Senate Study Bill 1014 - Introduced SENATE FILE _____ BY (PROPOSED COMMITTEE ON WAYS AND MEANS BILL BY CHAIRPERSON FEENSTRA) A BILL FOR An Act updating the Code references to the Internal Revenue 1 Code and decoupling from certain federal bonus depreciation 2 provisions and the expensing of certain depreciable business 3 assets, and including effective date and retroactive 4 applicability provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 1926XC (4) 87 mm/sc

S.F. _____ DIVISION I 1 INTERNAL REVENUE CODE REFERENCES 2 Section 1. Section 15.335, subsection 7, paragraph b, Code 3 2017, is amended to read as follows: 4 b. For purposes of this section , “Internal Revenue Code” 5 means the Internal Revenue Code in effect on January 1, 2015 6 2017 . 7 Sec. 2. Section 422.3, subsection 5, Code 2017, is amended 8 to read as follows: 9 5. “Internal Revenue Code” means the Internal Revenue Code 10 of 1954, prior to the date of its redesignation as the Internal 11 Revenue Code of 1986 by the Tax Reform Act of 1986, or means 12 the Internal Revenue Code of 1986 as amended to and including 13 January 1, 2015 2017 . 14 Sec. 3. Section 422.9, subsection 2, paragraph i, Code 2017, 15 is amended to read as follows: 16 i. The deduction for state sales and use taxes is allowable 17 only if the taxpayer elected to deduct the state sales and use 18 taxes in lieu of state income taxes under section 164 of the 19 Internal Revenue Code. A deduction for state sales and use 20 taxes is not allowed if the taxpayer has taken the deduction 21 for state income taxes or claimed the standard deduction under 22 section 63 of the Internal Revenue Code. This paragraph 23 applies to taxable years beginning after December 31, 2003, and 24 before January 1, 2008, and to taxable years beginning after 25 December 31, 2009 , and before January 1, 2015 . 26 Sec. 4. Section 422.10, subsection 3, paragraph b, Code 27 2017, is amended to read as follows: 28 b. For purposes of this section , “Internal Revenue Code” 29 means the Internal Revenue Code in effect on January 1, 2015 30 2017 . 31 Sec. 5. Section 422.11L, subsection 6, Code 2017, is amended 32 to read as follows: 33 6. For purposes of this section, “Internal Revenue Code” 34 means the Internal Revenue Code of 1954, prior to the date of 35 -1- LSB 1926XC (4) 87 mm/sc 1/ 7

S.F. _____ its redesignation as the Internal Revenue Code of 1986 by the 1 Tax Reform Act of 1986, or means the Internal Revenue Code of 2 1986 as amended to and including January 1, 2016 2017 . 3 Sec. 6. Section 422.32, subsection 1, paragraph h, Code 4 2017, is amended to read as follows: 5 h. “Internal Revenue Code” means the Internal Revenue Code 6 of 1954, prior to the date of its redesignation as the Internal 7 Revenue Code of 1986 by the Tax Reform Act of 1986, or means 8 the Internal Revenue Code of 1986 as amended to and including 9 January 1, 2015 2017 . 10 Sec. 7. Section 422.33, subsection 5, paragraph e, 11 subparagraph (2), Code 2017, is amended to read as follows: 12 (2) For purposes of this subsection , “Internal Revenue Code” 13 means the Internal Revenue Code in effect on January 1, 2015 14 2017 . 15 Sec. 8. EFFECTIVE UPON ENACTMENT. This division of this 16 Act, being deemed of immediate importance, takes effect upon 17 enactment. 18 Sec. 9. RETROACTIVE APPLICABILITY. This division of this 19 Act applies retroactively to January 1, 2016, for tax years 20 beginning on or after that date. 21 DIVISION II 22 BONUS DEPRECIATION 23 Sec. 10. Section 422.7, subsection 39A, unnumbered 24 paragraph 1, Code 2017, is amended to read as follows: 25 The additional first-year depreciation allowance authorized 26 in section 168(k) of the Internal Revenue Code, as enacted by 27 Pub. L. No. 110-185, §103, Pub. L. No. 111-5, §1201, Pub. L. 28 No. 111-240, §2022, Pub. L. No. 111-312, §401, Pub. L. No. 29 112-240, §331, and Pub. L. No. 113-295, §125, and Pub. L. No. 30 114-113, §143, does not apply in computing net income for 31 state tax purposes. If the taxpayer has taken the additional 32 first-year depreciation allowance for purposes of computing 33 federal adjusted gross income, then the taxpayer shall make the 34 following adjustments to federal adjusted gross income when 35 -2- LSB 1926XC (4) 87 mm/sc 2/ 7

S.F. _____ computing net income for state tax purposes: 1 Sec. 11. Section 422.35, subsection 19A, unnumbered 2 paragraph 1, Code 2017, is amended to read as follows: 3 The additional first-year depreciation allowance authorized 4 in section 168(k) of the Internal Revenue Code, as enacted by 5 Pub. L. No. 110-185, §103, Pub. L. No. 111-5, §1201, Pub. L. 6 No. 111-240, §2022, Pub. L. No. 111-312, §401, Pub. L. No. 7 112-240, §331, and Pub. L. No. 113-295, §125, and Pub. L. No. 8 114-113, §143, does not apply in computing net income for 9 state tax purposes. If the taxpayer has taken the additional 10 first-year depreciation allowance for purposes of computing 11 federal taxable income, then the taxpayer shall make the 12 following adjustments to federal taxable income when computing 13 net income for state tax purposes: 14 Sec. 12. EFFECTIVE UPON ENACTMENT. This division of this 15 Act, being deemed of immediate importance, takes effect upon 16 enactment. 17 Sec. 13. RETROACTIVE APPLICABILITY. This division of this 18 Act applies retroactively to January 1, 2016, for tax years 19 ending on or after that date. 20 DIVISION III 21 SECTION 179 EXPENSING 22 Sec. 14. Section 422.5, subsection 2, paragraph b, 23 subparagraph (1), Code 2017, is amended to read as follows: 24 (1) Add items of tax preference included in federal 25 alternative minimum taxable income under section 57, except 26 subsections (a)(1), (a)(2), and (a)(5), of the Internal Revenue 27 Code, make the adjustments included in federal alternative 28 minimum taxable income under section 56, except subsections 29 (a)(4), (b)(1)(C)(iii), and (d), of the Internal Revenue Code, 30 and add losses as required by section 58 of the Internal 31 Revenue Code. To the extent that any preference or adjustment 32 is determined by an individual’s federal adjusted gross income, 33 the individual’s federal adjusted gross income is computed in 34 accordance with section 422.7, subsections 39, 39A, 39B, and 35 -3- LSB 1926XC (4) 87 mm/sc 3/ 7

S.F. _____ 53 , and 53A . In the case of an estate or trust, the items of 1 tax preference, adjustments, and losses shall be apportioned 2 between the estate or trust and the beneficiaries in accordance 3 with rules prescribed by the director. 4 Sec. 15. Section 422.7, Code 2017, is amended by adding the 5 following new subsection: 6 NEW SUBSECTION . 53A. Notwithstanding the method for 7 computing the increased expensing allowance under section 179 8 of the Internal Revenue Code, as defined in section 422.3, 9 the method to be used in computing such increased expensing 10 allowance for tax years beginning on or after January 1, 2016, 11 shall be the method under section 179 of the Internal Revenue 12 Code, as amended to and including January 1, 2015. A taxpayer 13 affected by this subsection shall make adjustments to adjusted 14 gross income pursuant to rules adopted by the director. 15 Sec. 16. Section 422.9, subsection 2, paragraph h, Code 16 2017, is amended to read as follows: 17 h. For purposes of calculating the deductions in this 18 subsection that are authorized under the Internal Revenue Code, 19 and to the extent that any of such deductions is determined by 20 an individual’s federal adjusted gross income, the individual’s 21 federal adjusted gross income is computed in accordance with 22 section 422.7, subsections 39, 39A, 39B, and 53 , and 53A . 23 Sec. 17. Section 422.35, Code 2017, is amended by adding the 24 following new subsection: 25 NEW SUBSECTION . 24A. Notwithstanding the method for 26 computing the increased expensing allowance under section 179 27 of the Internal Revenue Code, as defined in section 422.32, 28 the method to be used in computing such increased expensing 29 allowance for tax years beginning on or after January 1, 2016, 30 shall be the method under section 179 of the Internal Revenue 31 Code, as amended to and including January 1, 2015. A taxpayer 32 affected by this subsection shall make adjustments to taxable 33 income pursuant to rules adopted by the director. 34 Sec. 18. EFFECTIVE UPON ENACTMENT. This division of this 35 -4- LSB 1926XC (4) 87 mm/sc 4/ 7

S.F. _____ Act, being deemed of immediate importance, takes effect upon 1 enactment. 2 Sec. 19. RETROACTIVE APPLICABILITY. This division of this 3 Act applies retroactively to January 1, 2016, for tax years 4 beginning on or after that date. 5 EXPLANATION 6 The inclusion of this explanation does not constitute agreement with 7 the explanation’s substance by the members of the general assembly. 8 Under current law with the exception of the solar energy 9 system credit in Code section 422.llL, Iowa Code references 10 to the Internal Revenue Code include the Internal Revenue 11 Code in effect on January 1, 2015, meaning federal income tax 12 revisions made by Congress in 2015 and 2016 are not applicable 13 for Iowa tax purposes for 2016 or beyond. This bill updates 14 the Iowa Code references to the Internal Revenue Code to make 15 those 2015 and 2016 federal income tax revisions applicable 16 for Iowa income tax purposes, and decouples with certain bonus 17 depreciation provisions and section 179 expensing provisions. 18 DIVISION I —— INTERNAL REVENUE CODE REFERENCES. The 19 division amends Code sections 422.3 and 422.32, general 20 definition sections in the chapter of the Code that governs 21 corporate and individual income tax and the franchise tax 22 on financial institutions, to update the references to the 23 Internal Revenue Code. 24 The division amends Code sections 15.335, 422.10, and 422.33 25 to update the references to the Internal Revenue Code for the 26 state research activities credit for individuals, corporations, 27 and corporations participating in certain economic development 28 programs to include the federal changes to the research 29 activities credit and the alternative simplified research 30 activities credit. 31 The division amends Code section 422.11L to update the 32 reference to the Internal Revenue Code for the state solar 33 energy system credit to include federal changes made in 2016 34 to the federal residential energy efficient property credit 35 -5- LSB 1926XC (4) 87 mm/sc 5/ 7

S.F. _____ and the federal energy credit. This reference to the Internal 1 Revenue Code already includes federal changes made in 2015 to 2 these federal credits (see 2016 Iowa Acts, ch. 1128, §4, 20, 3 and ch. 1138, §40-41). 4 Code section 422.9 provides individuals a deduction from 5 net income for state sales and use taxes if the individual 6 chose to deduct sales and use tax in lieu of state income taxes 7 or the standard deduction for federal income tax purposes. 8 This deduction was set to expire under both federal and Iowa 9 law for tax years beginning on or after January 1, 2015. The 10 federal Protecting Americans from Tax Hikes Act of 2015 made 11 the federal deduction permanent. The division allows the Iowa 12 deduction and makes it permanent for tax years beginning on or 13 after January 1, 2016. 14 Division I takes effect upon enactment and applies 15 retroactively to January 1, 2016, for tax years beginning on 16 or after that date. 17 DIVISION II —— BONUS DEPRECIATION. The division decouples, 18 for Iowa income tax purposes, from the federal additional 19 first-year depreciation allowance in section 168(k) of the 20 Internal Revenue Code (bonus depreciation) which was modified 21 and extended through 2019 by the federal Protecting Americans 22 from Tax Hikes Act of 2015. By decoupling, taxpayers who claim 23 bonus depreciation for federal tax purposes are required to 24 add such depreciation amounts back to Iowa net income, but are 25 then allowed under existing state law to deduct the amount of 26 depreciation that would otherwise be allowable under federal 27 law, without regard to the bonus depreciation allowance. 28 Division II takes effect upon enactment and applies 29 retroactively to January 1, 2016, for tax years ending on or 30 after that date. 31 DIVISION III —— SECTION 179 EXPENSING. The division 32 decouples, for Iowa income tax purposes, from the expensing 33 of certain depreciable business assets in section 179 of the 34 Internal Revenue Code which was modified and made permanent by 35 -6- LSB 1926XC (4) 87 mm/sc 6/ 7

S.F. _____ the federal Protecting Americans from Tax Hikes Act of 2015. 1 For tax years beginning on or after January 1, 2016, taxpayers 2 are required to compute their section 179 increased expensing 3 allowance according to the method prescribed under section 179 4 of the Internal Revenue Code in effect on January 1, 2015, 5 which provides a $25,000 limitation on expensing for taxable 6 years beginning after 2014. 7 Under current law, individual taxpayers were required, when 8 calculating alternative minimum tax under Code section 422.5(2) 9 and itemized deductions under Code section 422.9(2) for tax 10 year 2009, to recompute their federal adjusted gross income 11 to take into account the fact that Iowa decoupled from the 12 2009 federal changes to the section 179 increased expensing 13 allowance. The bill provides that taxpayers must make those 14 same adjustments to federal adjusted gross income for tax 15 years beginning on after January 1, 2016, to account for the 16 fact that Iowa has decoupled from changes to the section 179 17 increased expensing allowance as described above. 18 Division III takes effect upon enactment and applies 19 retroactively to January 1, 2016, for tax years beginning on 20 or after that date. 21 -7- LSB 1926XC (4) 87 mm/sc 7/ 7