H.F. _____ Section 1. Section 422.11, Code 2023, is amended to read as 1 follows: 2 422.11 Franchise tax credit. 3 1. The taxes imposed under this subchapter , less the credits 4 allowed under section 422.12 , shall be reduced by a franchise 5 tax credit. A taxpayer who is a shareholder in a financial 6 institution, as defined in section 581 of the Internal Revenue 7 Code, which has in effect for the tax year an election under 8 subchapter S of the Internal Revenue Code, or is a member of a 9 financial institution organized as a limited liability company 10 under chapter 524 that is taxed as a partnership for federal 11 income tax purposes, shall compute the amount of the tax credit 12 by recomputing the amount of tax under this subchapter by 13 reducing the taxable income of the taxpayer by the taxpayer’s 14 pro rata share of the items of income and expense of the 15 financial institution and subtracting the credits allowed 16 under section 422.12 . This recomputed tax shall be subtracted 17 from the amount of tax computed under this subchapter after 18 the deduction for credits allowed under section 422.12 . The 19 resulting amount, which shall not exceed the taxpayer’s 20 pro rata share of the franchise tax paid by the financial 21 institution, is the amount of the franchise tax credit allowed. 22 2. For a taxpayer making an election to apply the provisions 23 of section 422.16C that is also a financial institution subject 24 to the franchise tax under subchapter V, the tax imposed under 25 section 422.16C shall be reduced by a franchise tax credit 26 equal to the amount of franchise tax paid by the taxpayer for 27 the same year. 28 Sec. 2. NEW SECTION . 422.16C Pass-through entity —— 29 election —— entity-level tax —— credit. 30 1. As used in this section, unless the context otherwise 31 requires: 32 a. “Partnership” means the same as defined in section 33 422.25A, except a “partnership” does not include a pass-through 34 entity that is a publicly traded partnership as defined in 35 -1- LSB 1209YC (3) 90 jm/jh 1/ 5

H.F. _____ section 7704 of the Internal Revenue Code. 1 b. “Taxpayer” means a partnership or an S corporation. 2 2. a. Except as provided in paragraph “b” , for tax years 3 ending on or after December 31, 2022, and beginning prior to 4 January 1, 2026, notwithstanding any other provision of law to 5 the contrary, a taxpayer may elect to apply the provisions of 6 this section. 7 b. This section only applies to tax years for which the 8 limitation on individual deductions applies under section 9 164(b)(6) of the Internal Revenue Code. 10 3. a. A separate election shall be made for each tax year 11 on a form and at a time prescribed by the department. An 12 election shall be irrevocable once made and shall be binding on 13 the taxpayer and all partners or shareholders of the taxpayer. 14 b. If an election is made, a taxpayer shall not be required 15 to file a composite return for the same tax year pursuant to 16 section 422.16B. 17 4. a. A taxpayer electing to apply the provisions of this 18 section shall be subject to tax in an amount equal to the 19 applicable rate under section 422.5A for tax years beginning 20 before January 1, 2026, and the rate under section 422.5, 21 subsection 1, paragraph “a” , for tax years beginning on or after 22 January 1, 2026, imposed against the taxable income of the 23 taxpayer for the taxable year properly determined under this 24 chapter and allocated and apportioned to the state under the 25 rules adopted by the department. 26 b. The tax under this section shall be reduced by the credit 27 provided in subsection 5, paragraph “b” , and the franchise tax 28 credit in subsection 422.11, subsection 2, and the composite 29 credit in section 422.16B, subsection 4. Any other tax 30 credits shall not be claimed by the taxpayer against the tax 31 imposed under this section. A net operating loss or other loss 32 carryback or carryforward shall not be claimed by the taxpayer. 33 5. a. For a taxable year in which a taxpayer made an 34 election under this section, for the partners or shareholders 35 -2- LSB 1209YC (3) 90 jm/jh 2/ 5

H.F. _____ of the taxpayer, the taxes imposed under this subchapter, 1 less the credits allowed under section 422.12, shall be 2 reduced by a credit equal to the ratio of the partner’s or 3 shareholder’s share of taxable income over the total taxable 4 income multiplied by the state tax liability actually paid by 5 the taxpayer. 6 b. If the taxpayer is itself a partner or shareholder of 7 another taxpayer making an election to apply the provisions 8 of this section, the credit under this subsection shall be 9 allowed. 10 c. If the amount of credit allowed under this subsection 11 exceeds the tax liability of the partner or shareholder for the 12 tax year, the excess may be credited to the tax liability of 13 the partner or shareholder for the following five tax years or 14 until depleted, whichever occurs first. 15 6. A nonresident individual who is a partner or shareholder 16 of a taxpayer for a tax year in which an election is made under 17 this section shall not be required to file a tax return for 18 such tax year if the only source of income of the individual is 19 from a taxpayer making the election under this section and the 20 credit allowed to the partner or shareholder equals or exceeds 21 the tax liability of the partner or shareholder for the tax 22 imposed in the tax year the election is made. 23 7. A taxpayer making an election under this section is 24 liable for the entity-level tax imposed pursuant to this 25 section, including applicable penalties and interest. If 26 the electing taxpayer fails to timely pay the full amount of 27 the tax, the partners or shareholders shall be jointly and 28 severally liable, along with the electing taxpayer, to pay the 29 unpaid tax. 30 8. The department shall adopt rules pursuant to chapter 17A 31 to administer this section. 32 Sec. 3. Section 422.85, Code 2023, is amended to read as 33 follows: 34 422.85 Imposition of estimated tax. 35 -3- LSB 1209YC (3) 90 jm/jh 3/ 5

H.F. _____ A taxpayer subject to the tax imposed by sections 422.16C, 1 422.33 , and 422.60 shall make payments of estimated tax for the 2 taxable year if the amount of tax payable, less credits, can 3 reasonably be expected to be more than one thousand dollars for 4 the taxable year. For purposes of this subchapter , “estimated 5 tax” means the amount which the taxpayer estimates to be the tax 6 due and payable under subchapter II, III , or V of this chapter 7 for the taxable year. 8 Sec. 4. ESTIMATED TAX PAYMENTS FOR TAX YEARS BEGINNING PRIOR 9 TO EFFECTIVE DATE OF ACT. Notwithstanding sections 422.16 and 10 422.85, a taxpayer electing to apply the provisions of section 11 422.16C shall not be required to make estimated tax payments 12 for a tax year beginning prior to the effective date of this 13 Act. 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 tax 25 rates under Code section 422.5A imposed against the taxable 26 income of the taxpayer for the taxable year. Currently, the 27 taxable income of a partnership or S corporation passes through 28 to 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 35 -4- LSB 1209YC (3) 90 jm/jh 4/ 5

H.F. _____ the ratio of the partner’s or shareholder’s share of taxable 1 income over the total taxable income multiplied by the state 2 tax liability of the electing taxpayer. 3 The bill limits the number of credits the taxpayer is 4 eligible for if the taxpayer elects to be subject to tax at the 5 partnership or S corporation level. The bill also prohibits 6 the taxpayer from claiming a net operating loss or electing to 7 carryback or carryforward a loss. 8 The bill does allow the taxpayer, if the taxpayer is a 9 financial institution, to claim the franchise tax credit in 10 Code section 422.11 equal to the amount of franchise tax paid 11 by the taxpayer. 12 If the amount of credit allowed under the bill exceeds the 13 tax liability of the partner or shareholder for the tax year, 14 the excess may be credited to the tax liability of the partner 15 or shareholder for the following five tax years or until 16 depleted, whichever occurs first. 17 The bill specifies that the partners or shareholders shall 18 be jointly and severally liable to pay any unpaid tax. 19 For tax years where an election is made, the withholding 20 requirements of Code section 422.16 do not apply. The bill 21 does require the taxpayer to make estimated tax payments 22 pursuant to Code section 422.85, if applicable. However, a 23 taxpayer electing to be taxed at the partnership level or at 24 the S corporation level is not required to make estimated tax 25 payments for a tax year beginning prior to the effective date 26 of the bill. 27 -5- LSB 1209YC (3) 90 jm/jh 5/ 5