H.F. 2087 Section 1. NEW SECTION . 422.16C Pass-through entity —— 1 election —— entity-level tax —— credit. 2 1. As used in this section, unless the context otherwise 3 requires: 4 a. “Partnership” means the same as defined in section 5 422.25A, except a “partnership” does not include a pass-through 6 entity that is a publicly traded partnership as defined in 7 section 7704 of the Internal Revenue Code. 8 b. “Taxpayer” means a partnership or an S corporation. 9 2. a. Except as provided in paragraph “b” , for tax years 10 ending on or after December 31, 2022, and beginning prior to 11 January 1, 2026, notwithstanding any other provision of law to 12 the contrary, a taxpayer may elect to apply the provisions of 13 this section. 14 b. The provision of this section only apply to tax years 15 for which the limitation on individual deductions applies under 16 section 164(b)(6) of the Internal Revenue Code. 17 3. a. A separate election shall be made for each tax year 18 on a form and at a time prescribed by the department. An 19 election shall be irrevocable once made. 20 b. If an election is made, a taxpayer shall not be required 21 to file a composite return pursuant to section 422.16B. 22 4. A taxpayer electing to apply the provisions of this 23 section shall be subject to tax in an amount equal to the 24 applicable tax rates under section 422.5A imposed against the 25 net income of the taxpayer for the taxable year. 26 5. a. For a taxable year in which a taxpayer made an 27 election under this section, for the partners or shareholders 28 of the taxpayer, the taxes imposed under this subchapter, less 29 the credits allowed under section 422.12, shall be reduced by 30 a credit equal to the ratio of the partner’s or shareholder’s 31 share of net income over the total net income multiplied by the 32 state tax liability actually paid by the taxpayer. 33 b. If the partner or shareholder of the taxpayer is itself a 34 partner or shareholder, the credit under this subsection shall 35 -1- LSB 5087YH (3) 89 jm/jh 1/ 4

H.F. 2087 be allowed in accordance with the determination of income and 1 distributive share of income under sections 702 and 704 and 2 subchapter S of the Internal Revenue Code. 3 c. If the amount of credit allowed under this subsection 4 exceeds the tax liability of the partner or shareholder for the 5 tax year, the excess may be credited to the tax liability of 6 the partner or shareholder for the following five tax years or 7 until depleted, whichever occurs first. 8 6. A nonresident individual who is a partner or shareholder 9 of a taxpayer for a tax year in which an election is made under 10 this section shall not be required to file a tax return for 11 such tax year if the only source of income of the individual is 12 from a taxpayer making the election under this section and the 13 credit allowed to the partner or shareholder equals or exceeds 14 the tax liability of the partner or shareholder for the tax 15 imposed in the tax year the election is made. 16 7. a. A taxpayer making an election under this section 17 is liable for the entity-level tax imposed pursuant to this 18 section. If the electing taxpayer fails to timely pay the full 19 amount of the tax, the partners or shareholders shall be liable 20 to pay the unpaid tax. 21 b. Each partner’s or shareholder’s unpaid tax liability 22 shall be based on the ratio of the partner’s or shareholder’s 23 share of the net income of the taxpayer over the total net 24 income of the taxpayer. 25 8. For purposes of the credit allowed in this section, tax 26 paid by the taxpayer to another state which, as determined by 27 the department, is substantially similar to the tax imposed 28 in this section, shall be considered tax paid by the partner 29 or shareholder to the extent that the share of the income of 30 the partner or shareholder that is allocated and apportioned 31 to such other state bears to the total income of the taxpayer 32 allocated or apportioned to such other state. 33 9. For tax years where an election is made pursuant to this 34 section, the withholding requirements of section 422.16 do not 35 -2- LSB 5087YH (3) 89 jm/jh 2/ 4

H.F. 2087 apply to the taxpayer. 1 10. The department shall adopt rules pursuant to chapter 17A 2 to administer this section. 3 Sec. 2. Section 422.85, Code 2022, is amended to read as 4 follows: 5 422.85 Imposition of estimated tax. 6 A taxpayer subject to the tax imposed by sections 422.16C, 7 422.33 , and 422.60 shall make payments of estimated tax for the 8 taxable year if the amount of tax payable, less credits, can 9 reasonably be expected to be more than one thousand dollars for 10 the taxable year. For purposes of this subchapter , “estimated 11 tax” means the amount which the taxpayer estimates to be the tax 12 due and payable under subchapter II, III , or V of this chapter 13 for the taxable year. 14 EXPLANATION 15 The inclusion of this explanation does not constitute agreement with 16 the explanation’s substance by the members of the general assembly. 17 This bill relates to an entity-level taxation election for 18 pass-through entities and allows a partner or shareholder to 19 claim a credit against the individual income tax. 20 For tax years ending on or after December 31, 2022, and 21 beginning prior to January 1, 2026, a taxpayer (a partnership, 22 other than a publicly traded partnership, or a subchapter S 23 corporation), may elect to be subject to tax at the partnership 24 or S corporation level in an amount equal to the applicable 25 tax rates under Code section 422.5A imposed against the net 26 income of the taxpayer for the taxable year. Currently, the 27 net income of a partnership or S corporation passes through to 28 the partners or shareholders of the entity and is subject to 29 the individual income tax at the partner or shareholder level. 30 The bill only applies to tax years as long as the limitation 31 on individual deductions applies under section 164(b)(6) of the 32 Internal Revenue Code. 33 If an election is made, the partners or shareholders are 34 allowed a credit against the individual income tax equal to the 35 -3- LSB 5087YH (3) 89 jm/jh 3/ 4

H.F. 2087 ratio of the partner’s or shareholder’s share of net income 1 over the total net income multiplied by the state tax liability 2 of the taxpayer. 3 If the amount of credit allowed under the bill exceeds the 4 tax liability of the partner or shareholder for the tax year, 5 the excess may be credited to the tax liability of the partner 6 or shareholder for the following five tax years or until 7 depleted, whichever occurs first. 8 The bill specifies that a taxpayer making an election is 9 liable for the entity-level tax imposed pursuant to the bill. 10 If the electing taxpayer fails to timely pay the full amount of 11 the tax, the bill requires the partners or shareholders to pay 12 the unpaid tax. 13 For tax years where an election is made, the withholding 14 requirements of Code section 422.16 do not apply. The bill 15 does require the taxpayer to make estimated tax payments 16 pursuant to Code section 422.85, if applicable. 17 -4- LSB 5087YH (3) 89 jm/jh 4/ 4