On May 16, 2019, Iowa Governor Kim Reynolds signed into law House File 779 (HF 779), which makes a number of tax-related changes to the state's corporate income, bank franchise, and sales and use taxes. The final version of HF 779, however, does not include provisions that would have decoupled Iowa from the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) provisions related to global intangible low-taxed income (GILTI) set forth in IRC Sections 951A and 250 and the interest expense limitation rules provided in IRC Section 163(j).

Key provisions of HF 779 are summarized below.

Corporate income tax changes

For tax year 2019, HF 779 extends the tax-benefits of like-kind exchanges to include the exchange of all property, not just real property.

HF 779 also extends the Targeted Jobs Withholding Credit Pilot Project to June 30, 2021 (from June 30, 2019). The program offers a withholding tax credit to businesses that are located in, or expand into, one of the following project cities: Burlington, Council Bluffs, Fort Madison, Keokuk, and Sioux City. Qualified businesses must sign an agreement with the city and the Iowa Economic Development Authority to receive the credit, which equals 3% of gross wages paid to each employee covered by the agreement.

Bank franchise tax changes

For taxpayers subject to the bank franchise tax, HF 779 extends the tax benefits of like-kind exchanges to include the exchange of all property for tax year 2019.

In addition, HF 779 eliminates the bank franchise tax alternative minimum tax effective for tax year 2021. A related credit for alternative minimum tax paid will be eliminated for tax year 2022 and thereafter.

Sales and use tax changes

Under current law, effective as of January 1, 2019, Iowa requires a remote seller to collect and remit sales/use tax if during the year it made at least 200 sales or had at least $100,000 in sales to Iowa customers. Effective July 1, 2019, HF 779 eliminates the 200-sale threshold for remote sellers. With this change, remote sellers will only be subject to the $100,000 annual taxable sales threshold.

In addition, HF 779 expands the sales tax exemption for manufacturers by adding the word "primarily" to the definition of "manufacturer." This change allows companies that are primarily manufacturers, but engage in some non-manufacturing activities to claim the exemption. This change is retroactive to May 30, 2018 and is intended to override the narrower definition of a "manufacturer" provided by Senate File 2417 (SF 2417) (see Tax Alerts 2018-0987 and 2018-1123).

Effective July 1, 2019, HF 779 makes two other changes to Iowa's sales/use tax law: First, carpentry repair and carpentry installation become taxable services. Second, an exemption is adopted for grain bins and materials used to build and repair grain bins. A third change, retroactive to January 1, 2016, adds supplies and replacement parts to the exclusions from the existing machinery and equipment sales/use tax exemption.

Iowa conformity to GILTI and IRC Section 163(j)

For tax years 2017 and 2018, Iowa conformed to the IRC as of January 1, 2015. For tax years beginning in 2019, Iowa conforms to the IRC as it existed on March 24, 2018. For tax years beginning on or after January 1, 2020, Iowa will convert from a "fixed date" conformity state to a "rolling IRC conformity" state.¹

The Iowa legislature had considered decoupling from the TCJA provisions related to GILTI and the interest expense limitation rules provided in IRC Section 163(j) but ultimately did not. Thus, these TCJA provisions are now in effect for taxpayers for tax years beginning on or after January 1, 2019. Such decoupling may be considered in future Iowa legislative sessions.

Implications

HF 779 may be more notable for what was not done (i.e., decoupling Iowa's tax laws from GILTI and IRC Section 163(j) business interest expense limitations), than the provisions that were enacted. EY will continue to monitor developments in this area.

———————————————

———————————————
ENDNOTES

¹ Iowa Laws 2018, SF 2417 (see Tax Alerts 2018-0987 and 2018-1123).