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House File 352 - IntroducedA Bill ForAn Act 1relating to an entity-level taxation election for
2pass-through entities and allowing a partner or shareholder
3to claim a credit against the individual income tax, and
4including effective date and retroactive applicability
5provisions.
6BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:
1 Section 1. Section 422.11, Code 2023, is amended to read as
2follows:
3422.11 Franchise tax credit.
41. The taxes imposed under this subchapter, less the credits
5allowed under section 422.12, shall be reduced by a franchise
6tax credit. A taxpayer who is a shareholder in a financial
7institution, as defined in section 581 of the Internal Revenue
8Code, which has in effect for the tax year an election under
9subchapter S of the Internal Revenue Code, or is a member of a
10financial institution organized as a limited liability company
11under chapter 524 that is taxed as a partnership for federal
12income tax purposes, shall compute the amount of the tax credit
13by recomputing the amount of tax under this subchapter by
14reducing the taxable income of the taxpayer by the taxpayer’s
15pro rata share of the items of income and expense of the
16financial institution and subtracting the credits allowed
17under section 422.12. This recomputed tax shall be subtracted
18from the amount of tax computed under this subchapter after
19the deduction for credits allowed under section 422.12. The
20resulting amount, which shall not exceed the taxpayer’s
21pro rata share of the franchise tax paid by the financial
22institution, is the amount of the franchise tax credit allowed.
232. For a taxpayer making an election under section 422.16C
24that is also a financial institution subject to the franchise
25tax under subchapter V, the tax imposed under section 422.16C
26shall be reduced by a franchise tax credit equal to the amount
27of franchise tax paid by the taxpayer for the same year.
28 Sec. 2. NEW SECTION. 422.16C Pass-through entity —
29election — entity-level tax — credit.
301. As used in this section, unless the context otherwise
31requires:
32a. “Partnership” means the same as defined in section
33422.25A, except a “partnership” does not include a pass-through
34entity that is a publicly traded partnership as defined in
35section 7704 of the Internal Revenue Code.
-1- 1b. “Taxpayer” means a partnership or an S corporation.
22. a. Except as provided in paragraph “b”, for tax years
3beginning on or after January 1, 2022, but before tax years
4beginning on or after January 1, 2026, notwithstanding any
5other provision of law to the contrary, a taxpayer may elect to
6be subject to the provisions of this section.
7b. This section only applies to tax years for which the
8limitation on individual deductions applies under section
9164(b)(6) of the Internal Revenue Code.
103. a. A separate election shall be made for each tax year
11on a form and at a time prescribed by the department. An
12election shall be irrevocable once made and shall be binding on
13the taxpayer and all partners or shareholders of the taxpayer.
14b. If an election is made under this section, a taxpayer
15shall not be required to file a composite return for the same
16tax year pursuant to section 422.16B.
174. a. A taxpayer making an election under this section
18shall be subject to tax in an amount equal to the maximum rate
19under section 422.5A, imposed against the taxable income of the
20taxpayer for the taxable year properly determined under this
21chapter and allocated and apportioned to the state under the
22rules adopted by the department. The tax shall be due with the
23taxpayer’s return required under this chapter.
24b. The tax under this section shall be reduced by the credit
25provided in subsection 5, paragraph “b”, and the franchise
26tax credit in section 422.11, subsection 2, and the composite
27credit in section 422.16B, subsection 4. Any other tax
28credits shall not be claimed by the taxpayer against the tax
29imposed under this section. A net operating loss or other loss
30carryback or carryforward shall not be claimed by the taxpayer.
315. a. For a taxable year in which a taxpayer made an
32election under this section, for the partners or shareholders
33of the taxpayer, the taxes imposed under this subchapter, less
34the credits allowed under section 422.12, or the taxes imposed
35under subchapter III or V, as applicable, shall be reduced by
-2-1a credit equal to the ratio of the partner’s or shareholder’s
2share of the taxpayer’s taxable income over the taxpayer’s
3total taxable income multiplied by the state tax liability
4actually paid by the taxpayer.
5b. If the taxpayer is itself a partner or shareholder of
6another taxpayer making an election under this section, the
7credit under this subsection shall be allowed.
8c. An individual may claim the credit under this subsection
9allowed to a partnership or S corporation that has not made
10an election under this section, or allowed to an estate or
11trust distributing taxable income to an individual. The
12amount claimed by the individual shall be based upon the pro
13rata share of the individual’s earnings of a partnership,
14corporation, estate, or trust.
15d. If the amount of credit allowed under this subsection
16exceeds the tax liability of the partner or shareholder for the
17tax year, the excess may be credited to the tax liability of
18the partner or shareholder for the following five tax years or
19until depleted, whichever occurs first.
206. A nonresident individual who is a partner or shareholder
21of a taxpayer for a tax year in which an election is made under
22this section shall not be required to file an individual income
23tax return under section 422.13 for such tax year if the only
24Iowa source income of the individual is from a taxpayer making
25the election under this section, the credit allowed to the
26partner or shareholder equals or exceeds the tax liability of
27the partner or shareholder for the tax imposed in the tax year
28the election is made, and if the taxpayer files and pays the
29tax due under this section.
307. A taxpayer making an election under this section is
31liable for the entity-level tax imposed pursuant to this
32section, including applicable penalties and interest. This
33section shall not prohibit the department from assessing
34direct or indirect partners and shareholders for taxes owed in
35the event that the taxpayer fails to timely make any payment
-3-1required by this section for any reason.
28. In addition to and not in lieu of any period of
3limitation provided in section 422.25, if a taxpayer files an
4amended return that requests a refund of tax previously paid
5within one year prior to the expiration of the department’s
6applicable period of limitations in section 422.25, the
7department has one year from the date of receipt of the
8amended return to assess any direct or indirect partners
9and shareholders related to the reduction of any tax credit
10provided under subsection 5.
119. The department shall adopt rules pursuant to chapter 17A
12to administer this section.
13 Sec. 3. Section 422.85, Code 2023, is amended to read as
14follows:
15422.85 Imposition of estimated tax.
16A taxpayer subject to the tax imposed by sections 422.16C,
17 422.33, and 422.60 shall make payments of estimated tax for the
18taxable year if the amount of tax payable, less credits, can
19reasonably be expected to be more than one thousand dollars for
20the taxable year. For purposes of this subchapter, “estimated
21tax” means the amount which the taxpayer estimates to be the tax
22due and payable under subchapter II, III, or V of this chapter
23for the taxable year.
24 Sec. 4. ESTIMATED TAX PAYMENTS FOR TAX YEARS BEGINNING PRIOR
25TO EFFECTIVE DATE OF ACT. Notwithstanding sections 422.16 and
26422.85, a taxpayer electing to apply the provisions of section
27422.16C shall not be required to make estimated tax payments
28for a tax year beginning prior to the effective date of this
29Act.
30 Sec. 5. PENALTY AND INTEREST WAIVER RELATED TO TAX YEARS
31ENDING PRIOR TO EFFECTIVE DATE OF ACT. Notwithstanding any
32provision of law to the contrary, the department may waive
33penalty and interest for a return filing or tax payment related
34to an election to be subject to the provisions of section
35422.16C for a tax year ending prior to the effective date of
-4-1this Act.
2 Sec. 6. EFFECTIVE DATE. This Act, being deemed of immediate
3importance, takes effect upon enactment.
4 Sec. 7. RETROACTIVE APPLICABILITY. This Act applies
5retroactively to January 1, 2022, for tax years beginning on
6or after that date.
7EXPLANATION
8The inclusion of this explanation does not constitute agreement with
9the explanation’s substance by the members of the general assembly.
10This bill relates to an entity-level taxation election for
11pass-through entities and allows a partner or shareholder to
12claim a credit against the individual income tax.
13For tax years beginning on or after January 1, 2022, but
14before January 1, 2026, a taxpayer (a partnership, other than a
15publicly traded partnership, or a subchapter S corporation),
16may elect to be subject to tax at the partnership or S
17corporation level in an amount equal to the applicable tax
18rates under Code section 422.5A imposed against the taxable
19income of the taxpayer for the taxable year. Currently, the
20taxable income of a partnership or S corporation passes through
21to the partners or shareholders of the entity and is subject to
22the individual income tax at the partner or shareholder level.
23The bill only applies to tax years as long as the limitation
24on individual deductions applies under section 164(b)(6) of the
25Internal Revenue Code.
26If an election is made, the partners or shareholders are
27allowed a credit against the individual income tax equal to
28the ratio of the partner’s or shareholder’s share of taxable
29income over the total taxable income multiplied by the state
30tax liability of the electing taxpayer.
31An individual partner or shareholder may claim the credit
32under the bill even if a taxpayer has not made an election.
33The amount of the credit shall be based upon the pro rata
34share of the individual’s earnings of the taxpayer making the
35distribution.
-5- 1The bill limits the number of credits the taxpayer is
2eligible for if the taxpayer elects to be subject to tax at the
3partnership or S corporation level. The bill also prohibits
4the taxpayer from claiming a net operating loss or electing to
5carryback or carryforward a loss.
6The bill does allow the taxpayer, if the taxpayer is a
7financial institution, to claim the franchise tax credit in
8Code section 422.11 equal to the amount of franchise tax paid
9by the taxpayer.
10If the amount of credit allowed under the bill exceeds the
11tax liability of the partner or shareholder for the tax year,
12the excess may be credited to the tax liability of the partner
13or shareholder for the following five tax years or until
14depleted, whichever occurs first.
15A nonresident individual who is a partner or shareholder of
16a taxpayer for a tax year in which an election is made shall
17not be required to file an individual income tax return in
18this state if the only Iowa source income is from a taxpayer
19making an election under the bill, and the credit allowed the
20individual in the bill equals or exceeds the tax liability of
21the individual in the tax year the election is made.
22The bill specifies that a taxpayer making an election is
23liable for the entity-level tax imposed by the bill, and allows
24the department of revenue to assess direct or indirect partners
25and shareholders for taxes owed in the event the taxpayer fails
26to timely make any payment required by the bill.
27For tax years where an election is made, the withholding
28requirements of Code section 422.16 do not apply. The bill
29does require the taxpayer to make estimated tax payments
30pursuant to Code section 422.85, if applicable. However, a
31taxpayer electing to be taxed at the partnership level or at
32the S corporation level is not required to make estimated tax
33payments for a tax year beginning prior to the effective date
34of the bill.
35The bill takes effect upon enactment and applies
-6-1retroactively to tax years beginning on or after January 1,
22022.
-7-jm/jh
2pass-through entities and allowing a partner or shareholder
3to claim a credit against the individual income tax, and
4including effective date and retroactive applicability
5provisions.
6BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:
1 Section 1. Section 422.11, Code 2023, is amended to read as
2follows:
3422.11 Franchise tax credit.
41. The taxes imposed under this subchapter, less the credits
5allowed under section 422.12, shall be reduced by a franchise
6tax credit. A taxpayer who is a shareholder in a financial
7institution, as defined in section 581 of the Internal Revenue
8Code, which has in effect for the tax year an election under
9subchapter S of the Internal Revenue Code, or is a member of a
10financial institution organized as a limited liability company
11under chapter 524 that is taxed as a partnership for federal
12income tax purposes, shall compute the amount of the tax credit
13by recomputing the amount of tax under this subchapter by
14reducing the taxable income of the taxpayer by the taxpayer’s
15pro rata share of the items of income and expense of the
16financial institution and subtracting the credits allowed
17under section 422.12. This recomputed tax shall be subtracted
18from the amount of tax computed under this subchapter after
19the deduction for credits allowed under section 422.12. The
20resulting amount, which shall not exceed the taxpayer’s
21pro rata share of the franchise tax paid by the financial
22institution, is the amount of the franchise tax credit allowed.
232. For a taxpayer making an election under section 422.16C
24that is also a financial institution subject to the franchise
25tax under subchapter V, the tax imposed under section 422.16C
26shall be reduced by a franchise tax credit equal to the amount
27of franchise tax paid by the taxpayer for the same year.
28 Sec. 2. NEW SECTION. 422.16C Pass-through entity —
29election — entity-level tax — credit.
301. As used in this section, unless the context otherwise
31requires:
32a. “Partnership” means the same as defined in section
33422.25A, except a “partnership” does not include a pass-through
34entity that is a publicly traded partnership as defined in
35section 7704 of the Internal Revenue Code.
-1- 1b. “Taxpayer” means a partnership or an S corporation.
22. a. Except as provided in paragraph “b”, for tax years
3beginning on or after January 1, 2022, but before tax years
4beginning on or after January 1, 2026, notwithstanding any
5other provision of law to the contrary, a taxpayer may elect to
6be subject to the provisions of this section.
7b. This section only applies to tax years for which the
8limitation on individual deductions applies under section
9164(b)(6) of the Internal Revenue Code.
103. a. A separate election shall be made for each tax year
11on a form and at a time prescribed by the department. An
12election shall be irrevocable once made and shall be binding on
13the taxpayer and all partners or shareholders of the taxpayer.
14b. If an election is made under this section, a taxpayer
15shall not be required to file a composite return for the same
16tax year pursuant to section 422.16B.
174. a. A taxpayer making an election under this section
18shall be subject to tax in an amount equal to the maximum rate
19under section 422.5A, imposed against the taxable income of the
20taxpayer for the taxable year properly determined under this
21chapter and allocated and apportioned to the state under the
22rules adopted by the department. The tax shall be due with the
23taxpayer’s return required under this chapter.
24b. The tax under this section shall be reduced by the credit
25provided in subsection 5, paragraph “b”, and the franchise
26tax credit in section 422.11, subsection 2, and the composite
27credit in section 422.16B, subsection 4. Any other tax
28credits shall not be claimed by the taxpayer against the tax
29imposed under this section. A net operating loss or other loss
30carryback or carryforward shall not be claimed by the taxpayer.
315. a. For a taxable year in which a taxpayer made an
32election under this section, for the partners or shareholders
33of the taxpayer, the taxes imposed under this subchapter, less
34the credits allowed under section 422.12, or the taxes imposed
35under subchapter III or V, as applicable, shall be reduced by
-2-1a credit equal to the ratio of the partner’s or shareholder’s
2share of the taxpayer’s taxable income over the taxpayer’s
3total taxable income multiplied by the state tax liability
4actually paid by the taxpayer.
5b. If the taxpayer is itself a partner or shareholder of
6another taxpayer making an election under this section, the
7credit under this subsection shall be allowed.
8c. An individual may claim the credit under this subsection
9allowed to a partnership or S corporation that has not made
10an election under this section, or allowed to an estate or
11trust distributing taxable income to an individual. The
12amount claimed by the individual shall be based upon the pro
13rata share of the individual’s earnings of a partnership,
14corporation, estate, or trust.
15d. If the amount of credit allowed under this subsection
16exceeds the tax liability of the partner or shareholder for the
17tax year, the excess may be credited to the tax liability of
18the partner or shareholder for the following five tax years or
19until depleted, whichever occurs first.
206. A nonresident individual who is a partner or shareholder
21of a taxpayer for a tax year in which an election is made under
22this section shall not be required to file an individual income
23tax return under section 422.13 for such tax year if the only
24Iowa source income of the individual is from a taxpayer making
25the election under this section, the credit allowed to the
26partner or shareholder equals or exceeds the tax liability of
27the partner or shareholder for the tax imposed in the tax year
28the election is made, and if the taxpayer files and pays the
29tax due under this section.
307. A taxpayer making an election under this section is
31liable for the entity-level tax imposed pursuant to this
32section, including applicable penalties and interest. This
33section shall not prohibit the department from assessing
34direct or indirect partners and shareholders for taxes owed in
35the event that the taxpayer fails to timely make any payment
-3-1required by this section for any reason.
28. In addition to and not in lieu of any period of
3limitation provided in section 422.25, if a taxpayer files an
4amended return that requests a refund of tax previously paid
5within one year prior to the expiration of the department’s
6applicable period of limitations in section 422.25, the
7department has one year from the date of receipt of the
8amended return to assess any direct or indirect partners
9and shareholders related to the reduction of any tax credit
10provided under subsection 5.
119. The department shall adopt rules pursuant to chapter 17A
12to administer this section.
13 Sec. 3. Section 422.85, Code 2023, is amended to read as
14follows:
15422.85 Imposition of estimated tax.
16A taxpayer subject to the tax imposed by sections 422.16C,
17 422.33, and 422.60 shall make payments of estimated tax for the
18taxable year if the amount of tax payable, less credits, can
19reasonably be expected to be more than one thousand dollars for
20the taxable year. For purposes of this subchapter, “estimated
21tax” means the amount which the taxpayer estimates to be the tax
22due and payable under subchapter II, III, or V of this chapter
23for the taxable year.
24 Sec. 4. ESTIMATED TAX PAYMENTS FOR TAX YEARS BEGINNING PRIOR
25TO EFFECTIVE DATE OF ACT. Notwithstanding sections 422.16 and
26422.85, a taxpayer electing to apply the provisions of section
27422.16C shall not be required to make estimated tax payments
28for a tax year beginning prior to the effective date of this
29Act.
30 Sec. 5. PENALTY AND INTEREST WAIVER RELATED TO TAX YEARS
31ENDING PRIOR TO EFFECTIVE DATE OF ACT. Notwithstanding any
32provision of law to the contrary, the department may waive
33penalty and interest for a return filing or tax payment related
34to an election to be subject to the provisions of section
35422.16C for a tax year ending prior to the effective date of
-4-1this Act.
2 Sec. 6. EFFECTIVE DATE. This Act, being deemed of immediate
3importance, takes effect upon enactment.
4 Sec. 7. RETROACTIVE APPLICABILITY. This Act applies
5retroactively to January 1, 2022, for tax years beginning on
6or after that date.
7EXPLANATION
8The inclusion of this explanation does not constitute agreement with
9the explanation’s substance by the members of the general assembly.
10This bill relates to an entity-level taxation election for
11pass-through entities and allows a partner or shareholder to
12claim a credit against the individual income tax.
13For tax years beginning on or after January 1, 2022, but
14before January 1, 2026, a taxpayer (a partnership, other than a
15publicly traded partnership, or a subchapter S corporation),
16may elect to be subject to tax at the partnership or S
17corporation level in an amount equal to the applicable tax
18rates under Code section 422.5A imposed against the taxable
19income of the taxpayer for the taxable year. Currently, the
20taxable income of a partnership or S corporation passes through
21to the partners or shareholders of the entity and is subject to
22the individual income tax at the partner or shareholder level.
23The bill only applies to tax years as long as the limitation
24on individual deductions applies under section 164(b)(6) of the
25Internal Revenue Code.
26If an election is made, the partners or shareholders are
27allowed a credit against the individual income tax equal to
28the ratio of the partner’s or shareholder’s share of taxable
29income over the total taxable income multiplied by the state
30tax liability of the electing taxpayer.
31An individual partner or shareholder may claim the credit
32under the bill even if a taxpayer has not made an election.
33The amount of the credit shall be based upon the pro rata
34share of the individual’s earnings of the taxpayer making the
35distribution.
-5- 1The bill limits the number of credits the taxpayer is
2eligible for if the taxpayer elects to be subject to tax at the
3partnership or S corporation level. The bill also prohibits
4the taxpayer from claiming a net operating loss or electing to
5carryback or carryforward a loss.
6The bill does allow the taxpayer, if the taxpayer is a
7financial institution, to claim the franchise tax credit in
8Code section 422.11 equal to the amount of franchise tax paid
9by the taxpayer.
10If the amount of credit allowed under the bill exceeds the
11tax liability of the partner or shareholder for the tax year,
12the excess may be credited to the tax liability of the partner
13or shareholder for the following five tax years or until
14depleted, whichever occurs first.
15A nonresident individual who is a partner or shareholder of
16a taxpayer for a tax year in which an election is made shall
17not be required to file an individual income tax return in
18this state if the only Iowa source income is from a taxpayer
19making an election under the bill, and the credit allowed the
20individual in the bill equals or exceeds the tax liability of
21the individual in the tax year the election is made.
22The bill specifies that a taxpayer making an election is
23liable for the entity-level tax imposed by the bill, and allows
24the department of revenue to assess direct or indirect partners
25and shareholders for taxes owed in the event the taxpayer fails
26to timely make any payment required by the bill.
27For tax years where an election is made, the withholding
28requirements of Code section 422.16 do not apply. The bill
29does require the taxpayer to make estimated tax payments
30pursuant to Code section 422.85, if applicable. However, a
31taxpayer electing to be taxed at the partnership level or at
32the S corporation level is not required to make estimated tax
33payments for a tax year beginning prior to the effective date
34of the bill.
35The bill takes effect upon enactment and applies
-6-1retroactively to tax years beginning on or after January 1,
22022.
-7-jm/jh