June 5, 2023
Iowa governor signs omnibus tax legislation
On June 1, 2023, the Iowa Governor Kim Reynolds signed into law omnibus tax legislation, Senate File 565 (SF 565), which includes, among other things, provisions on bonus depreciation, tax filing status and Department of Revenue (Department) settlement authority.
In 2018, Iowa enacted Senate File 2417, which made several future income tax changes contingent on certain revenue targets, or "triggers," being met for Iowa's fiscal year ending June 30, 2022 (see Tax Alert 2021-1094). Conforming Iowa's law to federal bonus depreciation was one of the provisions subject to a triggering event. Until the triggering event, Iowa corporate and individual income taxpayers were required to make an adjustment when they took the additional first-year depreciation allowance in computing federal taxable income under IRC Section 168(k). The "trigger" in the 2018 law went into effect on January 1, 2023. Accordingly, SF 565 repeals the required revenue trigger, conforms Iowa's law to federal bonus depreciation and allows increased expensing under IRC Section 179 for assets placed in service on or after January 1, 2023.
Tax filing status
For tax years beginning on or after January 1, 2023, SF 565 requires taxpayers to use the same filing status for Iowa individual income tax purposes that they use for federal income tax purposes.
Current Iowa law authorizes the Iowa Director of Revenue (Director) to compromise and settle doubtful claims for taxes and refunds. SF 565 defines a "settlement" to include any compromise or abatement of tax, penalties, and interest and authorizes the Director to settle any taxes, penalties, and interest in cases of doubtful liability, doubtful collectability, or economic hardship, or to promote effective tax administration. Settlements are discretionary, and a taxpayer has no right to a settlement. A settlement is final, except in cases of fraud or mutual mistake, or the written settlement agreement states that it is not final.
Estimation of tax
SF 565 amends Iowa Code 422.25 to authorize the Director to estimate the tax due for a taxpayer who fails to file a required return, or files a false or fraudulent return, based on information the Director can obtain. The Department would then be required to issue a notice of assessment to the taxpayer. SF 565 creates procedures the Department must follow if a taxpayer files a return, or fails to file a return, within three years of the assessment date.
Tax return preparers and authorized representatives
SF 565 requires tax return preparers to include their personal identification number on any return they prepare and file with the Department, if the preparer is (1) licensed as a certified public accountant under Iowa or another state's law, (2) licensed to practice law in Iowa or (3) an enrolled agent.
Composite returns — financial institutions
Starting in 2022, pass-through entities (PTE) were required to file composite returns (see Tax Alert 2022-0321). Effective for tax years beginning on or after January 1, 2023, SF 565 excludes from this requirement PTEs that are either a financial institution or the sole owner of one or more financial institutions subject to the Iowa Financial Institution Franchise Tax.
Taxpayers should consider the foregoing changes. EY will continue to monitor developments in this area.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor