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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 shall 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, a nonresident,
1 29 including a nonresident estate or trust, or an individual,
1 30 estate, or trust that is domiciled in the state for less than
1 31 the entire tax year, the state's apportioned share of the
1 32 state alternative minimum tax is the amount of tax computed
1 33 under this subsection, reduced by the applicable credits in
1 34 sections 422.10 through 422.12 and this result multiplied by a
1 35 fraction with a numerator of the sum of state net income
2 1 allocated to Iowa as determined in section 422.8, subsection
2 2 2, paragraph "a" or "b" as applicable, plus tax preference
2 3 items, adjustments, and losses under subparagraph (1)
2 4 attributable to Iowa and with a denominator of the sum of
2 5 total net income computed under section 422.7 plus all tax
2 6 preference items, adjustments, and losses under subparagraph
2 7 (1). In computing this fraction, those items excludable under
2 8 subparagraph (1) shall not be used in computing the tax
2 9 preference items. Married taxpayers electing to file separate
2 10 returns or separately on a combined return must allocate the
2 11 minimum tax computed in this subsection in the proportion that
2 12 each spouse's respective preference items, adjustments, and
2 13 losses under subparagraph (1) bear to the combined preference
2 14 items, adjustments, and losses under subparagraph (1) of both
2 15 spouses.
2 16 Sec. 3. Section 422.8, subsection 2, Code 1995, is amended
2 17 to read as follows:
2 18 2. a. Nonresident's net income allocated to Iowa is the
2 19 net income, or portion thereof, which is derived from a
2 20 business, trade, profession, or occupation carried on within
2 21 this state or income from any property, trust, estate, or
2 22 other source within Iowa. However, income derived from a
2 23 business, trade, profession, or occupation carried on within
2 24 this state and income from any property, trust, estate, or
2 25 other source within Iowa shall not include distributions from
2 26 pensions, including defined benefit or defined contribution
2 27 plans, annuities, individual retirement accounts, and deferred
2 28 compensation plans or any earnings attributable thereto so
2 29 long as the distribution is directly related to an
2 30 individual's documented retirement and received while the
2 31 individual is a nonresident of this state. If a business,
2 32 trade, profession, or occupation is carried on partly within
2 33 and partly without the state, only the portion of the net
2 34 income which is fairly and equitably attributable to that part
2 35 of the business, trade, profession, or occupation carried on
3 1 within the state is allocated to Iowa for purposes of section
3 2 422.5, subsection 1, paragraph "j", and section 422.13 and
3 3 income from any property, trust, estate, or other source
3 4 partly within and partly without the state is allocated to
3 5 Iowa in the same manner, except that annuities, interest on
3 6 bank deposits and interest-bearing obligations, and dividends
3 7 are allocated to Iowa only to the extent to which they are
3 8 derived from a business, trade, profession, or occupation
3 9 carried on within the state.
3 10 b. A resident's income allocable to Iowa is the income
3 11 determined under section 422.7 reduced by items of income and
3 12 expenses from a subchapter S corporation which pass directly
3 13 to the shareholders under provisions of the Internal Revenue
3 14 Code and increased by the greatest of the following:
3 15 (1) The net income or loss of the corporation which is
3 16 fairly and equitably attributable to this state under section
3 17 422.33, subsections 2 and 3.
3 18 (2) The taxpayer's pro rata share of an amount deemed
3 19 distributed to shareholders which when added to the salaries,
3 20 wages, or other compensation for services performed by all
3 21 shareholders will equal ten percent of the net income of the
3 22 corporation computed in accordance with section 422.35 and
3 23 considering items of income and expense which pass directly to
3 24 the shareholders under provisions of the Internal Revenue Code
3 25 before deduction of shareholder's salaries, wages, or other
3 26 compensation for services performed.
3 27 (3) Any cash or the value of any property distributions
3 28 made to the extent they are paid from income upon which Iowa
3 29 income tax has not been paid as determined under rules of the
3 30 director.
3 31 Sec. 4. Section 422.8, Code 1995, is amended by adding the
3 32 following new subsection:
3 33 NEW SUBSECTION. 6. If the resident or part year resident
3 34 is a shareholder of a corporation which has in effect an
3 35 election under subchapter S of the Internal Revenue Code,
4 1 subsections 1 and 3 do not apply to any income taxes paid to
4 2 another state or foreign country on the income from the
4 3 corporation which has in effect an election under subchapter S
4 4 of the Internal Revenue Code.
4 5 Sec. 5. This Act, being deemed of immediate importance,
4 6 takes effect upon enactment and applies retroactively to
4 7 January 1, 1996, for tax years beginning on or after that
4 8 date.
4 9 EXPLANATION
4 10 Under current statutory provisions, a nonresident
4 11 shareholder of a subchapter S corporation computes an amount
4 12 of Iowa individual income tax on the nonresident's total
4 13 income earned everywhere and then that amount of tax is
4 14 prorated to Iowa in the ratio of gross income from Iowa
4 15 sources to total gross income.
4 16 The division taxes the income from a subchapter S
4 17 corporation for a resident shareholder the same way as the
4 18 income is taxed for a nonresident. An amount of Iowa
4 19 individual income tax is computed on the total resident
4 20 shareholder's total income everywhere and then the amount of
4 21 tax is prorated to Iowa in the ratio of gross income
4 22 everywhere reduced by the non-Iowa income of the subchapter S
4 23 corporation to total income everywhere. The resident
4 24 shareholder may still take an out-of-state tax credit on
4 25 income other than income from the subchapter S corporation for
4 26 taxes paid to another state.
4 27 The division applies retroactively to January 1, 1996, for
4 28 tax years beginning on or after that date.
4 29 LSB 3598XL 76
4 30 mg/jj/8
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