H.F. 2732 Section 1. NEW SECTION . 159.5A Water quality practice. 1 1. The department, acting through the division of soil 2 conservation and water quality, may enter onto land in order to 3 inspect a water quality practice and verify that such practice 4 has been established and maintained as required in chapter 467. 5 In entering onto the land, the division shall have the powers 6 conferred upon commissioners of soil and water conservation 7 districts under chapter 161A as if the water quality practice 8 were a soil and water conservation practice or erosion control 9 practice established on a voluntary or mandatory basis using 10 cost-share moneys. 11 2. Subsection 1 does not require the department to 12 enter onto land to inspect and verify the establishment or 13 maintenance of a water quality practice. 14 Sec. 2. NEW SECTION . 161A.11 Water quality practice —— 15 cooperation with the division. 16 The commissioners of a district where a water quality 17 practice is to be or has been established under chapter 467 are 18 deemed to be the agents of the division and shall act under 19 the direction and supervision of the division in entering 20 onto land located in the district in order to inspect a water 21 quality practice and verify that it has been established and 22 maintained as required in chapter 467. In entering onto the 23 land, the commissioners have all the powers conferred upon them 24 under this chapter as if the water quality practice were a soil 25 and water conservation practice or erosion control practice 26 established on a voluntary or mandatory basis using cost-share 27 moneys. 28 Sec. 3. NEW SECTION . 161A.77 Limitations on financial 29 assistance —— water quality practice tax credits. 30 A person is not eligible to receive an award of financial 31 assistance that is not required to be repaid by the recipient, 32 including but not limited to cost-share moneys under this 33 chapter, for that portion of the amount awarded under the water 34 quality practice program as either an edge-of-field practice 35 -1- LSB 6588YH (3) 91 da/js 1/ 9

H.F. 2732 tax credit or cover crop practice tax credit under chapter 467. 1 Sec. 4. NEW SECTION . 422.11K Water quality practice program 2 —— tax credits. 3 1. The taxes imposed under this subchapter, less the 4 credits allowed under section 422.12, shall be reduced by an 5 edge-of-field practice tax credit allowed under chapter 467. 6 2. The taxes imposed under this subchapter, less the credits 7 allowed under section 422.12, shall be reduced by a cover crop 8 practice tax credit allowed under chapter 467. 9 Sec. 5. Section 422.33, Code 2026, is amended by adding the 10 following new subsection: 11 NEW SUBSECTION . 24. a. The taxes imposed under this 12 subchapter, less the credits allowed under section 422.12, 13 shall be reduced by an edge-of-field practice tax credit 14 allowed under chapter 467. 15 b. The taxes imposed under this subchapter, less the credits 16 allowed under section 422.12, shall be reduced by a cover crop 17 practice tax credit allowed under chapter 467. 18 Sec. 6. NEW SECTION . 467.1 Definitions. 19 As used in this chapter, unless the context otherwise 20 requires: 21 1. a. “Cover crop” means a water quality practice that is 22 planted for seasonal vegetative cover and that is all of the 23 following: 24 (1) Part of a crop rotation cycle. 25 (2) Not intended for harvest. 26 (3) Established in a manner that promotes soil health. 27 b. “Cover crop” includes grasses, legumes, forbs, and other 28 vegetation specified by the department. 29 2. “Cropland” means any land suitable for use to produce 30 grains, seed crops, and forages. 31 3. “Department” means the department of agriculture and land 32 stewardship. 33 4. a. “Edge-of-field practice” means a water quality 34 practice designed to slow, filter, and process surface and 35 -2- LSB 6588YH (3) 91 da/js 2/ 9

H.F. 2732 subsurface water draining from cropland. 1 b. “Edge-of-field practice” includes all of the following: 2 (1) A bioreactor installed as part of or connected to a 3 field drainage system. 4 (2) A wetland established as part of or connected to a crop 5 field. 6 (3) A saturated buffer. 7 (4) Cropland integrated with a prairie grass strip. 8 (5) A riparian buffer strip. 9 (6) A grassed waterway. 10 (7) An area maintained in permanent vegetation cover, 11 including perennial vegetation cover consisting of grasses or 12 legumes, including but not limited to grasslands or forages. 13 (8) A wetland area if the area is mostly underwater or 14 waterlogged during the growing season and is characterized by 15 vegetation of hydric soils. 16 (9) Any other measure recognized by the department that 17 manages nutrients and reduces contributing contaminant loads to 18 receiving surface waters, including by detaining sediment-laden 19 water, reducing the volume or velocity of precipitation-induced 20 surface water, filtering sediment-laden water, or reducing 21 nutrient loss through tile drainage systems. 22 5. “Eligible taxpayer” means a person that meets all of the 23 following requirements: 24 a. Is eligible to claim the family farm tax credit under 25 chapter 425A. 26 b. Has a net worth not exceeding two million dollars 27 according to generally accepted accounting principles. 28 6. “Farming practice” includes but is not limited to a 29 decision regarding crop production, including crop types and 30 varieties to plant, cultivation and harvesting methods, and 31 the application of materials including manure and commercial 32 fertilizers, tillage, and crop rotation systems. 33 7. “Soil and water conservation practice” means the same as 34 defined in section 161A.42. 35 -3- LSB 6588YH (3) 91 da/js 3/ 9

H.F. 2732 8. “Soil health” means the continued capacity of soil to 1 permanently sustain plant and animal life. 2 9. “State fiscal year” means the fiscal year described in 3 section 3.12. 4 10. “Tax credit” means any of the following: 5 a. An edge-of-field practice tax credit. 6 b. A cover crop practice tax credit. 7 11. “Water quality practice” means any of the following: 8 a. An edge-of-field practice. 9 b. A cover crop practice. 10 Sec. 7. NEW SECTION . 467.2 Water quality practice program 11 —— administration. 12 1. This chapter shall be administered by the department of 13 agriculture and land stewardship. The department of revenue 14 shall cooperate with the department of agriculture and land 15 stewardship in administering this chapter. 16 2. The department of agriculture and land stewardship and 17 the department or revenue shall adopt rules pursuant to chapter 18 17A necessary or desirable to administer this chapter. 19 Sec. 8. NEW SECTION . 467.3 Water quality practice program 20 —— purpose. 21 1. A water quality practice program is established in the 22 department of agriculture and land stewardship. 23 2. The purpose of the program is to establish new water 24 quality practices as part of existing farming practices, 25 including by providing for the establishment of measures that 26 limit sediment or nutrients from being conveyed by subsurface 27 drainage or surface water runoff or leaching and that may be 28 part of a soil and water conservation practice and that may 29 promote soil health. 30 Sec. 9. NEW SECTION . 467.11 Edge-of-field practice tax 31 credit. 32 As part of the water quality practice program as provided in 33 section 467.3, an edge-of-field practice tax credit is allowed 34 against the taxes imposed in chapter 422, subchapter II, as 35 -4- LSB 6588YH (3) 91 da/js 4/ 9

H.F. 2732 provided in section 422.11K, and in chapter 422, subchapter 1 III, as provided in section 422.33, subsection 24. 2 Sec. 10. NEW SECTION . 467.12 Cover crop practice tax 3 credit. 4 As part of the water quality practice program as provided 5 in section 467.3, a cover crop practice tax credit is allowed 6 against the taxes imposed in chapter 422, subchapter II, as 7 provided in section 422.11K, and in chapter 422, subchapter 8 III, as provided in section 422.33, subsection 24. 9 Sec. 11. NEW SECTION . 467.13 Tax credit application —— 10 approval process. 11 1. The department of agriculture and land stewardship, in 12 cooperation with the department of revenue, shall establish 13 criteria and procedures for the review and approval or 14 disapproval of applications submitted by persons seeking to 15 participate in the water quality practice program by being 16 awarded any of the following: 17 a. An edge-of-field practice tax credit. The amount of 18 the tax credit shall not exceed fifty percent of the estimated 19 or actual cost of establishing the edge-of-field practice, 20 whichever is less. 21 b. A cover crop practice tax credit. The amount of the 22 tax credit shall not exceed fifty percent of the estimated or 23 actual cost of establishing the cover crop practice, whichever 24 is less. 25 2. The department shall not approve an application under 26 subsection 1 unless all of the following apply: 27 a. The person is an eligible taxpayer. 28 b. The person agrees to establish and maintain a water 29 quality practice associated with an edge-of-field practice tax 30 credit or a cover crop practice tax credit for not less than 31 ten years. 32 3. An eligible taxpayer may apply for and be approved 33 for the establishment of both an edge-of-field practice tax 34 credit and a cover crop practice tax credit, as described 35 -5- LSB 6588YH (3) 91 da/js 5/ 9

H.F. 2732 in subsection 1, so long as each application applies to 1 the establishment of a separate and distinct water quality 2 practice. 3 Sec. 12. NEW SECTION . 467.14 Tax credit application —— 4 approval. 5 1. Subject to subsection 2, the department shall approve 6 applications to participate in the water quality practice 7 program by awarding a tax credit pursuant to section 467.13 on 8 a first-come, first-served basis. 9 2. The department shall not approve an application if the 10 aggregate amount awarded for all tax credit awards exceeds ten 11 million dollars in any state fiscal year. 12 3. Applications that were approved by the department but for 13 which a tax credit was not awarded shall be placed on a wait 14 list in the order that the applications were received by the 15 department and shall be given priority for being awarded a tax 16 credit in the succeeding state fiscal year. 17 Sec. 13. NEW SECTION . 467.15 Tax credit award. 18 1. After the department of agriculture and land stewardship 19 has approved all applications by eligible taxpayers 20 participating in the water quality practice program under 21 section 467.14, and after the department has approved all 22 eligible taxpayers’ corresponding tax credit awards, the 23 department shall do one of the following: 24 a. Issue a tax credit certificate to each eligible taxpayer 25 that has been awarded an edge-of-field practice tax credit. 26 b. Issue a tax credit certificate to each eligible taxpayer 27 that has been awarded a cover crop practice tax credit. 28 2. The tax credit certificate shall be issued and contain 29 the information required by the department of revenue. 30 3. Under either tax credit, an individual may claim the 31 tax credit as a partnership, limited liability company, 32 S corporation, estate, or trust electing to have income 33 taxed directly to the individual. The amount claimed by the 34 individual shall be based upon the pro rata share of the 35 -6- LSB 6588YH (3) 91 da/js 6/ 9

H.F. 2732 individual’s earnings from the partnership, limited liability 1 company, S corporation, estate, or trust. 2 4. To claim the relevant tax credit, an eligible taxpayer 3 shall include a tax credit certificate for that tax credit with 4 the eligible taxpayer’s tax return pursuant to rules adopted 5 by the department of revenue. 6 5. A tax credit certificate, unless rescinded by the 7 department of agriculture and land stewardship, shall be 8 accepted by the department of revenue as payment for taxes 9 pursuant to chapter 422, subchapters II and III, subject to 10 any conditions or restrictions placed by the department of 11 agriculture and land stewardship upon the face of the tax 12 credit certificate and subject to the limitations of the water 13 quality practice program, including the application approved 14 by the department. 15 Sec. 14. NEW SECTION . 467.16 Tax credit award —— 16 limitations. 17 1. A tax credit awarded under section 467.15 to an eligible 18 taxpayer shall not be transferable to any other person other 19 than the eligible taxpayer’s estate or trust upon the eligible 20 taxpayer’s death pursuant to rules adopted by the department of 21 agriculture and land stewardship. 22 2. A tax credit in excess of the eligible taxpayer’s 23 tax liability for the tax year is not refundable but may be 24 credited to the tax liability for the following ten tax years 25 or until depleted, whichever is earlier. A tax credit shall 26 not be carried back to a tax year prior to the tax year in which 27 the eligible taxpayer redeems the tax credit. 28 3. If the eligible taxpayer fails to comply with any 29 requirement of the water quality practice program or the terms 30 of the approved application, as determined by the department of 31 agriculture and land stewardship, that department may revoke 32 the tax credit award and may rescind any tax credit certificate 33 that has been issued. The department of agriculture and land 34 stewardship shall notify the department of revenue of any 35 -7- LSB 6588YH (3) 91 da/js 7/ 9

H.F. 2732 required repayment of an awarded tax credit. Such repayment 1 shall be considered a tax payment due and payable to the 2 department of revenue by any taxpayer that claimed the tax 3 credit, and the taxpayer’s failure to make the repayment may 4 be treated by the department of revenue in the same manner as a 5 failure to pay the tax shown due, or required to be shown due, 6 with the filing of a return or deposit form. 7 EXPLANATION 8 The inclusion of this explanation does not constitute agreement with 9 the explanation’s substance by the members of the general assembly. 10 GENERAL PROVISIONS. This bill provides for a water quality 11 practice program (program) administered by the department of 12 agriculture and land stewardship (DALS) in cooperation with the 13 department of revenue (DOR). The purpose of the program is 14 to establish new water quality practices as part of existing 15 farming practices, including by providing for the establishment 16 of measures that limit sediment or nutrients from being 17 conveyed by subsurface drainage or surface water runoff or 18 leaching and that may be part of a soil and water conservation 19 practice and that may promote soil health. 20 TAX CREDIT PROVISIONS. The program provides for two 21 separate tax credits: (1) an edge-of-field practice tax credit 22 and (2) a cover crop practice tax credit. The bill provides 23 for the consideration and approval of applications submitted 24 to DALS by eligible taxpayers seeking to participate in the 25 program. A person is eligible to participate in the program 26 if the person is eligible to claim the family farm tax credit 27 (Code chapter 425A) and has a net worth not exceeding 28 $2 million. The person must also agree to establish and 29 maintain a water quality practice associated with a tax 30 credit for at least 10 years. The amount of the tax credit 31 cannot exceed 50 percent of the estimated or actual cost of 32 establishing the water quality practice, whichever is less. 33 DALS cannot approve an application, if the aggregate amount 34 awarded for all tax credit awards exceeds $10 million in any 35 -8- LSB 6588YH (3) 91 da/js 8/ 9

H.F. 2732 state fiscal year (July 1 through June 30). Upon approval of 1 a tax credit award, DALS must issue the eligible taxpayer a 2 tax credit certificate to be included as part of the eligible 3 taxpayer’s tax return according to DOR requirements. The bill 4 provides limitations upon the transferability of a tax credit 5 and the use of the tax credit to offset income. 6 ENFORCEMENT. DALS or a commissioner of a soil and water 7 conservation district is authorized to enter onto land where 8 a water quality practice is established in the same manner as 9 a commissioner may enter on the land where a soil and water 10 conservation practice financed with state cost-share moneys 11 is established (Code chapter 161A). If the eligible taxpayer 12 fails to comply with any requirement of the program or the 13 terms of the approved application, DALS may revoke the tax 14 credit award and may rescind any tax credit certificate that 15 has been issued. In that case, DOR must seek repayment of the 16 tax credit award by considering the repayment amount as a past 17 due tax amount. 18 -9- LSB 6588YH (3) 91 da/js 9/ 9