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February 24, 2022

Iowa Department of Revenue issues guidance on composite return requirements for 2022 as legislature considers elective pass-through entity tax

The Iowa Department of Revenue (Department) issued guidance for Iowa pass-through entities (PTEs) that must file composite tax returns and pay Iowa income or franchise tax on behalf of nonresident members with Iowa-source income from the PTE. The guidance applies to tax years beginning on or after January 1, 2022 (under Division II of Iowa Laws 2021, Senate File 608 (SF 608)).

Also, on January 25, 2022, Iowa House Ways and Means Committee member Dustin Hite introduced House File 2087 (HF 2087), which would provide a "workaround" to the federal $10,000 state tax deduction cap similar to those enacted in other states by allowing PTEs to pay tax at the entity level for tax years ending on or after December 31, 2022, but before tax years beginning on and after January 1, 2026 (the date the cap on the federal state tax deduction is currently scheduled to expire).

Composite return requirements

For tax years 2022 and later, PTEs must file composite tax returns on behalf of their nonresident members and pay Iowa income or franchise tax on those members' Iowa-source income from the PTE. The former PTE withholding tax on Iowa-sourced distributive share income is eliminated. PTEs, however, must still withhold and remit Iowa income tax, using a valid withholding permit, on income paid to a nonresident who is not an investor in the PTE.

For purposes of the new Iowa composite return requirements, PTEs include estates, trusts, entities taxed as a partnership and S corporations.1 "Nonresident members" include:

  • Individuals who are not residents of Iowa
  • Partners in a partnership whose commercial domicile is not in Iowa
  • Members of a limited liability company taxed as a partnership or S corporation whose commercial domicile is not in Iowa
  • Beneficiaries of a trust or estate with no situs in Iowa
  • Shareholders of a C or S corporation whose commercial domicile is not in Iowa
  • Financial institutions whose commercial domicile is not in Iowa2

The composite return tax will be computed by multiplying each nonresident member's Iowa-source income from the PTE by the top Iowa tax rate applicable to that member (for tax year 2022: 8.53% for individuals and PTEs, 9.8% for C corporations, and 5% for financial institutions). For calendar-year filers, the composite return is due on May 1, 2023. PTEs may, but are not required to, make quarterly estimated composite tax payments.

A PTE that receives Iowa-source income from another PTE (i.e., a tiered PTE) will be subject to the composite return requirements and tax on the distributive share income received from the lower-tiered PTE but will be able to claim a credit for the tax paid by the lower-tiered PTE on its composite return.

A nonresident member required to be included in a composite return may elect to be excluded from the composite return by completing a Form 41-175, Nonresident Member Composite Agreement,3 and providing the signed form to the PTE. The PTE should retain the form and must provide it to the Department upon request. Nonresident members electing out of the composite return are responsible for filing their own Iowa income or franchise tax returns and making corresponding tax payments, including estimated payments.

A nonresident member will receive a refundable credit for the tax paid on its behalf by the PTE on the composite return. Nonresident members who are individuals and who are included on a composite return will not be required to file an Iowa individual income tax return if their distributive share of income from the PTE is their only Iowa-source income. These members may file an individual return to claim their refundable credit. Nonresident members who are not individuals must file their Iowa income or franchise tax returns.

SALT deduction cap workaround

For purposes of the proposed PTE tax, a PTE would include S corporations and any entity subject to tax under subchapter K of the Internal Revenue Code. Publicly traded partnerships under IRC Section 7704 are not defined as partnerships for purposes of this proposed PTE tax. A PTE could make an irrevocable annual election to be taxed at the entity level at the applicable Iowa individual income tax rates. Electing entities would not be required to file a composite return. HF 2087 would require the election to be made for each tax year on a form and at a time prescribed by the Department.

Partners or shareholders of the electing PTE could claim a credit against Iowa individual income tax equal to the ratio of the partner's or shareholder's distributive share of net income over the PTE's total net income multiplied by the tax paid by the PTE. Credits in excess of the individual's tax liability could be carried forward up to five years or until utilized.

Partners or shareholders would be liable for unpaid taxes if the electing PTE fails to timely pay the full tax due. Nonresident partners or shareholders whose only source of Iowa income comes from the electing PTE would not be required to file an individual return if the credit exceeds the Iowa tax liability.

Electing PTEs would be required to make estimated tax payments if expected tax for the year exceeds $1,000. An electing PTE could claim a credit for taxes paid to other states on income not attributable to Iowa.

HF 2087 is currently being considered by the Iowa House Ways and Means Committee.


PTEs doing business in Iowa will need to consider the composite return requirements for 2022. The proposed SALT deduction cap workaround establishing an elective PTE tax is similar to those adopted in other states but is subject to revision. EY will continue to monitor developments in this area.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation
   • Bill Nolan (


1 The new Iowa composite return requirements do not apply to certain publicly traded partnerships, entities prohibited under federal or state law from making distributions to members, and certain entities engaged in disaster work.

2 Certain publicly-traded partnerships, tax-exempt entities (except to the extent they have unrelated business income) and insurance companies subject to Iowa insurance taxes are exempt from being included on a composite return.

3 This agreement is only valid for tax year 2022. The Department will issue forms and guidance for electing out of a composite return in future tax years.