Senate Study Bill 1052 - Introduced SENATE/HOUSE FILE _____ BY (PROPOSED DEPARTMENT OF REVENUE BILL) A BILL FOR An Act relating to the administration of the tax and related 1 laws by updating the Code references to the Internal 2 Revenue Code and by decoupling from certain federal bonus 3 depreciation provisions and including effective date and 4 retroactive applicability provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 1237DP (11) 84 tw/sc

S.F. _____ H.F. _____ DIVISION I 1 INTERNAL REVENUE CODE REFERENCES 2 Section 1. Section 422.3, subsection 5, Code 2011, is 3 amended to read as follows: 4 5. “Internal Revenue Code” means the Internal Revenue Code 5 of 1954, prior to the date of its redesignation as the Internal 6 Revenue Code of 1986 by the Tax Reform Act of 1986, or means 7 the Internal Revenue Code of 1986 as amended to and including 8 January 1, 2008 2011 . 9 Sec. 2. Section 422.7, subsection 29A, Code 2011, is amended 10 by striking the subsection. 11 Sec. 3. Section 422.9, subsection 2, paragraph i, Code 2011, 12 is amended to read as follows: 13 i. The deduction for state sales and use taxes is allowable 14 only if the taxpayer elected to deduct the state sales and use 15 taxes in lieu of state income taxes under section 164 of the 16 Internal Revenue Code. A deduction for state sales and use 17 taxes is not allowed if the taxpayer has taken the deduction 18 for state income taxes or claimed the standard deduction under 19 section 63 of the Internal Revenue Code. This paragraph 20 applies to taxable years beginning after December 31, 2003, and 21 before January 1, 2006 2008, and to taxable years beginning 22 after December 31, 2009, and before January 1, 2012 . 23 Sec. 4. Section 422.32, subsection 7, Code 2011, is amended 24 to read as follows: 25 7. “Internal Revenue Code” means the Internal Revenue Code 26 of 1954, prior to the date of its redesignation as the Internal 27 Revenue Code of 1986 by the Tax Reform Act of 1986, or means 28 the Internal Revenue Code of 1986 as amended to and including 29 January 1, 2008 2011 . 30 Sec. 5. EFFECTIVE UPON ENACTMENT. This division of this 31 Act, being deemed of immediate importance, takes effect upon 32 enactment. 33 Sec. 6. RETROACTIVE APPLICABILITY. The following provision 34 or provisions of this division of this Act apply retroactively 35 -1- LSB 1237DP (11) 84 tw/sc 1/ 13

S.F. _____ H.F. _____ to January 1, 2010, for tax years beginning on or after that 1 date: 2 1. The section of this Act amending section 422.3. 3 2. The section of this Act amending section 422.32. 4 Sec. 7. RETROACTIVE APPLICABILITY. The following provision 5 or provisions of this division of this Act apply retroactively 6 to January 1, 2011, for tax years beginning on or after that 7 date: 8 1. The section of this Act amending section 422.7, 9 subsection 29A. 10 DIVISION II 11 RESEARCH ACTIVITIES CREDIT 12 Sec. 8. Section 15.335, subsection 4, Code 2011, is amended 13 to read as follows: 14 4. a. In lieu of the credit amount computed in subsection 15 2 , an eligible business may elect to compute the credit amount 16 for qualified research expenses incurred in this state in a 17 manner consistent with the alternative incremental simplified 18 credit described in section 41(c)(4) 41(c)(5) of the Internal 19 Revenue Code. The taxpayer may make this election regardless 20 of the method used for the taxpayer’s federal income tax. The 21 election made under this paragraph is for the tax year and the 22 taxpayer may use another or the same method for any subsequent 23 year. 24 b. For purposes of the alternate credit computation 25 method in paragraph “a” , the credit percentages applicable to 26 qualified research expenses described in clauses (i), (ii), 27 and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause (ii) 28 of section 41(c)(5)(B) of the Internal Revenue Code are as 29 follows: 30 (1) In the case of an eligible business whose gross revenues 31 do not exceed twenty million dollars per year, the credit 32 percentages are two and fifty-four hundredths percent, three 33 and thirty-eight hundredths percent, and four and twenty-three 34 hundredths seven percent and three percent, respectively. 35 -2- LSB 1237DP (11) 84 tw/sc 2/ 13

S.F. _____ H.F. _____ (2) In the case of an eligible business whose gross revenues 1 exceed twenty million dollars per year, the credit percentages 2 are seventy-six hundredths percent, one and two hundredths 3 percent, and one and twenty-seven hundredths two and one-tenth 4 percent and nine-tenths percent, respectively. 5 Sec. 9. Section 15.335, subsection 7, Code 2011, is amended 6 to read as follows: 7 7. a. For purposes of this section , “base amount” , “basic 8 research payment” , and “qualified research expense” mean the 9 same as defined for the federal credit for increasing research 10 activities under section 41 of the Internal Revenue Code, 11 except that for the alternative incremental simplified credit 12 such amounts are for research conducted within this state. 13 b. For purposes of this section , “Internal Revenue Code” 14 means the Internal Revenue Code in effect on January 1, 2009 15 2011 . 16 Sec. 10. Section 15A.9, subsection 8, paragraphs b, c, and 17 e, Code 2011, are amended to read as follows: 18 b. In lieu of the credit amount computed in paragraph “a” , 19 subparagraph (1), subparagraph division (a), a business may 20 elect to compute the credit amount for qualified research 21 expenses incurred in this state within the zone in a manner 22 consistent with the alternative incremental simplified credit 23 described in section 41(c)(4) 41(c)(5) of the Internal Revenue 24 Code. The taxpayer may make this election regardless of 25 the method used for the taxpayer’s federal income tax. The 26 election made under this paragraph is for the tax year and the 27 taxpayer may use another or the same method for any subsequent 28 year. 29 c. For purposes of the alternate credit computation 30 method in paragraph “b” , the credit percentages applicable to 31 qualified research expenses described in clauses (i), (ii), and 32 (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause (ii) of 33 section 41(c)(5)(B) of the Internal Revenue Code are three and 34 thirty hundredths percent, four and forty hundredths percent, 35 -3- LSB 1237DP (11) 84 tw/sc 3/ 13

S.F. _____ H.F. _____ and five and fifty hundredths percent, respectively as follows: 1 (1) In the case of an eligible business whose gross revenues 2 do not exceed twenty million dollars per year, the credit 3 percentages are seven percent and three percent, respectively. 4 (2) In the case of an eligible business whose gross revenues 5 exceed twenty million dollars per year, the credit percentages 6 are two and one-tenths percent and nine-tenths percent, 7 respectively . 8 e. (1) For the purposes of this subsection , “base amount” , 9 “basic research payment” , and “qualified research expense” mean 10 the same as defined for the federal credit for increasing 11 research activities under section 41 of the Internal Revenue 12 Code, except that for the alternative incremental simplified 13 credit such amounts are for research conducted within this 14 state within the zone. 15 (2) For purposes of this subsection , “Internal Revenue Code” 16 means the Internal Revenue Code in effect on January 1, 2009 17 2011 . 18 Sec. 11. Section 422.10, subsection 1, paragraphs b and c, 19 Code 2011, are amended to read as follows: 20 b. In lieu of the credit amount computed in paragraph “a” , 21 subparagraph (1), subparagraph division (a), a taxpayer may 22 elect to compute the credit amount for qualified research 23 expenses incurred in this state in a manner consistent with the 24 alternative incremental simplified credit described in section 25 41(c)(4) 41(c)(5) of the Internal Revenue Code. The taxpayer 26 may make this election regardless of the method used for the 27 taxpayer’s federal income tax. The election made under this 28 paragraph is for the tax year and the taxpayer may use another 29 or the same method for any subsequent year. 30 c. For purposes of the alternate credit computation 31 method in paragraph “b” , the credit percentages applicable 32 to qualified research expenses described in clauses (i), 33 (ii), and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause 34 (ii) of section 41(c)(5)(B) of the Internal Revenue Code 35 -4- LSB 1237DP (11) 84 tw/sc 4/ 13

S.F. _____ H.F. _____ are one and sixty-five hundredths percent, two and twenty 1 hundredths percent, and two and seventy-five hundredths four 2 and fifty-five hundredths percent and one and ninety-five 3 hundredths percent, respectively. 4 Sec. 12. Section 422.10, subsection 3, Code 2011, is amended 5 to read as follows: 6 3. a. For purposes of this section , “base amount” , “basic 7 research payment” , and “qualified research expense” mean the 8 same as defined for the federal credit for increasing research 9 activities under section 41 of the Internal Revenue Code, 10 except that for the alternative incremental simplified credit 11 such amounts are for research conducted within this state. 12 b. For purposes of this section , “Internal Revenue Code” 13 means the Internal Revenue Code in effect on January 1, 2009 14 2011 . 15 Sec. 13. Section 422.33, subsection 5, paragraphs b, c, and 16 d, Code 2011, are amended to read as follows: 17 b. In lieu of the credit amount computed in paragraph 18 “a” , subparagraph (1), a corporation may elect to compute the 19 credit amount for qualified research expenses incurred in this 20 state in a manner consistent with the alternative incremental 21 simplified credit described in section 41(c)(4) 41(c)(5) of the 22 Internal Revenue Code. The taxpayer may make this election 23 regardless of the method used for the taxpayer’s federal income 24 tax. The election made under this paragraph is for the tax 25 year and the taxpayer may use another or the same method for 26 any subsequent year. 27 c. For purposes of the alternate credit computation 28 method in paragraph “b” , the credit percentages applicable 29 to qualified research expenses described in clauses (i), 30 (ii), and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause 31 (ii) of section 41(c)(5)(B) of the Internal Revenue Code 32 are one and sixty-five hundredths percent, two and twenty 33 hundredths percent, and two and seventy-five hundredths four 34 and fifty-five hundredths percent and one and ninety-five 35 -5- LSB 1237DP (11) 84 tw/sc 5/ 13

S.F. _____ H.F. _____ hundredths percent, respectively. 1 d. (1) For purposes of this subsection , “base amount” , 2 “basic research payment” , and “qualified research expense” mean 3 the same as defined for the federal credit for increasing 4 research activities under section 41 of the Internal Revenue 5 Code, except that for the alternative incremental simplified 6 credit such amounts are for research conducted within this 7 state. 8 (2) For purposes of this subsection , “Internal Revenue Code” 9 means the Internal Revenue Code in effect on January 1, 2009 10 2011 . 11 Sec. 14. EFFECTIVE UPON ENACTMENT. This division of this 12 Act, being deemed of immediate importance, takes effect upon 13 enactment. 14 Sec. 15. RETROACTIVE APPLICABILITY. The following 15 provision or provisions of this division of this Act apply 16 retroactively to July 1, 2010, for tax credits awarded on or 17 after that date: 18 1. The section of this Act amending section 15.335, 19 subsection 4. 20 2. The section of this Act amending section 15A.9. 21 Sec. 16. RETROACTIVE APPLICABILITY. The following 22 provision or provisions of this division of this Act apply 23 retroactively to January 1, 2010, for tax years beginning on 24 or after that date: 25 1. The section of this Act amending section 15.335, 26 subsection 7. 27 2. The section of this Act amending section 422.10, 28 subsection 1. 29 3. The section of this Act amending section 422.10, 30 subsection 3. 31 4. The section of this Act amending section 422.33. 32 DIVISION III 33 BONUS DEPRECIATION 34 Sec. 17. Section 422.5, subsection 2, paragraph b, 35 -6- LSB 1237DP (11) 84 tw/sc 6/ 13

S.F. _____ H.F. _____ subparagraph (1), Code 2011, is amended to read as follows: 1 (1) Add items of tax preference included in federal 2 alternative minimum taxable income under section 57, except 3 subsections (a)(1), (a)(2), and (a)(5), of the Internal Revenue 4 Code, make the adjustments included in federal alternative 5 minimum taxable income under section 56, except subsections 6 (a)(4), (b)(1)(C)(iii), and (d), of the Internal Revenue Code, 7 and add losses as required by section 58 of the Internal 8 Revenue Code. To the extent that any preference or adjustment 9 is determined by an individual’s federal adjusted gross income, 10 the individual’s federal adjusted gross income is computed in 11 accordance with section 422.7, subsection subsections 39 , 39A, 12 39B, and 53 . In the case of an estate or trust, the items of 13 tax preference, adjustments, and losses shall be apportioned 14 between the estate or trust and the beneficiaries in accordance 15 with rules prescribed by the director. 16 Sec. 18. Section 422.7, Code 2011, is amended by adding the 17 following new subsections: 18 NEW SUBSECTION . 39A. The additional first-year 19 depreciation allowance authorized in section 168(k) of the 20 Internal Revenue Code, as enacted by Pub. L. No. 110-185, 21 section 103, Pub. L. No. 111-5, section 1201, Pub. L. No. 22 111-240, section 2022, and Pub. L. No. 111-312, section 23 401, does not apply in computing net income for state tax 24 purposes. If the taxpayer has taken the additional first-year 25 depreciation allowance for purposes of computing federal 26 adjusted gross income, then the taxpayer shall make the 27 following adjustments to federal adjusted gross income when 28 computing net income for state tax purposes: 29 a. Add the total amount of depreciation taken under section 30 168(k) of the Internal Revenue Code for the tax year. 31 b. Subtract the amount of depreciation allowable under the 32 modified accelerated cost recovery system described in section 33 168 of the Internal Revenue Code and calculated without regard 34 to section 168(k). 35 -7- LSB 1237DP (11) 84 tw/sc 7/ 13

S.F. _____ H.F. _____ c. Any other adjustments to gains or losses necessary to 1 reflect the adjustments made in paragraphs “a” and “b” . The 2 director shall adopt rules for the administration of this 3 paragraph. 4 NEW SUBSECTION . 39B. The additional first-year 5 depreciation allowance authorized in section 168(n) of the 6 Internal Revenue Code, as enacted by Pub. L. No. 110-343, 7 section 710, does not apply in computing net income for 8 state tax purposes. If the taxpayer has taken the additional 9 first-year depreciation allowance for purposes of computing 10 federal adjusted gross income, then the taxpayer shall make the 11 following adjustments to federal adjusted gross income when 12 computing net income for state tax purposes: 13 a. Add the total amount of depreciation taken under section 14 168(n) of the Internal Revenue Code for the tax year. 15 b. Subtract the amount of depreciation allowable under the 16 modified accelerated cost recovery system described in section 17 168 of the Internal Revenue Code and calculated without regard 18 to section 168(n). 19 c. Any other adjustments to gains or losses necessary to 20 reflect the adjustments made in paragraphs “a” and “b” . The 21 director shall adopt rules for the administration of this 22 paragraph. 23 Sec. 19. Section 422.7, subsection 53, Code 2011, is amended 24 to read as follows: 25 53. A taxpayer is not allowed to take the increased 26 expensing allowance under section 179 of the Internal Revenue 27 Code, as amended by Pub. L. No. 110-185 111-5, section 1202 , in 28 computing adjusted gross income for state tax purposes. 29 Sec. 20. Section 422.9, subsection 2, paragraph h, Code 30 2011, is amended to read as follows: 31 h. For purposes of calculating the deductions in this 32 subsection that are authorized under the Internal Revenue Code, 33 and to the extent that any of such deductions is determined by 34 an individual’s federal adjusted gross income, the individual’s 35 -8- LSB 1237DP (11) 84 tw/sc 8/ 13

S.F. _____ H.F. _____ federal adjusted gross income is computed in accordance with 1 section 422.7, subsection subsections 39 , 39A, 39B, and 53 . 2 Sec. 21. Section 422.35, Code 2011, is amended by adding the 3 following new subsections: 4 NEW SUBSECTION . 19A. The additional first-year 5 depreciation allowance authorized in section 168(k) of the 6 Internal Revenue Code, as enacted by Pub. L. No. 110-185, 7 section 103, Pub. L. No. 111-5, section 1201, Pub. L. No. 8 111-240, section 2022, and Pub. L. No. 111-312, section 9 401, does not apply in computing net income for state tax 10 purposes. If the taxpayer has taken the additional first-year 11 depreciation allowance for purposes of computing federal 12 taxable income, then the taxpayer shall make the following 13 adjustments to federal taxable income when computing net income 14 for state tax purposes: 15 a. Add the total amount of depreciation taken under section 16 168(k) of the Internal Revenue Code for the tax year. 17 b. Subtract the amount of depreciation allowable under the 18 modified accelerated cost recovery system described in section 19 168 of the Internal Revenue Code and calculated without regard 20 to section 168(k). 21 c. Any other adjustments to gains or losses necessary to 22 reflect the adjustments made in paragraphs “a” and “b” . The 23 director shall adopt rules for the administration of this 24 paragraph. 25 NEW SUBSECTION . 19B. The additional first-year 26 depreciation allowance authorized in section 168(n) of the 27 Internal Revenue Code, as enacted by Pub. L. No. 110-343, 28 section 710, does not apply in computing net income for 29 state tax purposes. If the taxpayer has taken the additional 30 first-year depreciation allowance for purposes of computing 31 federal taxable income, then the taxpayer shall make the 32 following adjustments to federal taxable income when computing 33 net income for state tax purposes: 34 a. Add the total amount of depreciation taken under section 35 -9- LSB 1237DP (11) 84 tw/sc 9/ 13

S.F. _____ H.F. _____ 168(n) of the Internal Revenue Code for the tax year. 1 b. Subtract the amount of depreciation allowable under the 2 modified accelerated cost recovery system described in section 3 168 of the Internal Revenue Code and calculated without regard 4 to section 168(n). 5 c. Any other adjustments to gains or losses necessary to 6 reflect the adjustments made in paragraphs “a” and “b” . The 7 director shall adopt rules for the administration of this 8 paragraph. 9 Sec. 22. Section 422.35, subsection 24, Code 2011, is 10 amended to read as follows: 11 24. A taxpayer is not allowed to take the increased 12 expensing allowance under section 179 of the Internal Revenue 13 Code, as amended by Pub. L. No. 110-185 111-5, section 1202 , in 14 computing taxable income for state tax purposes. 15 Sec. 23. EFFECTIVE UPON ENACTMENT. This division of this 16 Act, being deemed of immediate importance, takes effect upon 17 enactment. 18 Sec. 24. RETROACTIVE APPLICABILITY. The following 19 provision or provisions of this division of this Act apply 20 retroactively to January 1, 2008, for tax years ending on or 21 after that date: 22 1. The section of this Act amending section 422.5. 23 2. The section of this Act enacting section 422.7, new 24 subsections 39A and 39B. 25 3. The section of this Act amending section 422.9. 26 4. The section of this Act enacting section 422.35, new 27 subsections 19A and 19B. 28 Sec. 25. RETROACTIVE APPLICABILITY. The following 29 provision or provisions of this division of this Act apply 30 retroactively to January 1, 2009, for tax years beginning on or 31 after that date, and before January 1, 2010: 32 1. The section of this Act amending section 422.7, 33 subsection 53. 34 2. The section of this Act amending section 422.35, 35 -10- LSB 1237DP (11) 84 tw/sc 10/ 13

S.F. _____ H.F. _____ subsection 24. 1 EXPLANATION 2 This bill updates Iowa Code references to the Internal 3 Revenue Code, provides for changes to the Iowa research 4 activities credit, and decouples from certain federal 5 depreciation provisions. 6 Division I of the bill updates references in Code sections 7 422.3 and 422.32 to the Internal Revenue Code, making certain 8 federal income tax revisions enacted by Congress in 2008, 9 2009, and 2010 applicable for purposes of the corporate and 10 individual income taxes and the franchise tax. These revisions 11 only apply to tax years beginning on or after January 1, 2010, 12 and do not include tax years beginning after December 31, 2007, 13 and before January 1, 2010. 14 The division strikes Code section 422.7, subsection 29A, 15 which provided an exclusion from income of the value of health 16 care coverage of a nonqualified tax dependent up to the age 17 of 25. The federal Patient Protection and Affordable Care 18 Act, Pub. L. No. 111-148, provides for the exclusion from 19 income of the value of health care coverage of a nonqualified 20 tax dependent up to the age of 27, effective March 30, 2010. 21 Because the bill now couples Iowa with the Internal Revenue 22 Code with regard to this provision, Code section 422.7, 23 subsection 29A, is no longer necessary for tax years beginning 24 on or after January 1, 2011. This change applies retroactively 25 to that date. 26 Currently, in certain circumstances, Code section 27 422.9(2)(i) provides individuals a deduction from net income 28 (also known as a “below-the-line” deduction) for state sales 29 and use taxes in lieu of a deduction for income taxes. This 30 deduction was only available for taxable years beginning 31 after December 31, 2003, and before January 1, 2006. The 32 division extends this deduction to tax years beginning after 33 December 31, 2003, and before January 1, 2008, and to tax years 34 beginning after December 31, 2009, and before January 1, 2012. 35 -11- LSB 1237DP (11) 84 tw/sc 11/ 13

S.F. _____ H.F. _____ Division II of the bill amends certain Code sections 1 relating to the state research activities tax credit for 2 individuals, corporations, corporations in economic development 3 areas, and corporations in quality jobs enterprise zones. The 4 division updates Iowa Code references to the Internal Revenue 5 Code for purposes of coupling with changes to the federal 6 research activities tax credit. 7 The division also makes certain changes relating to the 8 alternative incremental research tax credit. Because this tax 9 credit was repealed for federal tax purposes, the bill removes 10 references to it from the Iowa Code and replaces them with 11 an alternative simplified research tax credit for Iowa tax 12 purposes. The amendments to Code section 15.335, subsection 13 4, and Code section 15A.9 relate to this change and apply 14 retroactively to July 1, 2010, for tax credits awarded on or 15 after that date. 16 The division also makes certain changes in the calculation 17 of the additional research activities credit that depend on 18 whether an eligible business has $20 million or more in gross 19 revenues. These changes only apply to tax years beginning 20 on or after January 1, 2010, and do not include tax years 21 beginning after December 31, 2008, and before January 1, 2010. 22 Division III of the bill amends certain sections of 23 the individual and corporate income taxes relating to the 24 computation of net income (also known as “above-the-line” 25 computation) by decoupling, for Iowa income tax purposes, from 26 the federal accelerated depreciation deductions enacted by 27 Congress as part of the Recovery Rebates and Economic Stimulus 28 for the American People Act of 2008, the American Recovery and 29 Reinvestment Act of 2009, the Small Business Jobs Act of 2010, 30 and the Tax Relief, Unemployment Insurance Authorization and 31 Job Creation Act of 2010. In addition, the division decouples, 32 for Iowa income tax purposes, from the federal accelerated 33 depreciation deductions for certain disaster assistance 34 property enacted by Congress as part of the Emergency Economic 35 -12- LSB 1237DP (11) 84 tw/sc 12/ 13

S.F. _____ H.F. _____ Stabilization, Energy Improvement and Extension, and Tax 1 Extenders and AMT Relief Acts of 2008. These changes are 2 retroactive to January 1, 2008, for tax years ending on or 3 after that date. 4 The division also decouples, for Iowa tax purposes, from the 5 increased expensing allowance under section 179 of the Internal 6 Revenue Code enacted by Congress as part of the American 7 Recovery and Reinvestment Act of 2009 and makes a number of 8 conforming changes. The changes take effect for tax years 9 beginning on or after January 1, 2009, and before January 1, 10 2010. 11 Each of the divisions of the bill takes effect upon 12 enactment. 13 -13- LSB 1237DP (11) 84 tw/sc 13/ 13