July 7, 2020
Iowa decouples from GILTI and federal limitation on business interest expense deductions, retroactively conforms to PPP loan forgiveness, adopts partnership audit and adjustment rules
On June 29, 2020, Iowa Governor Kim Reynolds signed House File 2641 (HF 2641), containing Iowa tax law changes, including:
GILTI and IRC Section 163(j) business interest expense limitation decoupling
For 2018, Iowa conformed to the Internal Revenue Code of 1986, as amended (IRC), as it existed on January 1, 2015. For tax years beginning on or after January 1, 2019, Iowa conformed to the IRC as of March 24, 2018. Under prior legislation, Iowa became an IRC rolling conformity state for tax years beginning on or after January 1, 2020. Accordingly, Iowa did not conform to certain provisions of the TCJA enacted in December 2017, including provisions related to the inclusion in federal taxable income of global intangible low taxed income (GILTI) from foreign subsidiaries under IRC Sections 951A and 250 and limitations on the deductibility of business interest expense (BIE) contained in IRC Section 163(j) for 2018 tax years. Iowa conformed to these provisions, however, for tax years beginning on or after January 1, 2019.
Under HF 2641, Iowa tax law decouples from the GILTI provisions retroactive to tax years beginning on or after January 1, 2019, and directs the Iowa Department of Revenue (Department) to rescind recently enacted administrative rules that would have included GILTI in Iowa taxable income (see Tax Alert 2019-2137).
Iowa tax law, under HF 2641, also decouples from IRC Section 163(j)'s limitation on BIE deductions for tax years beginning on or after January 1, 2020. Because Iowa's tax law conformed to IRC Section 163(j)'s limitation on BIE deductions for 2019 tax years, the Department issued guidance in June 2020 stating that Iowa does not conform to the increase in the deduction limitation from 30% to 50%, as enacted under the CARES Act. Iowa's tax statute1 states that its definition of the IRC shall not be construed to include any amendment to the IRC enacted after its existing conformity date (i.e., March 24, 2018, for tax years beginning on or after January 1, 2019), including any amendment with retroactive applicability or effectiveness. (The CARES Act was enacted on March 27, 2020, and thus is not included within the current conformity period for that year.)
As a result:
Small Business Administration Paycheck Protection Program
In recently updated FAQs, the Department stated that a Paycheck Protection Program (PPP) loan that is forgiven and excluded from federal gross income under Section 1106 of the CARES Act in a tax year beginning on or after January 1, 2020, also qualifies for exclusion from income for Iowa tax purposes. Because Iowa conformed to the IRC as of March 24, 2018, before 2020, no exclusion existed for PPP loans forgiven in a tax year that began before January 1, 2020. HF 2641 corrected this by stating that, notwithstanding any other provision of Iowa law to the contrary, Iowa will conform to the exclusion from gross income of a forgiven PPP loan under Section 1106 of the CARES Act for any tax year beginning on or after January 1, 2019, and ending after March 27, 2020. Accordingly, taxpayers with fiscal years that began in 2019 that receive PPP loans during 2020 would have forgiven loans for that fiscal year excluded from Iowa tax.
Partnership audit and federal adjustment reporting provisions
HF 2641 creates a procedure to report changes to federal taxable income resulting from the new federal centralized partnership audit regime, which is substantially similar to the Multistate Tax Commission's model uniform statute and regulation.2 This procedure allows partnerships and certain partners to elect to pay additional Iowa tax, penalty and interest arising from a federal partnership adjustment on behalf of its owners, thereby relieving the owners of the administrative requirement to further report such federal adjustments to Iowa. These provisions are effective for federal partnership adjustments that have a final determination after July 1, 2020.
In addition, HF 2641 establishes that Iowa audits and assessments of, and appeals by, pass-through entities such as partnerships and S corporations will be conducted and determined solely at the entity level through a state partnership representative. HF 2641 also outlines a procedure for reporting those Iowa audit adjustments, similar to the procedure for reporting federal audit adjustments, including the election to pay additional Iowa tax, penalty and interest arising from the Iowa audit adjustment on behalf of its owners. These provisions are effective for tax years beginning on or after January 1, 2020.
Penalty and other administrative provisions
HF 2641 amends penalty provisions in Iowa Code Section 421.27 for specified business organizations, which include partnerships or other entities required to file an information return, corporations required to file corporate income tax returns and financial institutions required to file a financial institution franchise tax return. These amendments apply to tax years beginning on or after January 1, 2022, and include:
In addition, HF 2641 amends Iowa Code Section 421.27(6) to create a penalty for any person willfully committing a "fraudulent practice" with respect to a claim for refund, credit, abatement or other benefit with the intent to evade tax or to which the person is not entitled. The penalty is 75% of the refund, credit, abatement or other benefit claimed. Under Section 26 of Art. III of Iowa's constitution,3 this provision is presumably effective as of July 1, 2020 because HF 2641 itself is silent as to its effective date.
HF 2641 also makes changes to other administrative provisions, including those relating to powers of attorney and a taxpayer's ability to elect to receive certain Department correspondence electronically.
Taxpayers preparing corporate income tax returns for tax years beginning on or after January 1, 2019, should consider HF 2641's decoupling from the federal GILTI provisions and conformity to the CARES Act's PPP loan forgiveness provisions. Taxpayers that have already filed 2019 returns should consider the impact of these provisions and whether amended returns need to be filed. Partnerships will also need to consider the implications of Iowa's new rules for reporting federal final determinations issued after July 1, 2020, as well as state entity-level audit procedures for tax years beginning on or after January 1, 2020.
1 Iowa Code Section 422.32(2)(h)(1).
2 The model uniform statute and regulation for reporting adjustments to federal taxable income and federal partnership audit adjustments is available on the Multistate Tax Commission's website.
3 Iowa Const. Art. III, §26 ("An Act of the general assembly passed at a regular session of a general assembly shall take effect on July 1 following its passage unless a different effective date is stated in an Act of the general assembly.") As indicated above, Gov. Reynolds signed HF 2641 on June 29, 2020.