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The 2024 session of the Iowa legislature recently concluded with the enactment of tax bills that, among other changes, accelerate the state's move to a flat individual income tax rate, extend existing incentives and create a new tax credit package for investments in qualified advanced manufacturing, bioscience or research and development.

Major income tax changes enacted during Iowa's 2024 session are summarized below.

Senate File 2442 (SF 2442) — move to flat individual income tax rate starting in 2025

Governor Kim Reynolds signed SF 2442 on May 1, 2024, which accelerates Iowa's move to a flat individual income tax rate structure. In 2022, Iowa passed House File 2317 (HF 2317 - see Tax Alert 2022-0351) which began a four-year phase-down of individual income tax rates that would culminate with a flat rate of 3.9% by 2026. SF 2442 implements a flat 3.8% individual income tax rate beginning in 2025.

SF 2442 also extends the Iowa Economic Development Authority's (IEDA) authority to enter withholding agreements for targeted jobs until June 30, 2027 (from June 30, 2024) and increases the investment threshold for qualifying for the credit from $500,000 to $1 million. The credit, created in 2006, provides a withholding tax credit equal to 3.0% of the gross wages paid by an employer to each employee covered. The agreements, which are executed between employers and border pilot project cities meeting defined criteria, must be approved by the IEDA. Employers claim the credit on quarterly withholding tax returns and then remit the withholding to the pilot project city, rather than the Iowa General Fund, to finance projects related to the employer under the agreement.

Effective for tax years beginning on or after January 1, 2025, S.B. 2442 allows financial institutions with an investment subsidiary to elect to include that subsidiary's income and expenses on their Iowa bank franchise tax return. Once made, the election remains in place so long as the investment subsidiary remains a subsidiary of the financial institution, unless the Iowa Department of Revenue (Department) grants leave to file separate returns. For purposes of apportionment, the commercial domicile of the investment subsidiary will be the commercial domicile of the financial institution.

SF 2442 did not change corporate income tax rates or bank franchise tax rates. (For a summary of previously enacted bank franchise tax rate developments see Tax Alert 2022-0964.) HF 2317 previously authorized annual reductions in the corporate income tax rate if certain revenue triggers were satisfied. The most recent rate reductions for 2024 were certified by the Department in 2023. See Tax Alert 2023-1603.

House File 2636 (HF 2636) — captive insurance rates

On April 19, 2024, Governor Reynolds signed HF 2636 , which sets reinsurance tax rates from captive insurance companies on assumed reinsurance premiums to: 0.200% on premiums up to $20 million; 0.125% on premiums over $20 million up to $40 million, 0.045% on premiums over $40 million up to $60 million, and 0.020% on premiums over $60 million. The revised rates took immediate effect.

Senate File 574 (SF 574) — Major Economic Growth Attraction (MEGA) Program

On May 1, 2024, Governor Reynolds signed SF 574, which creates the MEGA Program to be administered by the IEDA. The program provides a tax credit to certain foreign businesses that acquire agricultural land in Iowa if certain requirements are met. Requirements to qualify for the credit include investing over $1 billion in the proposed project, creating jobs in Iowa as a result of the investment, and primarily engaging in advance manufacturing, biosciences or research and development (data centers and retail businesses do not qualify).

Incentives available under the MEGA Program include:

• A qualifying investment tax credit of up to 5% of the business's qualifying investment
• A sales tax refund for certain purchases that are made by a business and used for the construction or equipping of an eligible business's qualifying project investment
• A withholding tax credit of up to 3% of gross wages paid to each employee in a project job that meets certain wage thresholds

Sales tax refunds will be paid to the business equally over five tax years. Applications for the MEGA Program can be submitted beginning July 1, 2024.

Implications

SF 2442 accelerates Iowa's transition to a flat rate individual income tax structure. Iowa employers should confirm their withholding rates align with the new flat rate structure when it becomes effective in 2025. (See Tax Alert 2024-0932.)

The Iowa legislature also approved constitutional amendments that would require Iowa to have a flat individual income tax rate; all new individual or corporate taxes or rate increases would need two-thirds majority support from both legislative chambers to pass. These amendments must be passed by the legislature during the 2025 legislative session to be placed on the ballot for voters to approve in a general election.