House File 352 - Reprinted HOUSE FILE 352 BY COMMITTEE ON WAYS AND MEANS (SUCCESSOR TO HSB 69) (As Amended and Passed by the House April 13, 2023 ) A BILL FOR An Act relating to an entity-level taxation election for 1 pass-through entities and allowing a partner or shareholder 2 to claim a credit against the individual and corporate 3 income taxes and the franchise tax, and including effective 4 date and retroactive applicability provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 HF 352 (5) 90 jm/jh/md

H.F. 352 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 under section 422.16C 23 that is also a financial institution subject to the franchise 24 tax under subchapter V, the tax imposed under section 422.16C 25 shall be reduced by a franchise tax credit equal to the amount 26 of franchise tax paid by the taxpayer for the same year. 27 Sec. 2. NEW SECTION . 422.16C Pass-through entity —— 28 election —— entity-level tax —— credit. 29 1. As used in this section, unless the context otherwise 30 requires: 31 a. “Partnership” means the same as defined in section 32 422.25A, except a “partnership” does not include a pass-through 33 entity that is a publicly traded partnership as defined in 34 section 7704 of the Internal Revenue Code. 35 -1- HF 352 (5) 90 jm/jh/md 1/ 4

H.F. 352 b. “Taxpayer” means a partnership or an S corporation. 1 2. For tax years beginning on or after January 1, 2022, 2 notwithstanding any other provision of law to the contrary, 3 a taxpayer may elect to be subject to the provisions of this 4 section. This section only applies to tax years for which 5 the limitation on individual deductions applies under section 6 164(b)(6) of the Internal Revenue Code. 7 3. a. A separate election shall be made for each tax year 8 on a form and at a time prescribed by the department. An 9 election shall be irrevocable once made and shall be binding on 10 the taxpayer and all partners or shareholders of the taxpayer. 11 b. If an election is made under this section, a taxpayer 12 shall not be required to file a composite return for the same 13 tax year pursuant to section 422.16B. 14 4. a. A taxpayer making an election under this section 15 shall be subject to tax in an amount equal to the maximum rate 16 under section 422.5A, imposed against the taxable income of the 17 taxpayer for the taxable year properly determined under this 18 chapter and allocated and apportioned to the state under the 19 rules adopted by the department. The tax shall be due with the 20 taxpayer’s return required under this chapter. 21 b. The tax under this section shall be reduced by the credit 22 provided in subsection 5, paragraph “b” , and the franchise 23 tax credit in section 422.11, subsection 2, and the composite 24 credit in section 422.16B, subsection 4. Any other tax 25 credits shall not be claimed by the taxpayer against the tax 26 imposed under this section. A net operating loss or other loss 27 carryback or carryforward shall not be claimed by the taxpayer. 28 5. a. For a taxable year in which a taxpayer made an 29 election under this section, for the partners or shareholders 30 of the taxpayer, the taxes imposed under this subchapter, less 31 the credits allowed under section 422.12, or the taxes imposed 32 under subchapter III or V, as applicable, shall be reduced by a 33 credit equal to the product of the following amounts: 34 (1) The ratio of the partner’s or shareholder’s share of 35 -2- HF 352 (5) 90 jm/jh/md 2/ 4

H.F. 352 the taxpayer’s taxable income over the taxpayer’s total taxable 1 income multiplied by the state tax liability actually paid by 2 the taxpayer. 3 (2) The difference between one hundred percent and the 4 highest individual income tax rate in effect for the tax year. 5 b. If the taxpayer is itself a partner or shareholder of 6 another taxpayer making an election under this section, the 7 credit under this subsection shall be allowed. 8 c. Any credit in excess of the tax liability is refundable. 9 In lieu of claiming a refund, the partner or shareholder 10 may elect to have the overpayment shown on the partner’s or 11 shareholder’s final, completed return credited to the tax 12 liability for the following tax year. 13 6. A nonresident individual who is a partner or shareholder 14 of a taxpayer for a tax year in which an election is made under 15 this section shall not be required to file an individual income 16 tax return under section 422.13 for such tax year if the only 17 Iowa source income of the individual is from a taxpayer making 18 the election under this section, the credit allowed to the 19 partner or shareholder equals or exceeds the tax liability of 20 the partner or shareholder for the tax imposed in the tax year 21 the election is made, and if the taxpayer files and pays the 22 tax due under this section. 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. This 26 section shall not prohibit the department from assessing 27 direct or indirect partners and shareholders for taxes owed in 28 the event that the taxpayer fails to timely make any payment 29 required by this section for any reason. 30 8. In addition to and not in lieu of any period of 31 limitation provided in section 422.25, if a taxpayer files an 32 amended return that requests a refund of tax previously paid 33 within one year prior to the expiration of the department’s 34 applicable period of limitations in section 422.25, the 35 -3- HF 352 (5) 90 jm/jh/md 3/ 4

H.F. 352 department has one year from the date of receipt of the 1 amended return to assess any direct or indirect partners 2 and shareholders related to the reduction of any tax credit 3 provided under subsection 5. 4 9. The department shall adopt rules pursuant to chapter 17A 5 to administer this section. 6 Sec. 3. Section 422.85, Code 2023, is amended to read as 7 follows: 8 422.85 Imposition of estimated tax. 9 A taxpayer subject to the tax imposed by sections 422.16C, 10 422.33 , and 422.60 shall make payments of estimated tax for the 11 taxable year if the amount of tax payable, less credits, can 12 reasonably be expected to be more than one thousand dollars for 13 the taxable year. For purposes of this subchapter , “estimated 14 tax” means the amount which the taxpayer estimates to be the tax 15 due and payable under subchapter II, III , or V of this chapter 16 for the taxable year. 17 Sec. 4. ESTIMATED TAX PAYMENTS FOR TAX YEARS BEGINNING PRIOR 18 TO EFFECTIVE DATE OF ACT. Notwithstanding sections 422.16 and 19 422.85, a taxpayer electing to apply the provisions of section 20 422.16C shall not be required to make estimated tax payments 21 for a tax year beginning prior to the effective date of this 22 Act. 23 Sec. 5. PENALTY AND INTEREST WAIVER RELATED TO TAX YEARS 24 ENDING PRIOR TO EFFECTIVE DATE OF ACT. Notwithstanding any 25 provision of law to the contrary, the department may waive 26 penalty and interest for a return filing or tax payment related 27 to an election to be subject to the provisions of section 28 422.16C for a tax year ending prior to the effective date of 29 this Act. 30 Sec. 6. EFFECTIVE DATE. This Act, being deemed of immediate 31 importance, takes effect upon enactment. 32 Sec. 7. RETROACTIVE APPLICABILITY. This Act applies 33 retroactively to January 1, 2022, for tax years beginning on 34 or after that date. 35 -4- HF 352 (5) 90 jm/jh/md 4/ 4