House Study Bill 708 - Introduced HOUSE FILE _____ BY (PROPOSED COMMITTEE ON WAYS AND MEANS BILL BY CHAIRPERSON HEIN) A BILL FOR An Act relating to the treatment of certain income as a 1 foreign dividend for Iowa corporate income tax purposes, 2 and modifying the business interest expense deduction for 3 Iowa individual and corporate tax purposes and including 4 effective date and retroactive applicability provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 6303YC (9) 88 jm/jh

H.F. _____ Section 1. Section 422.35, subsection 21, Code 2020, is 1 amended to read as follows: 2 21. Subtract the amount of net foreign dividend income , 3 including based upon the percentage of ownership as set forth 4 in section 243 of the Internal Revenue Code. Net foreign 5 dividend includes subpart F income as defined in section 952 6 of the Internal Revenue Code, based upon the percentage of 7 ownership as set forth in section 243 of the Internal Revenue 8 Code and includes global intangible low-taxed income as defined 9 in section 951A of the Internal Revenue Code after applying 10 the deduction allowed for global intangible low-taxed income 11 allowed under section 250(a)(1)(B) of the Internal Revenue 12 Code . 13 Sec. 2. Section 422.7, Code 2020, is amended by adding the 14 following new subsection: 15 NEW SUBSECTION . 59. a. Section 163(j) of the Internal 16 Revenue Code does not apply in computing net income for state 17 tax purposes. If the taxpayer’s federal adjusted gross income 18 for the tax year was increased or decreased by reason of the 19 application of section 163(j) of the Internal Revenue Code, 20 the taxpayer shall recompute net income for state tax purposes 21 under rules prescribed by the director. 22 b. Paragraph “a” shall not apply during any tax year 23 in which the additional first-year depreciation allowance 24 authorized in section 168(k) of the Internal Revenue Code 25 applies in computing net income for state tax purposes. 26 c. For any tax year in which paragraph “a” does not apply, 27 a taxpayer shall not be permitted to deduct any amount of 28 interest expense paid or accrued in a previous taxable year 29 that is allowed as a deduction in the current taxable year by 30 reason of the carryforward of disallowed business interest 31 provisions of section 163(j)(2) of the Internal Revenue Code, 32 if either of the following apply: 33 (1) The interest expense was originally paid or accrued 34 during a tax year in which paragraph “a” applied. 35 -1- LSB 6303YC (9) 88 jm/jh 1/ 4

H.F. _____ (2) The interest expense was originally paid or accrued 1 during a tax year in which the taxpayer was not required to 2 file an Iowa return. 3 Sec. 3. Section 422.35, Code 2020, is amended by adding the 4 following new subsection: 5 NEW SUBSECTION . 26. a. Section 163(j) of the Internal 6 Revenue Code does not apply in computing net income for state 7 tax purposes. If the taxpayer’s federal taxable income for 8 the tax year was increased or decreased by reason of the 9 application of section 163(j) of the Internal Revenue Code, 10 the taxpayer shall recompute net income for state tax purposes 11 under rules prescribed by the director. 12 b. Paragraph “a” shall not apply during any tax year 13 in which the additional first-year depreciation allowance 14 authorized in section 168(k) of the Internal Revenue Code 15 applies in computing net income for state tax purposes. 16 c. For any tax year in which paragraph “a” does not apply, 17 a taxpayer shall not be permitted to deduct any amount of 18 interest expense paid or accrued in a previous taxable year 19 that is allowed as a deduction in the current taxable year by 20 reason of the carryforward of disallowed business interest 21 provisions of section 163(j)(2) of the Internal Revenue Code, 22 if either of the following apply: 23 (1) The interest expense was originally paid or accrued 24 during a tax year in which paragraph “a” applied. 25 (2) The interest expense was originally paid or accrued 26 during a tax year in which the taxpayer was not required to 27 file an Iowa return. 28 Sec. 4. EFFECTIVE DATE. This Act, being deemed of immediate 29 importance, takes effect upon enactment. 30 Sec. 5. RETROACTIVE APPLICABILITY. This Act applies 31 retroactively to January 1, 2019, for tax years beginning on 32 or after that date. 33 EXPLANATION 34 The inclusion of this explanation does not constitute agreement with 35 -2- LSB 6303YC (9) 88 jm/jh 2/ 4

H.F. _____ the explanation’s substance by the members of the general assembly. 1 This bill relates to the treatment of certain income as a 2 foreign dividend for Iowa corporate income tax purposes, and 3 modifies the business expense deduction for Iowa individual and 4 corporate tax purposes. 5 FOREIGN DIVIDEND INCOME. Federal law includes in a 6 taxpayer’s gross income global intangible low-taxed income 7 (GILTI) as defined in section 951A of the Internal Revenue 8 Code, subject to a deduction equal to 50 percent of the 9 corporation’s GILTI under section 250(a)(1)(B) of the Internal 10 Revenue Code. The amendment to Code section 422.35(21) directs 11 corporate taxpayers to treat the taxpayer’s net GILTI amount as 12 a foreign dividend for Iowa income tax purposes, meaning the 13 taxpayer qualifies for the same dividends received deduction 14 that applies to subpart F income and other foreign dividends. 15 BUSINESS INTEREST EXPENSE DEDUCTION. The federal Tax Cuts 16 and Jobs Act (TCJA) created a new limitation on the deduction 17 of business interest expense for tax years beginning on or 18 after January 1, 2018. Currently, the state couples with 19 federal law limiting the deduction of business interest expense 20 for tax years beginning on or after January 1, 2019. 21 The bill decouples, for Iowa individual and corporate income 22 tax purposes, from the federal limitation on deduction of 23 business interest expenses for tax years beginning on or after 24 January 1, 2019. 25 The decoupling from the federal limitation on deduction 26 of business interest expense does not apply during any tax 27 year in which the additional first-year depreciation allowance 28 authorized in section 168(k) of the Internal Revenue Code 29 (bonus depreciation) applies in computing net income for state 30 tax purposes. 31 For any tax year in which a taxpayer is not permitted to 32 deduct any amount of interest expense paid or accrued in a 33 previous taxable year due to the allowance of the additional 34 first-year depreciation, the bill prohibits the deduction of 35 -3- LSB 6303YC (9) 88 jm/jh 3/ 4

H.F. _____ any amount of interest expense paid or accrued in a previous 1 taxable year in the current taxable year by reason of the 2 carryforward of disallowed business interest provisions of 3 section 163(j)(2) of the Internal Revenue Code, if either of 4 the following apply: the interest expense was originally paid 5 or accrued during a tax year in which there was a decoupling 6 from the federal limitation on business expense, or the 7 interest expense was originally paid or accrued during a tax 8 year in which the taxpayer was not required to file an Iowa 9 return. 10 EFFECTIVE DATE AND APPLICABILITY. The bill takes effect 11 upon enactment, and applies retroactively to January 1, 2019, 12 for tax years beginning on or after that date. 13 -4- LSB 6303YC (9) 88 jm/jh 4/ 4