The Iowa legislature, before adjourning on May 15, 2025, approved bills that would replace the current research activities tax credit with a new research and development (R&D) tax credit program, reduce financial assistance to companies with layoffs and closures, and expand the exemption for retirement income to include certain lump sum distributions. These bills have been sent to Governor Kim Reynolds for her consideration. These provisions are discussed below.

Senate File 657 — changes to Iowa's R&D tax credit

Senate File 657 (SF 657), which was passed on May 14, 2025, contains several economic development incentive provisions and would change Iowa's R&D tax credit program for individual and corporate income taxpayers, effective for tax years beginning on or after January 1, 2026.

Before 2023, Iowa provided a refundable research activities tax credit, administered by the Iowa Department of Revenue, equal to 6.5% of Iowa's apportioned share of qualifying expenditures for increasing research activities. The Iowa research activities tax credit was generally based on the federal research tax credit, except that the Iowa credit was calculated using the ratio of Iowa research expenditures over total research expenditures.

Significant changes were made to the research activities tax credit beginning in the 2023 tax year. (See Tax Alert 2022-0351.) The refundability of the credit was being phased down 10 percentage points each year over five years, beginning in 2023, so that 90% of the excess credit was refundable for the 2023 tax year and 50% of excess credit would be refundable for the 2027 tax year. The eligibility of supply costs as qualified Iowa research expenses was also slated to be phased out over five years, beginning with the 2023 tax year. The 2023 law changes also appeared to limit the eligibility of wages paid to employees or third parties as research expenses and limited a taxpayer's ability to claim the credit on an amended return.

SF 657 would repeal the research activities tax credit for tax years beginning on or after January 1, 2026, with a repeal from the Iowa code on January 1, 2027. The research activities tax credit would be replaced with a new R&D tax credit program, administered by the Iowa Economic Development Authority (IEDA), to provide tax credits to eligible businesses that incur qualified research expenses in Iowa for tax years beginning on or after January 1, 2026. SF 657 would define eligible expenditures as qualified research expenses under IRC Section 41 to the extent the expenditures occurred in Iowa and cap the total credits that IEDA could issue in a fiscal year at $40 million.

SF 657 would also allow the IEDA to approve and issue a tax credit certificate to qualified businesses for up to 3.5% of eligible expenditures. Businesses would claim the credit in the tax year immediately following the tax year in which the eligible expenditures were incurred. SF 657 also would:

• Make the R&D tax credit refundable for credits that exceed a business's tax liability or allow taxpayers to use the refundable portion creditable in the following year
• Prohibit the R&D tax credit from being transferred
• Allow a qualified business to claim the tax credit for up to five years, with recertification available upon application to the IEDA
• Require a qualified business to apply to the IEDA each year during the five-year period the business is qualified for the tax credit to seek review by a certified public accountant for eligible research expenditures
• Specify that the tax credit is available to businesses actively engaged in qualified research and development primarily engaged in advanced manufacturing, bioscience, insurance and finance, and technology innovation
• The sectors available for the credit within these business classifications would include second-generation food innovation, food ingredients and supplements, crop protection, hybrid seed technologies, diagnostic analytics and immunotherapies, chip technologies and microelectronics, medical equipment and supplies, software and technology, aerospace, pharmaceuticals, consumer products, and other sectors as determined by the IEDA by administrative rule
• Specify certain business sectors that are not eligible for the tax credit, including agriculture producers, contractors, finance or investment companies, retailers, wholesalers, transportation companies, ethanol biorefineries, agricultural cooperative associations, real estate companies, collection agencies, accountants, architects, and publishers

Senate File 657 — reduction of financial assistance to companies with a mass layoff or closure

SF 657 would allow the Economic Development Authority to reduce or eliminate some or all of the financial assistance it has awarded to entities that experienced a business closure or mass layoff for which notice is required under Chapter 48C. This provision would apply to an entity awarded a tax incentive or other financial assistance under any program administered by the authority.

House File 976 — lump sum distributions of retirement income exempted starting in 2025

House File 976 (HF 976), which was passed by the legislature on May 13, 2025, is the Iowa Department of Revenue's "technical omnibus" tax bill. A key change in the bill would expand Iowa's current individual income tax exemption for retirement income.

Beginning in 2023, Iowa does not tax Social Security income or retirement income of someone who is (1) disabled, (2) at least 55 years old, or (3) the surviving spouse of an individual who would have qualified for the exclusion. Retirement income is defined as the total received from all governmental or other pension or retirement plans, including defined benefit or contribution plans, annuities, individual retirement accounts, plans maintained or contributed to by an employer or by a self-employed person as an employer, and deferred compensation plans (see Tax Alert 2022-0351).

The change would apply retroactively to tax years beginning on or after January 1, 2025.

Implications

Taxpayers should monitor these changes and look for additional information for the revamped R&D tax credit program to be issued by IDEA.