S.F. _____ H.F. _____ Section 1. Section 15.335, subsection 1, paragraphs b and c, 1 Code Supplement 2009, are amended to read as follows: 2 b. In lieu of the credit amount computed in paragraph 3 “a” , subparagraph (1), an eligible business may elect to 4 compute the credit amount for qualified research expenses 5 incurred in this state in a manner consistent with the 6 alternative incremental simplified credit described in section 7 41(c)(4) 41(c)(5) of the Internal Revenue Code. The taxpayer 8 may make this election regardless of the method used for the 9 taxpayer’s federal income tax. The election made under this 10 paragraph is for the tax year and the taxpayer may use another 11 or the same method for any subsequent year. 12 c. For purposes of the alternate credit computation 13 method in paragraph “b” , the credit percentages applicable 14 to qualified research expenses described in clauses (i), 15 (ii), and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause 16 (ii) of section 41(c)(5)(B) of the Internal Revenue Code 17 are one and sixty-five hundredths percent, two and twenty 18 hundredths percent, and two and seventy-five hundredths four 19 and fifty-five hundredths percent and one and ninety-five 20 hundredths percent, respectively. 21 Sec. 2. Section 15.335, subsection 4, Code Supplement 2009, 22 is amended to read as follows: 23 4. a. For purposes of this section, “base amount” , “basic 24 research payment” , and “qualified research expense” mean the 25 same as defined for the federal credit for increasing research 26 activities under section 41 of the Internal Revenue Code, 27 except that for the alternative incremental simplified credit 28 such amounts are for research conducted within this state. 29 b. For purposes of this section, “Internal Revenue Code” 30 means the Internal Revenue Code in effect on January 1, 31 2009 2010 . 32 Sec. 3. Section 15A.9, subsection 8, paragraphs b, c, and e, 33 Code Supplement 2009, are amended to read as follows: 34 b. In lieu of the credit amount computed in paragraph “a” , 35 -1- LSB 5436XD (8) 83 tw/sc 1/ 10

S.F. _____ H.F. _____ subparagraph (1), subparagraph division (a), a business may 1 elect to compute the credit amount for qualified research 2 expenses incurred in this state within the zone in a manner 3 consistent with the alternative incremental simplified credit 4 described in section 41(c)(4) 41(c)(5) of the Internal Revenue 5 Code. The taxpayer may make this election regardless of 6 the method used for the taxpayer’s federal income tax. The 7 election made under this paragraph is for the tax year and the 8 taxpayer may use another or the same method for any subsequent 9 year. 10 c. For purposes of the alternate credit computation 11 method in paragraph “b” , the credit percentages applicable to 12 qualified research expenses described in clauses (i), (ii), 13 and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause (ii) 14 of section 41(c)(5)(B) of the Internal Revenue Code are three 15 and thirty hundredths percent, four and forty hundredths 16 percent, and five and fifty hundredths four and fifty-five 17 hundredths percent and one and ninety-five hundredths percent, 18 respectively. 19 e. (1) For the purposes of this subsection, “base 20 amount” , “basic research payment” , and “qualified research 21 expense” mean the same as defined for the federal credit 22 for increasing research activities under section 41 of 23 the Internal Revenue Code, except that for the alternative 24 incremental simplified credit such amounts are for research 25 conducted within this state within the zone. 26 (2) For purposes of this subsection, “Internal Revenue 27 Code” means the Internal Revenue Code in effect on January 1, 28 2009 2010 . 29 Sec. 4. Section 422.3, subsection 5, Code 2009, is amended 30 to read as follows: 31 5. “Internal Revenue Code” means the Internal Revenue Code 32 of 1954, prior to the date of its redesignation as the Internal 33 Revenue Code of 1986 by the Tax Reform Act of 1986, or means 34 the Internal Revenue Code of 1986 as amended to and including 35 -2- LSB 5436XD (8) 83 tw/sc 2/ 10

S.F. _____ H.F. _____ January 1, 2008 2010 . 1 Sec. 5. Section 422.5, subsection 2, paragraph b, 2 subparagraph (1), Code Supplement 2009, is amended to read as 3 follows: 4 (1) Add items of tax preference included in federal 5 alternative minimum taxable income under section 57, except 6 subsections (a)(1), (a)(2), and (a)(5), of the Internal Revenue 7 Code, make the adjustments included in federal alternative 8 minimum taxable income under section 56, except subsections 9 (a)(4), (b)(1)(C)(iii), and (d), of the Internal Revenue Code, 10 and add losses as required by section 58 of the Internal 11 Revenue Code. To the extent that any preference or adjustment 12 is determined by an individual’s federal adjusted gross income, 13 the individual’s federal adjusted gross income is computed in 14 accordance with section 422.7, subsection 39 subsections 39, 15 39A, and 39B . In the case of an estate or trust, the items of 16 tax preference, adjustments, and losses shall be apportioned 17 between the estate or trust and the beneficiaries in accordance 18 with rules prescribed by the director. 19 Sec. 6. Section 422.7, Code Supplement 2009, is amended by 20 adding the following new subsections: 21 NEW SUBSECTION . 39A. The additional first-year 22 depreciation allowance authorized in section 168(k) of the 23 Internal Revenue Code, as enacted by Pub. L. No. 110-85, 24 section 103, and Pub. L. No. 111-5, section 1201, does not 25 apply in computing net income for state tax purposes. If 26 a taxpayer has taken a deduction for additional first-year 27 depreciation in computing federal adjusted gross income, the 28 following adjustments to federal adjusted gross income shall 29 be made: 30 a. Add the total amount of depreciation taken on all 31 property for which the election under section 168(k) of the 32 Internal Revenue Code was made for the tax year. 33 b. Subtract an amount equal to depreciation allowed on such 34 property for the tax year using the modified accelerated cost 35 -3- LSB 5436XD (8) 83 tw/sc 3/ 10

S.F. _____ H.F. _____ recovery system depreciation method applicable under section 1 168 of the Internal Revenue Code without regard to section 2 168(k). 3 c. Any other adjustments to gains or losses to reflect the 4 adjustments made in paragraphs “a” and “b” , pursuant to rules 5 adopted by the director. 6 NEW SUBSECTION . 39B. The additional first-year 7 depreciation allowance authorized in section 168(n) of the 8 Internal Revenue Code, as enacted by Pub. L. No. 110-343, 9 section 710, does not apply in computing net income for 10 state tax purposes. If a taxpayer has taken a deduction 11 for additional first-year depreciation in computing federal 12 adjusted gross income, the following adjustments to federal 13 adjusted gross income shall be made: 14 a. Add the total amount of depreciation taken on all 15 property for which the election under section 168(n) of the 16 Internal Revenue Code was made for the tax year. 17 b. Subtract an amount equal to depreciation allowed on such 18 property for the tax year using the modified accelerated cost 19 recovery system depreciation method applicable under section 20 168 of the Internal Revenue Code without regard to section 21 168(n). 22 c. Any other adjustments to gains or losses to reflect the 23 adjustments made in paragraphs “a” and “b” , pursuant to rules 24 adopted by the director. 25 Sec. 7. Section 422.7, subsection 53, Code Supplement 2009, 26 is amended by striking the subsection. 27 Sec. 8. Section 422.9, subsection 2, paragraphs h and i, 28 Code Supplement 2009, are amended to read as follows: 29 h. For purposes of calculating the deductions in this 30 subsection that are authorized under the Internal Revenue Code, 31 and to the extent that any of such deductions is determined by 32 an individual’s federal adjusted gross income, the individual’s 33 federal adjusted gross income is computed in accordance with 34 section 422.7, subsection 39 subsections 39, 39A, and 39B . 35 -4- LSB 5436XD (8) 83 tw/sc 4/ 10

S.F. _____ H.F. _____ i. The deduction for state sales and use taxes is allowable 1 only if the taxpayer elected to deduct the state sales and use 2 taxes in lieu of state income taxes under section 164 of the 3 Internal Revenue Code. A deduction for state sales and use 4 taxes is not allowed if the taxpayer has taken the deduction 5 for state income taxes or claimed the standard deduction under 6 section 63 of the Internal Revenue Code. This paragraph 7 applies to taxable years beginning after December 31, 2003, and 8 before January 1, 2006 2008, and to taxable years beginning 9 after December 31, 2008, and before January 1, 2010 . 10 Sec. 9. Section 422.10, subsection 1, paragraphs b and c, 11 Code Supplement 2009, are amended to read as follows: 12 b. In lieu of the credit amount computed in paragraph “a” , 13 subparagraph (1), subparagraph division (a), a taxpayer may 14 elect to compute the credit amount for qualified research 15 expenses incurred in this state in a manner consistent with the 16 alternative incremental simplified credit described in section 17 41(c)(4) 41(c)(5) of the Internal Revenue Code. The taxpayer 18 may make this election regardless of the method used for the 19 taxpayer’s federal income tax. The election made under this 20 paragraph is for the tax year and the taxpayer may use another 21 or the same method for any subsequent year. 22 c. For purposes of the alternate credit computation 23 method in paragraph “b” , the credit percentages applicable to 24 qualified research expenses described in clauses (i), (ii), 25 and (iii) of section 41(c)(4)(A) section 41(c)(5)(A) and 26 clause (ii) of section 41(c)(5)(B) of the Internal Revenue 27 Code are one and sixty-five hundredths percent, two and twenty 28 hundredths percent, and two and seventy-five hundredths four 29 and fifty-five hundredths percent and one and ninety-five 30 hundredths percent, respectively. 31 Sec. 10. Section 422.10, subsection 3, Code Supplement 32 2009, is amended to read as follows: 33 3. a. For purposes of this section, “base amount” , “basic 34 research payment” , and “qualified research expense” mean the 35 -5- LSB 5436XD (8) 83 tw/sc 5/ 10

S.F. _____ H.F. _____ same as defined for the federal credit for increasing research 1 activities under section 41 of the Internal Revenue Code, 2 except that for the alternative incremental simplified credit 3 such amounts are for research conducted within this state. 4 b. For purposes of this section, “Internal Revenue Code” 5 means the Internal Revenue Code in effect on January 1, 6 2009 2010 . 7 Sec. 11. Section 422.32, subsection 7, Code Supplement 8 2009, is amended to read as follows: 9 7. “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, 2008 2010 . 14 Sec. 12. Section 422.33, subsection 5, paragraphs b, c, and 15 d, Code Supplement 2009, are amended to read as follows: 16 b. In lieu of the credit amount computed in paragraph 17 “a” , subparagraph (1), a corporation may elect to compute 18 the credit amount for qualified research expenses incurred 19 in this state in a manner consistent with the alternative 20 incremental simplified credit described in section 21 41(c)(4) 41(c)(5) of the Internal Revenue Code. The taxpayer 22 may make this election regardless of the method used for the 23 taxpayer’s federal income tax. The election made under this 24 paragraph is for the tax year and the taxpayer may use another 25 or the same method for any subsequent year. 26 c. For purposes of the alternate credit computation 27 method in paragraph “b” , the credit percentages applicable to 28 qualified research expenses described in clauses (i), (ii), 29 and (iii) of section 41(c)(4)(A) section 41(c)(5)(A) and 30 clause (ii) of section 41(c)(5)(B) of the Internal Revenue 31 Code are one and sixty-five hundredths percent, two and twenty 32 hundredths percent, and two and seventy-five hundredths four 33 and fifty-five hundredths percent and one and ninety-five 34 hundredths percent, respectively. 35 -6- LSB 5436XD (8) 83 tw/sc 6/ 10

S.F. _____ H.F. _____ d. (1) For purposes of this subsection, “base amount” , 1 “basic research payment” , and “qualified research expense” 2 mean the same as defined for the federal credit for 3 increasing research activities under section 41 of the 4 Internal Revenue Code, except that for the alternative 5 incremental simplified credit such amounts are for research 6 conducted within this state. 7 (2) For purposes of this subsection, “Internal Revenue 8 Code” means the Internal Revenue Code in effect on January 1, 9 2009 2010 . 10 Sec. 13. Section 422.35, Code Supplement 2009, is amended by 11 adding the following new subsections: 12 NEW SUBSECTION . 19A. The additional first-year 13 depreciation allowance authorized in section 168(k) of the 14 Internal Revenue Code, as enacted by Pub. L. No. 110-85, 15 section 103, and Pub. L. No. 111-5, section 1201, does not 16 apply in computing net income for state tax purposes. If 17 a taxpayer has taken a deduction for additional first-year 18 depreciation in computing federal taxable income, the following 19 adjustments to federal taxable income shall be made: 20 a. Add the total amount of depreciation taken on all 21 property for which the election under section 168(k) of the 22 Internal Revenue Code was made for the tax year. 23 b. Subtract an amount equal to depreciation allowed on such 24 property for the tax year using the modified accelerated cost 25 recovery system depreciation method applicable under section 26 168 of the Internal Revenue Code without regard to section 27 168(k). 28 c. Any other adjustments to gains or losses to reflect the 29 adjustments made in paragraphs “a” and “b” , pursuant to rules 30 adopted by the director. 31 NEW SUBSECTION . 19B. The additional first-year 32 depreciation allowance authorized in section 168(n) of the 33 Internal Revenue Code, as enacted by Pub. L. No. 110-343, 34 section 710, does not apply in computing net income for 35 -7- LSB 5436XD (8) 83 tw/sc 7/ 10

S.F. _____ H.F. _____ state tax purposes. If a taxpayer has taken a deduction for 1 additional first-year depreciation in computing federal taxable 2 income, the following adjustments to federal taxable income 3 shall be made: 4 a. Add the total amount of depreciation taken on all 5 property for which the election under section 168(n) of the 6 Internal Revenue Code was made for the tax year. 7 b. Subtract an amount equal to depreciation allowed on such 8 property for the tax year using the modified accelerated cost 9 recovery system depreciation method applicable under section 10 168 of the Internal Revenue Code without regard to section 11 168(n). 12 c. Any other adjustments to gains or losses to reflect the 13 adjustments made in paragraphs “a” and “b” , pursuant to rules 14 adopted by the director. 15 Sec. 14. Section 422.35, subsection 24, Code Supplement 16 2009, is amended by striking the subsection. 17 Sec. 15. EFFECTIVE UPON ENACTMENT AND RETROACTIVE 18 APPLICABILITY. 19 1. This Act, being deemed of immediate importance, takes 20 effect upon enactment. 21 2. The sections of this Act amending sections 15.335, 15A.9, 22 422.3, 422.9, subsection 2, paragraph “i” , 422.10, 422.32, and 23 422.33 apply retroactively to January 1, 2009, for tax years 24 beginning on or after that date. 25 3. The sections of this Act amending sections 422.5, 422.7, 26 subsection 53, 422.9, subsection 2, paragraph “h” , and 422.35, 27 subsection 24, and enacting sections 422.7, subsections 39A and 28 39B, and 422.35, subsections 19A and 19B, apply retroactively 29 to January 1, 2008, for tax years ending on or after that date. 30 EXPLANATION 31 This bill updates references in Code sections 15.335, 15A.9, 32 422.3, 422.10, 422.32, and 422.33 to the Internal Revenue Code, 33 making certain federal income tax revisions enacted by Congress 34 in 2008 and 2009 applicable for purposes of the corporate and 35 -8- LSB 5436XD (8) 83 tw/sc 8/ 10

S.F. _____ H.F. _____ individual income taxes and the franchise tax. These revisions 1 only apply to tax years beginning on or after January 1, 2009, 2 and thus do not include tax years beginning after December 31, 3 2007, and before January 1, 2009. 4 The bill amends certain Code sections relating to the state 5 research activities tax credit for individuals, corporations, 6 corporations in economic development areas, and corporations 7 in quality jobs enterprise zones by updating references to the 8 Internal Revenue Code that include changes in the research 9 activities tax credit. The alternative incremental research 10 tax credit was repealed for federal income tax purposes, so 11 the bill strikes references to it and provides in its place 12 an alternative simplified research tax credit for Iowa tax 13 purposes. 14 The bill strikes Code section 422.7, subsection 53, and 15 Code section 422.35, subsection 24, relating to the increased 16 expensing allowance under section 179 of the Internal Revenue 17 Code. Because the bill now couples Iowa with the federal 18 Internal Revenue Code with regard to these provisions, they are 19 no longer necessary. 20 The bill amends certain sections of the individual and 21 corporate income taxes related to the computation of net income 22 (also known as “above-the-line” computation) by decoupling, 23 for Iowa income tax purposes, from the federal accelerated 24 depreciation deductions enacted by Congress as part of the 25 Recovery Rebates and Economic Stimulus for the American People 26 Act of 2008 (“the federal Economic Stimulus Act of 2008”) and 27 the American Recovery and Reinvestment Act of 2009. 28 The bill also decouples, for Iowa income tax purposes, from 29 the federal accelerated depreciation deductions for certain 30 disaster assistance property enacted by Congress as part of the 31 Emergency Economic Stabilization Act of 2008. The bill makes a 32 number of changes in conformance with this Act. 33 In certain circumstances, Code section 422.9(2)(i) provides 34 individuals a deduction from net income (a “below-the-line” 35 -9- LSB 5436XD (8) 83 tw/sc 9/ 10

S.F. _____ H.F. _____ deduction) for state sales and use taxes in lieu of a deduction 1 for income taxes. This deduction was only available for 2 taxable years beginning after December 31, 2003, and before 3 January 1, 2006. The bill extends this deduction to taxable 4 years beginning before January 1, 2008, and to taxable years 5 beginning after December 31, 2008, and before January 1, 2010. 6 The deduction is not available for the 2008 tax year. 7 The bill contains a number of retroactive applicability 8 provisions: (1) the sections of the bill relating to the 9 decoupling from federal bonus depreciation and recoupling with 10 the expensing allowance apply retroactively to January 1, 2008, 11 for tax years ending on or after that date; (2) all other 12 sections of the bill apply retroactively to January 1, 2009, 13 for tax years beginning on or after that date. 14 The bill takes effect upon enactment. 15 -10- LSB 5436XD (8) 83 tw/sc 10/ 10