S.F. 282 DIVISION I 1 INTERNAL REVENUE CODE REFERENCES 2 Section 1. Section 422.3, subsection 5, Code 2011, is 3 amended to read as follows: 4 5. “Internal Revenue Code” means the Internal Revenue Code 5 of 1954, prior to the date of its redesignation as the Internal 6 Revenue Code of 1986 by the Tax Reform Act of 1986, or means 7 the Internal Revenue Code of 1986 as amended to and including 8 January 1, 2008 2011 . 9 Sec. 2. Section 422.7, subsection 29A, Code 2011, is amended 10 by striking the subsection. 11 Sec. 3. Section 422.9, subsection 2, paragraph i, Code 2011, 12 is amended to read as follows: 13 i. The deduction for state sales and use taxes is allowable 14 only if the taxpayer elected to deduct the state sales and use 15 taxes in lieu of state income taxes under section 164 of the 16 Internal Revenue Code. A deduction for state sales and use 17 taxes is not allowed if the taxpayer has taken the deduction 18 for state income taxes or claimed the standard deduction under 19 section 63 of the Internal Revenue Code. This paragraph 20 applies to taxable years beginning after December 31, 2003, and 21 before January 1, 2006 2008, and to taxable years beginning 22 after December 31, 2009, and before January 1, 2012 . 23 Sec. 4. Section 422.32, subsection 7, Code 2011, is amended 24 to read as follows: 25 7. “Internal Revenue Code” means the Internal Revenue Code 26 of 1954, prior to the date of its redesignation as the Internal 27 Revenue Code of 1986 by the Tax Reform Act of 1986, or means 28 the Internal Revenue Code of 1986 as amended to and including 29 January 1, 2008 2011 . 30 Sec. 5. EFFECTIVE UPON ENACTMENT. This division of this 31 Act, being deemed of immediate importance, takes effect upon 32 enactment. 33 Sec. 6. RETROACTIVE APPLICABILITY. The following provision 34 or provisions of this division of this Act apply retroactively 35 -1- LSB 1800XS (2) 84 tw/sc 1/ 8

S.F. 282 to January 1, 2010, for tax years beginning on or after that 1 date: 2 1. The section of this Act amending section 422.3. 3 2. The section of this Act amending section 422.32. 4 Sec. 7. RETROACTIVE APPLICABILITY. The following provision 5 or provisions of this division of this Act apply retroactively 6 to January 1, 2011, for tax years beginning on or after that 7 date: 8 1. The section of this Act amending section 422.7, 9 subsection 29A. 10 Sec. 8. RETROACTIVE APPLICABILITY. The following provision 11 or provisions of this division of this Act apply retroactively 12 to tax years beginning on or after January 1, 2006, but before 13 January 1, 2008, and to tax years beginning on or after January 14 1, 2010, but before January 1, 2012: 15 1. The section of this Act amending section 422.9. 16 DIVISION II 17 RESEARCH ACTIVITIES CREDIT 18 Sec. 9. Section 15.335, subsection 4, Code 2011, is amended 19 to read as follows: 20 4. a. In lieu of the credit amount computed in subsection 21 2 , an eligible business may elect to compute the credit amount 22 for qualified research expenses incurred in this state in a 23 manner consistent with the alternative incremental simplified 24 credit described in section 41(c)(4) 41(c)(5) of the Internal 25 Revenue Code. The taxpayer may make this election regardless 26 of the method used for the taxpayer’s federal income tax. The 27 election made under this paragraph is for the tax year and the 28 taxpayer may use another or the same method for any subsequent 29 year. 30 b. For purposes of the alternate credit computation 31 method in paragraph “a” , the credit percentages applicable to 32 qualified research expenses described in clauses (i), (ii), 33 and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause (ii) 34 of section 41(c)(5)(B) of the Internal Revenue Code are as 35 -2- LSB 1800XS (2) 84 tw/sc 2/ 8

S.F. 282 follows: 1 (1) In the case of an eligible business whose gross revenues 2 do not exceed twenty million dollars per year, the credit 3 percentages are two and fifty-four hundredths percent, three 4 and thirty-eight hundredths percent, and four and twenty-three 5 hundredths seven percent and three percent, respectively. 6 (2) In the case of an eligible business whose gross revenues 7 exceed twenty million dollars per year, the credit percentages 8 are seventy-six hundredths percent, one and two hundredths 9 percent, and one and twenty-seven hundredths two and one-tenth 10 percent and nine-tenths percent, respectively. 11 Sec. 10. Section 15.335, subsection 7, Code 2011, is amended 12 to read as follows: 13 7. a. For purposes of this section , “base amount” , “basic 14 research payment” , and “qualified research expense” mean the 15 same as defined for the federal credit for increasing research 16 activities under section 41 of the Internal Revenue Code, 17 except that for the alternative incremental simplified credit 18 such amounts are for research conducted within this state. 19 b. For purposes of this section , “Internal Revenue Code” 20 means the Internal Revenue Code in effect on January 1, 2009 21 2011 . 22 Sec. 11. Section 15A.9, subsection 8, paragraphs b, c, and 23 e, Code 2011, are amended to read as follows: 24 b. In lieu of the credit amount computed in paragraph “a” , 25 subparagraph (1), subparagraph division (a), a business may 26 elect to compute the credit amount for qualified research 27 expenses incurred in this state within the zone in a manner 28 consistent with the alternative incremental simplified credit 29 described in section 41(c)(4) 41(c)(5) of the Internal Revenue 30 Code. The taxpayer may make this election regardless of 31 the method used for the taxpayer’s federal income tax. The 32 election made under this paragraph is for the tax year and the 33 taxpayer may use another or the same method for any subsequent 34 year. 35 -3- LSB 1800XS (2) 84 tw/sc 3/ 8

S.F. 282 c. For purposes of the alternate credit computation 1 method in paragraph “b” , the credit percentages applicable to 2 qualified research expenses described in clauses (i), (ii), and 3 (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause (ii) of 4 section 41(c)(5)(B) of the Internal Revenue Code are three and 5 thirty hundredths percent, four and forty hundredths percent, 6 and five and fifty hundredths percent, respectively as follows: 7 (1) In the case of an eligible business whose gross revenues 8 do not exceed twenty million dollars per year, the credit 9 percentages are seven percent and three percent, respectively. 10 (2) In the case of an eligible business whose gross revenues 11 exceed twenty million dollars per year, the credit percentages 12 are two and one-tenths percent and nine-tenths percent, 13 respectively . 14 e. (1) For the purposes of this subsection , “base amount” , 15 “basic research payment” , and “qualified research expense” mean 16 the same as defined for the federal credit for increasing 17 research activities under section 41 of the Internal Revenue 18 Code, except that for the alternative incremental simplified 19 credit such amounts are for research conducted within this 20 state within the zone. 21 (2) For purposes of this subsection , “Internal Revenue Code” 22 means the Internal Revenue Code in effect on January 1, 2009 23 2011 . 24 Sec. 12. Section 422.10, subsection 1, paragraphs b and c, 25 Code 2011, are amended to read as follows: 26 b. In lieu of the credit amount computed in paragraph “a” , 27 subparagraph (1), subparagraph division (a), a taxpayer may 28 elect to compute the credit amount for qualified research 29 expenses incurred in this state in a manner consistent with the 30 alternative incremental simplified credit described in section 31 41(c)(4) 41(c)(5) of the Internal Revenue Code. The taxpayer 32 may make this election regardless of the method used for the 33 taxpayer’s federal income tax. The election made under this 34 paragraph is for the tax year and the taxpayer may use another 35 -4- LSB 1800XS (2) 84 tw/sc 4/ 8

S.F. 282 or the same method for any subsequent year. 1 c. For purposes of the alternate credit computation 2 method in paragraph “b” , the credit percentages applicable 3 to qualified research expenses described in clauses (i), 4 (ii), and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause 5 (ii) of section 41(c)(5)(B) of the Internal Revenue Code 6 are one and sixty-five hundredths percent, two and twenty 7 hundredths percent, and two and seventy-five hundredths four 8 and fifty-five hundredths percent and one and ninety-five 9 hundredths percent, respectively. 10 Sec. 13. Section 422.10, subsection 3, Code 2011, is amended 11 to read as follows: 12 3. a. For purposes of this section , “base amount” , “basic 13 research payment” , and “qualified research expense” mean the 14 same as defined for the federal credit for increasing research 15 activities under section 41 of the Internal Revenue Code, 16 except that for the alternative incremental simplified credit 17 such amounts are for research conducted within this state. 18 b. For purposes of this section , “Internal Revenue Code” 19 means the Internal Revenue Code in effect on January 1, 2009 20 2011 . 21 Sec. 14. Section 422.33, subsection 5, paragraphs b, c, and 22 d, Code 2011, are amended to read as follows: 23 b. In lieu of the credit amount computed in paragraph 24 “a” , subparagraph (1), a corporation may elect to compute the 25 credit amount for qualified research expenses incurred in this 26 state in a manner consistent with the alternative incremental 27 simplified credit described in section 41(c)(4) 41(c)(5) of the 28 Internal Revenue Code. The taxpayer may make this election 29 regardless of the method used for the taxpayer’s federal income 30 tax. The election made under this paragraph is for the tax 31 year and the taxpayer may use another or the same method for 32 any subsequent year. 33 c. For purposes of the alternate credit computation 34 method in paragraph “b” , the credit percentages applicable 35 -5- LSB 1800XS (2) 84 tw/sc 5/ 8

S.F. 282 to qualified research expenses described in clauses (i), 1 (ii), and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause 2 (ii) of section 41(c)(5)(B) of the Internal Revenue Code 3 are one and sixty-five hundredths percent, two and twenty 4 hundredths percent, and two and seventy-five hundredths four 5 and fifty-five hundredths percent and one and ninety-five 6 hundredths percent, respectively. 7 d. (1) For purposes of this subsection , “base amount” , 8 “basic research payment” , and “qualified research expense” mean 9 the same as defined for the federal credit for increasing 10 research activities under section 41 of the Internal Revenue 11 Code, except that for the alternative incremental simplified 12 credit such amounts are for research conducted within this 13 state. 14 (2) For purposes of this subsection , “Internal Revenue Code” 15 means the Internal Revenue Code in effect on January 1, 2009 16 2011 . 17 Sec. 15. EFFECTIVE UPON ENACTMENT. This division of this 18 Act, being deemed of immediate importance, takes effect upon 19 enactment. 20 Sec. 16. RETROACTIVE APPLICABILITY. The following 21 provision or provisions of this division of this Act apply 22 retroactively to July 1, 2010, for tax credits awarded on or 23 after that date: 24 1. The section of this Act amending section 15.335, 25 subsection 4. 26 2. The section of this Act amending section 15A.9. 27 Sec. 17. RETROACTIVE APPLICABILITY. The following 28 provision or provisions of this division of this Act apply 29 retroactively to January 1, 2010, for tax years beginning on 30 or after that date: 31 1. The section of this Act amending section 15.335, 32 subsection 7. 33 2. The section of this Act amending section 422.10, 34 subsection 1. 35 -6- LSB 1800XS (2) 84 tw/sc 6/ 8

S.F. 282 3. The section of this Act amending section 422.10, 1 subsection 3. 2 4. The section of this Act amending section 422.33. 3 EXPLANATION 4 This bill updates Iowa Code references to the Internal 5 Revenue Code and provides for changes to the Iowa research 6 activities credit provisions. 7 Division I of the bill updates references in Code sections 8 422.3 and 422.32 to the Internal Revenue Code, making certain 9 federal income tax revisions enacted by Congress in 2008, 10 2009, and 2010 applicable for purposes of the corporate and 11 individual income taxes and the franchise tax. These revisions 12 only apply to tax years beginning on or after January 1, 2010, 13 and do not include tax years beginning after December 31, 2007, 14 and before January 1, 2010. 15 The division strikes Code section 422.7, subsection 29A, 16 which provided an exclusion from income of the value of health 17 care coverage of a nonqualified tax dependent up to the age 18 of 25. The federal Patient Protection and Affordable Care 19 Act, Pub. L. No. 111-148, provides for the exclusion from 20 income of the value of health care coverage of a nonqualified 21 tax dependent up to the age of 27, effective March 30, 2010. 22 Because the bill now couples Iowa with the Internal Revenue 23 Code with regard to this provision, Code section 422.7, 24 subsection 29A, is no longer necessary for tax years beginning 25 on or after January 1, 2011. This change applies retroactively 26 to that date. 27 Currently, in certain circumstances, Code section 28 422.9(2)(i) provides individuals a deduction from net income 29 (also known as a “below-the-line” deduction) for state sales 30 and use taxes in lieu of a deduction for income taxes. This 31 deduction was only available for taxable years beginning 32 after December 31, 2003, and before January 1, 2006. The 33 division extends this deduction to tax years beginning after 34 December 31, 2003, and before January 1, 2008, and to tax years 35 -7- LSB 1800XS (2) 84 tw/sc 7/ 8

S.F. 282 beginning after December 31, 2009, and before January 1, 2012. 1 Division II of the bill amends certain Code sections 2 relating to the state research activities tax credit for 3 individuals, corporations, corporations in economic development 4 areas, and corporations in quality jobs enterprise zones. The 5 division updates Iowa Code references to the Internal Revenue 6 Code for purposes of coupling with changes to the federal 7 research activities tax credit. 8 The division also makes certain changes relating to the 9 alternative incremental research tax credit. Because this 10 tax credit was repealed for federal tax purposes, the bill 11 removes references to it from the Iowa Code and replaces them 12 with an alternative simplified research tax credit for Iowa 13 tax purposes based upon the new federal alternative simplified 14 credit. The amendments to Code section 15.335, subsection 15 4, and Code section 15A.9 relate to this change and apply 16 retroactively to July 1, 2010, for tax credits awarded on or 17 after that date. 18 The division also makes certain changes in the calculation 19 of the additional research activities credit that depend on 20 whether an eligible business has $20 million or more in gross 21 revenues. These changes only apply to tax years beginning 22 on or after January 1, 2010, and do not include tax years 23 beginning after December 31, 2008, and before January 1, 2010. 24 Both divisions of the bill take effect upon enactment. 25 -8- LSB 1800XS (2) 84 tw/sc 8/ 8