SENATE/HOUSE FILE _____

BY  (PROPOSED DEPARTMENT OF REVENUE BILL)

A BILL FOR

An Act relating to the administration of the tax and related laws by updating the Code references to the Internal Revenue Code and by decoupling from certain federal bonus depreciation provisions and including effective date and retroactive applicability provisions.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:

DIVISION I

INTERNAL REVENUE CODE REFERENCES
   Section 1.  Section 422.3, subsection 5, Code 2011, is amended to read as follows:
   5.  “Internal Revenue Code” means the Internal Revenue Code of 1954, prior to the date of its redesignation as the Internal Revenue Code of 1986 by the Tax Reform Act of 1986, or means the Internal Revenue Code of 1986 as amended to and including January 1, 2008 2011.
   Sec. 2.  Section 422.7, subsection 29A, Code 2011, is amended by striking the subsection.
   Sec. 3.  Section 422.9, subsection 2, paragraph i, Code 2011, is amended to read as follows:
   i.  The deduction for state sales and use taxes is allowable only if the taxpayer elected to deduct the state sales and use taxes in lieu of state income taxes under section 164 of the Internal Revenue Code. A deduction for state sales and use taxes is not allowed if the taxpayer has taken the deduction for state income taxes or claimed the standard deduction under section 63 of the Internal Revenue Code. This paragraph applies to taxable years beginning after December 31, 2003, and before January 1, 2006 2008, and to taxable years beginning after December 31, 2009, and before January 1, 2012.
   Sec. 4.  Section 422.32, subsection 7, Code 2011, is amended to read as follows:
   7.  “Internal Revenue Code” means the Internal Revenue Code of 1954, prior to the date of its redesignation as the Internal Revenue Code of 1986 by the Tax Reform Act of 1986, or means the Internal Revenue Code of 1986 as amended to and including January 1, 2008 2011.
   Sec. 5.  EFFECTIVE UPON ENACTMENT.  This division of this Act, being deemed of immediate importance, takes effect upon enactment.
   Sec. 6.  RETROACTIVE APPLICABILITY.  The following provision or provisions of this division of this Act apply retroactively to January 1, 2010, for tax years beginning on or after that date:
   1.  The section of this Act amending section 422.3.
   2.  The section of this Act amending section 422.32.
   Sec. 7.  RETROACTIVE APPLICABILITY.  The following provision or provisions of this division of this Act apply retroactively to January 1, 2011, for tax years beginning on or after that date:
   1.  The section of this Act amending section 422.7, subsection 29A.

DIVISION II

RESEARCH ACTIVITIES CREDIT
   Sec. 8.  Section 15.335, subsection 4, Code 2011, is amended to read as follows:
   4.
  a.  In lieu of the credit amount computed in subsection 2, an eligible business may elect to compute the credit amount for qualified research expenses incurred in this state in a manner consistent with the alternative incremental simplified credit described in section 41(c)(4) 41(c)(5) of the Internal Revenue Code. The taxpayer may make this election regardless of the method used for the taxpayer’s federal income tax. The election made under this paragraph is for the tax year and the taxpayer may use another or the same method for any subsequent year.
   b.  For purposes of the alternate credit computation method in paragraph  “a”, the credit percentages applicable to qualified research expenses described inclauses (i), (ii), and (iii) ofsection 41(c)(4)(A) 41(c)(5)(A) and clause (ii) of section 41(c)(5)(B) of the Internal Revenue Code are as follows:
   (1)  In the case of an eligible business whose gross revenues do not exceed twenty million dollars per year, the credit percentages are two and fifty-four hundredths percent, three and thirty-eight hundredths percent, and four and twenty-three hundredths seven percent and three percent, respectively.
   (2)  In the case of an eligible business whose gross revenues exceed twenty million dollars per year, the credit percentages are seventy-six hundredths percent, one and two hundredths percent, and one and twenty-seven hundredths two and one-tenth percent and nine-tenths percent, respectively.
   Sec. 9.  Section 15.335, subsection 7, Code 2011, is amended to read as follows:
   7.
  a.  For purposes of this section, “base amount”, “basic research payment”, and“qualified research expense” mean the same as defined for the federal credit for increasing research activities under section 41 of the Internal Revenue Code, except that for the alternative incremental simplified credit such amounts are for research conducted within this state.
   b.  For purposes of this section,“Internal Revenue Code”means theInternal Revenue Code in effect on January 1, 2009 2011.
   Sec. 10.  Section 15A.9, subsection 8, paragraphs b, c, and e, Code 2011, are amended to read as follows:
   b.  In lieu of the credit amount computed in paragraph “a”, subparagraph (1), subparagraph division (a), a business may elect to compute the credit amount for qualified research expenses incurred in this state within the zone in a manner consistent with the alternative incremental simplified credit described in section 41(c)(4) 41(c)(5) of the Internal Revenue Code. The taxpayer may make this election regardless of the method used for the taxpayer’s federal income tax. The election made under this paragraph is for the tax year and the taxpayer may use another or the same method for any subsequent year.
   c.  For purposes of the alternate credit computation method in paragraph “b”, the credit percentages applicable to qualified research expenses described inclauses (i), (ii), and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause (ii) of section 41(c)(5)(B) of the Internal Revenue Code are three and thirty hundredths percent, four and forty hundredths percent, and five and fifty hundredths percent, respectively as follows:
   (1)  In the case of an eligible business whose gross revenues do not exceed twenty million dollars per year, the credit percentages are seven percent and three percent, respectively.
   (2)  In the case of an eligible business whose gross revenues exceed twenty million dollars per year, the credit percentages are two and one-tenths percent and nine-tenths percent, respectively.
   e.
  (1)  For the purposes of this subsection, “base amount”, “basic research payment”, and“qualified research expense” mean the same as defined for the federal credit for increasing research activities under section 41 of the Internal Revenue Code, except that for the alternative incremental simplified credit such amounts are for research conducted within this state within the zone.
   (2)  For purposes of this subsection,“Internal Revenue Code”means the Internal Revenue Code in effect on January 1, 2009 2011.
   Sec. 11.  Section 422.10, subsection 1, paragraphs b and c, Code 2011, are amended to read as follows:
   b.  In lieu of the credit amount computed in paragraph “a”, subparagraph (1), subparagraph division (a), a taxpayer may elect to compute the credit amount for qualified research expenses incurred in this state in a manner consistent with the alternative incremental simplified credit described in section 41(c)(4) 41(c)(5) of the Internal Revenue Code. The taxpayer may make this election regardless of the method used for the taxpayer’s federal income tax. The election made under this paragraph is for the tax year and the taxpayer may use another or the same method for any subsequent year.
   c.  For purposes of the alternate credit computation method in paragraph “b”, the credit percentages applicable to qualified research expenses described inclauses (i), (ii), and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause (ii) of section 41(c)(5)(B) of the Internal Revenue Code are one and sixty-five hundredths percent, two and twenty hundredths percent, and two and seventy-five hundredths four and fifty-five hundredths percent and one and ninety-five hundredths percent, respectively.
   Sec. 12.  Section 422.10, subsection 3, Code 2011, is amended to read as follows:
   3.
  a.  For purposes of this section, “base amount”, “basic research payment”, and“qualified research expense” mean the same as defined for the federal credit for increasing research activities under section 41 of the Internal Revenue Code, except that for the alternative incremental simplified credit such amounts are for research conducted within this state.
   b.  For purposes of this section,“Internal Revenue Code”means the Internal Revenue Code in effect on January 1, 2009 2011.
   Sec. 13.  Section 422.33, subsection 5, paragraphs b, c, and d, Code 2011, are amended to read as follows:
   b.  In lieu of the credit amount computed in paragraph “a”, subparagraph (1), a corporation may elect to compute the credit amount for qualified research expenses incurred in this state in a manner consistent with the alternative incremental simplified credit described in section 41(c)(4) 41(c)(5) of the Internal Revenue Code. The taxpayer may make this election regardless of the method used for the taxpayer’s federal income tax. The election made under this paragraph is for the tax year and the taxpayer may use another or the same method for any subsequent year.
   c.  For purposes of the alternate credit computation method in paragraph “b”, the credit percentages applicable to qualified research expenses described inclauses (i), (ii), and (iii) of section 41(c)(4)(A) 41(c)(5)(A) and clause (ii) of section 41(c)(5)(B) of the Internal Revenue Code are one and sixty-five hundredths percent, two and twenty hundredths percent, and two and seventy-five hundredths four and fifty-five hundredths percent and one and ninety-five hundredths percent, respectively.
   d.
  (1)  For purposes of this subsection, “base amount”, “basic research payment”, and“qualified research expense” mean the same as defined for the federal credit for increasing research activities under section 41 of the Internal Revenue Code, except that for the alternative incremental simplified credit such amounts are for research conducted within this state.
   (2)  For purposes of this subsection,“Internal Revenue Code”means the Internal Revenue Code in effect on January 1, 2009 2011.
   Sec. 14.  EFFECTIVE UPON ENACTMENT.  This division of this Act, being deemed of immediate importance, takes effect upon enactment.
   Sec. 15.  RETROACTIVE APPLICABILITY.  The following provision or provisions of this division of this Act apply retroactively to July 1, 2010, for tax credits awarded on or after that date:
   1.  The section of this Act amending section 15.335, subsection 4.
   2.  The section of this Act amending section 15A.9.
   Sec. 16.  RETROACTIVE APPLICABILITY.  The following provision or provisions of this division of this Act apply retroactively to January 1, 2010, for tax years beginning on or after that date:
   1.  The section of this Act amending section 15.335, subsection 7.
   2.  The section of this Act amending section 422.10, subsection 1.
   3.  The section of this Act amending section 422.10, subsection 3.
   4.  The section of this Act amending section 422.33. 

DIVISION III

BONUS DEPRECIATION
   Sec. 17.  Section 422.5, subsection 2, paragraph b, subparagraph (1), Code 2011, is amended to read as follows:
   (1)  Add items of tax preference included in federal alternative minimum taxable income under section 57, except subsections (a)(1), (a)(2), and (a)(5), of the Internal Revenue Code, make the adjustments included in federal alternative minimum taxable income under section 56, except subsections (a)(4), (b)(1)(C)(iii), and (d), of the Internal Revenue Code, and add losses as required by section 58 of the Internal Revenue Code. To the extent that any preference or adjustment is determined by an individual’s federal adjusted gross income, the individual’s federal adjusted gross income is computed in accordance with section 422.7, subsection subsections 39, 39A, 39B, and 53. In the case of an estate or trust, the items of tax preference, adjustments, and losses shall be apportioned between the estate or trust and the beneficiaries in accordance with rules prescribed by the director.
   Sec. 18.  Section 422.7, Code 2011, is amended by adding the following new subsections:
   NEW SUBSECTION.  39A.  The additional first-year depreciation allowance authorized in section 168(k) of the Internal Revenue Code, as enacted by Pub. L. No. 110-185, section 103, Pub. L. No. 111-5, section 1201, Pub. L. No. 111-240, section 2022, and Pub. L. No. 111-312, section 401, does not apply in computing net income for state tax purposes. If the taxpayer has taken the additional first-year depreciation allowance for purposes of computing federal adjusted gross income, then the taxpayer shall make the following adjustments to federal adjusted gross income when computing net income for state tax purposes:
   a.  Add the total amount of depreciation taken under section 168(k) of the Internal Revenue Code for the tax year.
   b.  Subtract the amount of depreciation allowable under the modified accelerated cost recovery system described in section 168 of the Internal Revenue Code and calculated without regard to section 168(k).
   c.  Any other adjustments to gains or losses necessary to reflect the adjustments made in paragraphs“a” and “b”. The director shall adopt rules for the administration of this paragraph.
   NEW SUBSECTION.  39B.  The additional first-year depreciation allowance authorized in section 168(n) of the Internal Revenue Code, as enacted by Pub. L. No. 110-343, section 710, does not apply in computing net income for state tax purposes. If the taxpayer has taken the additional first-year depreciation allowance for purposes of computing federal adjusted gross income, then the taxpayer shall make the following adjustments to federal adjusted gross income when computing net income for state tax purposes:
   a.  Add the total amount of depreciation taken under section 168(n) of the Internal Revenue Code for the tax year.
   b.  Subtract the amount of depreciation allowable under the modified accelerated cost recovery system described in section 168 of the Internal Revenue Code and calculated without regard to section 168(n).
   c.  Any other adjustments to gains or losses necessary to reflect the adjustments made in paragraphs“a” and “b”. The director shall adopt rules for the administration of this paragraph.
   Sec. 19.  Section 422.7, subsection 53, Code 2011, is amended to read as follows:
   53.  A taxpayer is not allowed to take the increased expensing allowance under section 179 of the Internal Revenue Code, as amended by Pub. L. No. 110-185 111-5, section 1202, in computing adjusted gross income for state tax purposes.
   Sec. 20.  Section 422.9, subsection 2, paragraph h, Code 2011, is amended to read as follows:
   h.  For purposes of calculating the deductions in this subsection that are authorized under the Internal Revenue Code, and to the extent that any of such deductions is determined by an individual’s federal adjusted gross income, the individual’s federal adjusted gross income is computed in accordance with section 422.7, subsection subsections 39, 39A, 39B, and 53.
   Sec. 21.  Section 422.35, Code 2011, is amended by adding the following new subsections:
   NEW SUBSECTION.  19A.  The additional first-year depreciation allowance authorized in section 168(k) of the Internal Revenue Code, as enacted by Pub. L. No. 110-185, section 103, Pub. L. No. 111-5, section 1201, Pub. L. No. 111-240, section 2022, and Pub. L. No. 111-312, section 401, does not apply in computing net income for state tax purposes. If the taxpayer has taken the additional first-year depreciation allowance for purposes of computing federal taxable income, then the taxpayer shall make the following adjustments to federal taxable income when computing net income for state tax purposes:
   a.  Add the total amount of depreciation taken under section 168(k) of the Internal Revenue Code for the tax year.
   b.  Subtract the amount of depreciation allowable under the modified accelerated cost recovery system described in section 168 of the Internal Revenue Code and calculated without regard to section 168(k).
   c.  Any other adjustments to gains or losses necessary to reflect the adjustments made in paragraphs“a” and “b”. The director shall adopt rules for the administration of this paragraph.
   NEW SUBSECTION.  19B.  The additional first-year depreciation allowance authorized in section 168(n) of the Internal Revenue Code, as enacted by Pub. L. No. 110-343, section 710, does not apply in computing net income for state tax purposes. If the taxpayer has taken the additional first-year depreciation allowance for purposes of computing federal taxable income, then the taxpayer shall make the following adjustments to federal taxable income when computing net income for state tax purposes:
   a.  Add the total amount of depreciation taken under section 168(n) of the Internal Revenue Code for the tax year.
   b.  Subtract the amount of depreciation allowable under the modified accelerated cost recovery system described in section 168 of the Internal Revenue Code and calculated without regard to section 168(n).
   c.  Any other adjustments to gains or losses necessary to reflect the adjustments made in paragraphs“a” and “b”. The director shall adopt rules for the administration of this paragraph.
   Sec. 22.  Section 422.35, subsection 24, Code 2011, is amended to read as follows:
   24.  A taxpayer is not allowed to take the increased expensing allowance under section 179 of the Internal Revenue Code, as amended by Pub. L. No. 110-185 111-5, section 1202, in computing taxable income for state tax purposes.
   Sec. 23.  EFFECTIVE UPON ENACTMENT.  This division of this Act, being deemed of immediate importance, takes effect upon enactment.
   Sec. 24.  RETROACTIVE APPLICABILITY.  The following provision or provisions of this division of this Act apply retroactively to January 1, 2008, for tax years ending on or after that date:
   1.  The section of this Act amending section 422.5.
   2.  The section of this Act enacting section 422.7, new subsections 39A and 39B.
   3.  The section of this Act amending section 422.9.
   4.  The section of this Act enacting section 422.35, new subsections 19A and 19B.
   Sec. 25.  RETROACTIVE APPLICABILITY.  The following provision or provisions of this division of this Act apply retroactively to January 1, 2009, for tax years beginning on or after that date, and before January 1, 2010:
   1.  The section of this Act amending section 422.7, subsection 53.
   2.  The section of this Act amending section 422.35, subsection 24.
EXPLANATION
   This bill updates Iowa Code references to the Internal Revenue Code, provides for changes to the Iowa research activities credit, and decouples from certain federal depreciation provisions.
   Division I of the bill updates references in Code sections 422.3 and 422.32 to the Internal Revenue Code, making certain federal income tax revisions enacted by Congress in 2008, 2009, and 2010 applicable for purposes of the corporate and individual income taxes and the franchise tax. These revisions only apply to tax years beginning on or after January 1, 2010, and do not include tax years beginning after December 31, 2007, and before January 1, 2010.
   The division strikes Code section 422.7, subsection 29A, which provided an exclusion from income of the value of health care coverage of a nonqualified tax dependent up to the age of 25. The federal Patient Protection and Affordable Care Act, Pub. L. No. 111-148, provides for the exclusion from income of the value of health care coverage of a nonqualified tax dependent up to the age of 27, effective March 30, 2010. Because the bill now couples Iowa with the Internal Revenue Code with regard to this provision, Code section 422.7, subsection 29A, is no longer necessary for tax years beginning on or after January 1, 2011. This change applies retroactively to that date.
   Currently, in certain circumstances, Code section 422.9(2)(i) provides individuals a deduction from net income (also known as a “below-the-line” deduction) for state sales and use taxes in lieu of a deduction for income taxes. This deduction was only available for taxable years beginning after December 31, 2003, and before January 1, 2006. The division extends this deduction to tax years beginning after December 31, 2003, and before January 1, 2008, and to tax years beginning after December 31, 2009, and before January 1, 2012.
   Division II of the bill amends certain Code sections relating to the state research activities tax credit for individuals, corporations, corporations in economic development areas, and corporations in quality jobs enterprise zones. The division updates Iowa Code references to the Internal Revenue Code for purposes of coupling with changes to the federal research activities tax credit. 
   The division also makes certain changes relating to the alternative incremental research tax credit. Because this tax credit was repealed for federal tax purposes, the bill removes references to it from the Iowa Code and replaces them with an alternative simplified research tax credit for Iowa tax purposes. The amendments to Code section 15.335, subsection 4, and Code section 15A.9 relate to this change and apply retroactively to July 1, 2010, for tax credits awarded on or after that date.
   The division also makes certain changes in the calculation of the additional research activities credit that depend on whether an eligible business has $20 million or more in gross revenues. These changes only apply to tax years beginning on or after January 1, 2010, and do not include tax years beginning after December 31, 2008, and before January 1, 2010.
   Division III of the bill amends certain sections of the individual and corporate income taxes relating to the computation of net income (also known as “above-the-line” computation) by decoupling, for Iowa income tax purposes, from the federal accelerated depreciation deductions enacted by Congress as part of the Recovery Rebates and Economic Stimulus for the American People Act of 2008, the American Recovery and Reinvestment Act of 2009, the Small Business Jobs Act of 2010, and the Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010. In addition, the division decouples, for Iowa income tax purposes, from the federal accelerated depreciation deductions for certain disaster assistance property enacted by Congress as part of the Emergency Economic Stabilization, Energy Improvement and Extension, and Tax Extenders and AMT Relief Acts of 2008. These changes are retroactive to January 1, 2008, for tax years ending on or after that date.
   The division also decouples, for Iowa tax purposes, from the increased expensing allowance under section 179 of the Internal Revenue Code enacted by Congress as part of the American Recovery and Reinvestment Act of 2009 and makes a number of conforming changes. The changes take effect for tax years beginning on or after January 1, 2009, and before January 1, 2010.
   Each of the divisions of the bill takes effect upon enactment.