarried or legally separated Married: determined on last day of tax year, but also includes widows

whose spouse died during tax year Jointly: combined tax items calculated and reported on one return Separately: each spouse calculates and reports respective tax items on different tax

returns Separately on a combined return: each spouse calculates tax items separately, but

reported on same tax return Head of Household: unmarried individual who maintains household that for

more than ½ of tax year that is principal place of abode for qualifying relative

Surviving Spouse: unmarried individual whose spouse died within last 2 tax years and who maintains household for entire tax year for dependent child

Why important? Affects tax calculation Affects certain tax credit and deduction amounts Affects tax return filing requirement


Starting Point for Individuals: federal adjusted gross income (AGI)



Starting Point for estates and trusts: federal taxable income (without personal exemption deduction)



Certain subtractions identical to corporate tax Interest and dividends from federal securities 65% of wages paid to eligible individuals Amounts by which federal taxable income was

increased by the federal work opportunity credit, alcohol fuel credit, and employer social security credit, and the Iowa biodiesel production sales tax refund

Ordinary or capital gain realized from involuntary conversion of property due to eminent domain

Gain from sale of state & local bonds of Iowa if specifically exempt by statute


Up to $100 per week of certain disability payments for qualifying individuals For Iowa legislators who do not itemize travel expenses, certain per diem travel

expenses allowed under the IRC if legislator lives more than 50 miles away from State Capitol, and $50 per day if legislator lives within 50 miles of State Capitol

U.S. restitution payments to Japanese Americans interned during WWII, and payments to victims of persecution by Nazi Germany or other Axis powers

Victim compensation awards and restitution received by criminal victim, and civil damages in civil action by victim against offender

Federal Segal AmeriCorps education award payments State supplemental assistance payments for providing unskilled (not a licensed

health care professional) in-home health care services to a relative (spouse, parents, children, siblings, lineal ancestors, lineal descendants, including adoption and step-relations)

Contributions, state match payments, and earnings from Iowa individual development accounts established by low-income taxpayers

Health insurance premiums for taxpayer, spouse, and dependents (including long-term care insurance)


Contributions (up to annual limit) to and earnings from Education Savings Plan (529 plan) or ABLE savings plan Contribution limit is $3,188 per beneficiary for 2016

Up to $10,000 of unreimbursed expenses (travel, lodging, lost wages) of living taxpayer who donates one or more human organs to another human being

Up to $2,000 of cost of clean fuel motor vehicle if taxpayer was eligible for federal alternative motor vehicle credit under IRC §30B

Income from certain distressed sales (installment real estate contract forfeiture, transfer of property in cancellation of debt, exchange of property in foreclosure) if debt-to-asset ratio is 90% and net worth of taxpayer is less than $75,000

Payments to nonresident electric utility workers for emergency response work performed in Iowa, or training received in Iowa

For estates and trusts, amount of administrative expenses not taken or allowed as a deduction in calculating federal income tax


Certain veteran and military benefits: Pay, including retirement pay, received from federal government for

military service performed while on active duty status in the armed forces, armed forces military reserve, or the National Guard

Agent orange settlement proceeds received by disabled veteran or beneficiary

Student loan repayments received by taxpayer serving on activity duty status in armed forces, armed forces military reserve, or National Guard

Grants received from Iowa Injured Veterans Grant Program Unemployment assistance and travel expenses received from Iowa

Veterans Trust Fund Withdrawals from a qualified retirement plan if the individual or

individual’s spouse is a member of Iowa National Guard or military reserve and is ordered to active duty


Certain retirement Income: All social security benefits Maximum of $6,000 ($12,000 for married couple) of

other retirement income for individual who is disabled, at least 55 years old, or an eligible survivor of such individual This is in addition to military retirement pay exclusion


Certain Net Capital Gains: Gains from sale of breeding, dairy, or sport cattle or horses owned for at

least 2 years, or breeding livestock held for at least 1 year (farmers and ranchers only)

Gains from sale of timber 50% of gain from sale of certain stock in Iowa corporation to a qualified

Iowa employer stock ownership plan (ESOP) if, upon completion of transaction, ESOP owns at least 30% of the Iowa corporation.

Sale of real property used in business, or the sale of all or substantially all of the tangible personal property or service of a business. Must be asset sale. Sale of stock or ownership interest doesn’t qualify. Ranniger

v. Iowa Dept. of Revenue, N.W. 2d 267 (2008) “Substantially all”: at last 90% of fair market value of all business property “service of a business”: intangible assets used in business (goodwill, patents,

copyrights, trademarks) Sale must meet 2 qualifications: Must have held real property or business for at least 10 years Must have materially participated in business for at least 10 years immediately

preceding sale. Lance v. Iowa State Board of Tax Review, Iowa Ct. of Appeals No. 14-1144 (2015). Waiver of material participation for sale of business to lineal descendants “Material participation”: federal test, highly dependent on type of business and

taxpayer circumstances


Certain additions identical to corporate tax Interest and dividends from foreign and state securities,

except those specifically exempt under Iowa law. Bonus depreciation deduction IRC §179 deduction adjustment

Other additions Certain oil & gas costs (intangible drilling costs and

percentage depletion) Nonqualified withdrawals from Education Savings Plan

(529 plan) or ABLE savings plan to extent previously deducted

Filing Threshold—General Rules

All individuals Under 65: $9,000 single/$13,500 other filers 65 or older: $24,000 single/$32,000 other filers Income = Net income + non-military retirement income

exempt under Iowa law (i.e. general retirement exclusion, SS income)

Nonresidents: exempt if less than $1,000 of Iowa apportioned income

Estates and Trusts Taxable income of $600 or more

Taxable Income Calculation (Deductions)

Individuals Deduct federal income tax paid during year, reduced by refunds received Deduct either standard deduction or itemized deductions 2016 standard deduction (indexed to inflation)

$1,970 for single or married filed separately $4,860 for married filing jointly, surviving spouse, head of household

Itemized deductions same as federal with following adjustments: No deduction allowed for Iowa income tax payments No charitable deduction allowed for contribution to tax-exempt organization for deposit into Iowa College

Savings Plan (529 plans) if taxpayer designated any part of contribution be used for direct benefit of dependent or other person

Deduct adoption expenses to extent they exceed 3% of net income and not used to calculate Iowa adoption tax credit

Deduct mileage expenses incurred in charitable work to extent state reimbursement exceeds federal mileage amount

Deduct up to $5,000 of expenses for in-home care of certain disabled relatives eligible to receive state medical assistance benefits

Deduct amount that federal mortgage interest credit decreased amount of federally deductible mortgage interest

Deduct state sales and use tax paid if elected for federal tax in lieu of state income tax deduction 2015 tax year only. Not available for 2016 and beyond unless Iowa couples with federal PATH Act of 2015

Estates and Trusts Deduct federal income tax paid during year, reduced by refund received, add back Iowa income tax

Net Operating Loss

Net operating loss: Iowa taxable income is negative amount

May be carried back 2 years (amend returns and received refund of previous tax paid) or forward up to 20 tax years (used as a deduction to offset future income) Carryback period 5 years for NOL from farming business Carryback period 3 years for casualty or theft property

loss or farm or small business in presidentially declared disaster area

Tax Calculation—Regular Tax Historical Rates

Tax Calculation—Regular Tax Current Rates (2016) Regular Tax (income brackets indexed for inflation) (1) 0.36% on the first $1,554 of taxable income (2) 0.72% on the next $1,554 of taxable income (3) 2.43% on the next $3,108 of taxable income (4) 4.50% on the next $7,770 of taxable income (5) 6.12% on the next $9,324 of taxable income (6) 6.48% on the next $7,770 of taxable income (7) 6.80% on the next $15,540 of taxable income (8) 7.92% on the next $23,310 of taxable income (9) 8.98% on taxable income over $69,930.

Tax Calculation—Alternative Minimum Tax (AMT)

Ensures a minimum amount of tax is paid by certain taxpayers who reap large savings from certain tax deductions and exemptions

Alternative Minimum Taxable Income (AMTI) Start with taxable income Add back certain “preference items”

Adjustments to medical and dental expenses, investment interest, certain miscellaneous itemized deductions, state and local taxes, depreciation and amortization, incentive stock options, mining costs, long-term contracts, pollution control facilities, adjusted basis, alcohol fuel credit, merchant marine capital construction funds, farming and passive activity losses, and net operating losses

Subtract exemption amount $17,500 for married filing separately, estate or trust

Exemption reduced by 25% of amount AMTI exceeds $75,000 (full phase-out at $300,000) $26,000 for single or head of household

Exemption reduced by 25% of amount AMTI exceeds $112,500 (full phase-out at $450,000) $35,000 for married filing jointly

Exemption amount reduced by 25% of amount AMTI exceeds $150,000 (full phase-out at $600,000)

Multiply AMTI by 6.7% (75% of highest individual tax rate of 8.98%) AMT imposed to the extent it exceeds regular tax AMT may be claimed as tax credit in future years to extent regular tax exceeds AMT for

that year

Tax Calculation—Other Taxes

Alternate tax calculation Imposed in lieu of regular tax or AMT Not available to taxpayers with single filing status Multiply combined income in excess of $13,500 ($32,000 for 65 or older) by

8.98% (highest tax rate) Income = Net income + non-military retirement income exempt under Iowa law (i.e.

general retirement exclusion, SS income)

Lump-sum tax Full distribution of retirement account because of age, death, separation from

service, or disability may be subject to federal lump-sum tax, Iowa imposes state-level tax equal to 25% of federal lump-sum tax

Local government surtaxes Counties may impose emergency medical services income surtax on county

residents School districts may impose surtax for school funding on school district residents Cumulative surtaxes can’t exceed 20 percent of state income tax liability

Allocation and Apportionment of Income

Residents “Out-of-state” tax credit: resident subject to tax on entire taxable income, but allowed tax credit

equal to income tax paid on that income to another state, local, foreign country Tax credit limited to amount of Iowa tax that would have been due on non-Iowa income

“S-corp. apportionment” tax credit: resident owners of S-corp. can elect to apportion S-corp. income

Reciprocal tax agreements Nonresidents Tax on amount of income derived from business or occupation carried on in Iowa, and income from

property, trust, estate, or other source in Iowa Wage allocation: services rendered in Iowa Real and tangible property income allocation: located or having situs in Iowa Business income apportionment: generally same as corporate tax Intangible asset allocation: not allocated to Iowa unless used here or part of business carried on here Retirement Income: not allocated to Iowa. States prohibited from imposing income tax on retirement

income of nonresidents. 4 U.S.C. §114. “nonresident” tax credit provided Part-year resident Both tax credits available

Income Tax Checkoffs

Excess tax payments (refund or additional payment remitted with return) can be contributed to 4 income tax checkoffs Iowa State Fair Foundation checkoff Fish and Game Protection Fund checkoff Child Abuse Prevention Program Fund checkoff Joint Veterans Trust Fund and Volunteer Fire Fighter

Preparedness Fund checkoff $1.50 of tax liability can be contributed to Iowa

Election Campaign Fund to finance public elections Can be directed to particular political party or to all

parties

Questions?

Iowa�Individual and corporate income tax�and franchise taxIn GeneralNet Tax Revenues by Fiscal Year Collection of Taxes: “pay as you go”Federal Tax ConformityTaxation of Business IncomeState Taxation—Constitutional Constraints State Taxation—Constitutional ConstraintsState Taxation—Constitutional ConstraintsState Taxation—Constitutional ConstraintsState Taxation—Constitutional ConstraintsCalculating TaxesIowa Corporate Income TaxApplicationApplication—Exempt EntitiesApplication—Exempt ActivitiesNet Income CalculationNet Income Calculation—Subtractions Net Income Calculation—AdditionsNet Income Calculation—Additions Net Income Calculation—Additions Taxable Income Calculation—Allocation and ApportionmentTaxable Income Calculation—Allocation and ApportionmentTaxable Income Calculation—Allocation and ApportionmentTaxable Income Calculation—Allocation and ApportionmentNet Operating LossCalculation of Tax—Regular TaxCalculation of Tax—Alternative Minimum Tax (AMT) Calculation of Tax—UBITIowa Franchise TaxApplicationNet Income Calculation—Differences from Corporate Income TaxTaxable Income Calculation—Differences from Corporate Income TaxTax Calculation—Differences from Corporate Income TaxIowa Individual Income TaxApplicationApplication: Residency StatusApplication: Residency StatusApplication: Filing StatusNet Income Calculation Net Income CalculationNet Income Calculation—SubtractionsNet Income Calculation—Subtractions Net Income Calculation—SubtractionsNet Income Calculation—Subtractions Net Income Calculation—Subtractions Net Income Calculation—Subtractions Net Income Calculation—Additions Filing Threshold—General Rules Taxable Income Calculation (Deductions)Net Operating LossTax Calculation—Regular Tax Historical RatesTax Calculation—Regular Tax Current Rates (2016)Tax Calculation—Alternative Minimum Tax (AMT)Tax Calculation—Other TaxesAllocation and Apportionment of IncomeIncome Tax CheckoffsSlide Number 58

iowa individual and corporate income tax and franchise taxboston stock exchange v. state tax comm.,...

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