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PAG LIN
1 1 Section 1. Section 422.5, subsection 1, paragraph j, Code
1 2 1995, is amended by adding the following new unnumbered
1 3 paragraph:
1 4 NEW UNNUMBERED PARAGRAPH. The tax imposed upon the taxable
1 5 income of a resident shareholder in a corporation which has in
1 6 effect for the tax year an election under subchapter S of the
1 7 Internal Revenue Code and carries on business within and
1 8 without the state may be computed by reducing the amount
1 9 determined pursuant to paragraphs "a" through "i" by the
1 10 amounts of nonrefundable credits under this division and by
1 11 multiplying this resulting amount by a fraction of which the
1 12 resident's net income allocated to Iowa, as determined in
1 13 section 422.8, subsection 2, paragraph "b", is the numerator
1 14 and the resident's total net income computed under section
1 15 422.7 is the denominator. This paragraph also applies to
1 16 individuals who are residents of Iowa for less than the entire
1 17 tax year.
1 18 Sec. 2. Section 422.5, subsection 1, paragraph k,
1 19 unnumbered paragraph 4, Code 1995, is amended to read as
1 20 follows:
1 21 In the case of a resident, including a resident estate or
1 22 trust, the state's apportioned share of the state alternative
1 23 minimum tax is one hundred percent of the state alternative
1 24 minimum tax computed in this subsection. In the case of a
1 25 resident or part year resident shareholder in a corporation
1 26 which has in effect for the tax year an election under
1 27 subchapter S of the Internal Revenue Code and carries on
1 28 business within and without the state, nonresident, including
1 29 a nonresident estate or trust, or an individual, estate, or
1 30 trust that is domiciled in the state for less than the entire
1 31 tax year, the state's apportioned share of the state
1 32 alternative minimum tax is the amount of tax computed under
1 33 this subsection, reduced by the applicable credits in sections
1 34 422.10 through 422.12 and this result multiplied by a fraction
1 35 with a numerator of the sum of state net income allocated to
2 1 Iowa as determined in section 422.8, subsection 2, paragraph
2 2 "a" or "b" as applicable, plus tax preference items,
2 3 adjustments, and losses under subparagraph (1) attributable to
2 4 Iowa and with a denominator of the sum of total net income
2 5 computed under section 422.7 plus all tax preference items,
2 6 adjustments, and losses under subparagraph (1). In computing
2 7 this fraction, those items excludable under subparagraph (1)
2 8 shall not be used in computing the tax preference items.
2 9 Married taxpayers electing to file separate returns or
2 10 separately on a combined return must allocate the minimum tax
2 11 computed in this subsection in the proportion that each
2 12 spouse's respective preference items, adjustments, and losses
2 13 under subparagraph (1) bear to the combined preference items,
2 14 adjustments, and losses under subparagraph (1) of both
2 15 spouses.
2 16 Sec. 3. Section 422.7, Code 1995, is amended by adding the
2 17 following new subsection:
2 18 NEW SUBSECTION. 32. Resident shareholders of a
2 19 corporation which has an election in effect under subchapter S
2 20 of the Internal Revenue Code shall add their proportionate
2 21 share of a deemed distribution of current year income to the
2 22 extent that the salaries, wages, or other compensation for
2 23 services performed by all shareholders does not equal ten
2 24 percent of net income of the corporation computed in
2 25 accordance with section 422.35 and considering items of income
2 26 and expense which pass directly to the shareholders under
2 27 provisions of the Internal Revenue Code before deduction of
2 28 shareholders' salaries, wages, or other compensation for
2 29 services performed. In addition there shall be added any cash
2 30 or the value of any property distributions made to the extent
2 31 they are made from income upon which Iowa income tax has not
2 32 been paid as determined under rules of the director.
2 33 Sec. 4. Section 422.8, subsection 2, Code 1995, is amended
2 34 to read as follows:
2 35 2. a. Nonresident's net income allocated to Iowa is the
3 1 net income, or portion thereof, which is derived from a
3 2 business, trade, profession, or occupation carried on within
3 3 this state or income from any property, trust, estate, or
3 4 other source within Iowa. However, income derived from a
3 5 business, trade, profession, or occupation carried on within
3 6 this state and income from any property, trust, estate, or
3 7 other source within Iowa shall not include distributions from
3 8 pensions, including defined benefit or defined contribution
3 9 plans, annuities, individual retirement accounts, and deferred
3 10 compensation plans or any earnings attributable thereto so
3 11 long as the distribution is directly related to an
3 12 individual's documented retirement and received while the
3 13 individual is a nonresident of this state. If a business,
3 14 trade, profession, or occupation is carried on partly within
3 15 and partly without the state, only the portion of the net
3 16 income which is fairly and equitably attributable to that part
3 17 of the business, trade, profession, or occupation carried on
3 18 within the state is allocated to Iowa for purposes of section
3 19 422.5, subsection 1, paragraph "j", and section 422.13 and
3 20 income from any property, trust, estate, or other source
3 21 partly within and partly without the state is allocated to
3 22 Iowa in the same manner, except that annuities, interest on
3 23 bank deposits and interest-bearing obligations, and dividends
3 24 are allocated to Iowa only to the extent to which they are
3 25 derived from a business, trade, profession, or occupation
3 26 carried on within the state.
3 27 b. A resident's income allocable to Iowa is the income
3 28 determined under section 422.7 reduced by the net income or
3 29 loss of a corporation which is fairly and equitably
3 30 attributable without the state under section 422.33. For the
3 31 purposes of this paragraph, "corporation" means a corporation
3 32 which has in effect for the tax year an election under
3 33 subchapter S of the Internal Revenue Code and carries on
3 34 business partly within and partly without the state. This
3 35 paragraph also applies to individuals who are residents of
4 1 Iowa for less than the entire tax year.
4 2 Sec. 5. Section 422.8, Code 1995, is amended by adding the
4 3 following new subsection:
4 4 NEW SUBSECTION. 6. If the resident or part year resident
4 5 is a shareholder of a corporation which has in effect an
4 6 election under subchapter S of the Internal Revenue Code,
4 7 subsections 1 and 3 do not apply to any income taxes paid to
4 8 another state or foreign country on the income from the
4 9 corporation which has in effect an election under subchapter S
4 10 of the Internal Revenue Code.
4 11 Sec. 6. This Act takes effect upon enactment and applies
4 12 retroactively to January 1, 1995, for tax years beginning on
4 13 or after that date.
4 14 EXPLANATION
4 15 Under current statutory provisions, a nonresident
4 16 shareholder of a subchapter S corporation computes an amount
4 17 of Iowa individual income tax on the nonresident's total
4 18 income earned everywhere and then that amount of tax is
4 19 prorated to Iowa in the ratio of gross income from Iowa
4 20 sources to total gross income.
4 21 The bill taxes the income from a subchapter S corporation
4 22 for a resident shareholder the same way as the income is taxed
4 23 for a nonresident. An amount of Iowa individual income tax is
4 24 computed on the total resident shareholder's total income
4 25 everywhere and then the amount of tax is prorated to Iowa in
4 26 the ratio of gross income everywhere reduced by the non-Iowa
4 27 income of the subchapter S corporation to total income
4 28 everywhere. The resident shareholder may still take an out-
4 29 of-state tax credit on income other than income from the
4 30 subchapter S corporation for taxes paid to another state.
4 31 The bill applies retroactively to January 1, 1995, for tax
4 32 years beginning on or after that date.
4 33 LSB 1066YC 76
4 34 mg/cf/24
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