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House Study Bill 69 - IntroducedA Bill ForAn Act 1relating to an entity-level taxation election for
2pass-through entities and allowing a partner or shareholder
3to claim a credit against the individual income tax.
4BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:
1 Section 1. Section 422.11, Code 2023, is amended to read as
2follows:
3422.11 Franchise tax credit.
41. The taxes imposed under this subchapter, less the credits
5allowed under section 422.12, shall be reduced by a franchise
6tax credit. A taxpayer who is a shareholder in a financial
7institution, as defined in section 581 of the Internal Revenue
8Code, which has in effect for the tax year an election under
9subchapter S of the Internal Revenue Code, or is a member of a
10financial institution organized as a limited liability company
11under chapter 524 that is taxed as a partnership for federal
12income tax purposes, shall compute the amount of the tax credit
13by recomputing the amount of tax under this subchapter by
14reducing the taxable income of the taxpayer by the taxpayer’s
15pro rata share of the items of income and expense of the
16financial institution and subtracting the credits allowed
17under section 422.12. This recomputed tax shall be subtracted
18from the amount of tax computed under this subchapter after
19the deduction for credits allowed under section 422.12. The
20resulting amount, which shall not exceed the taxpayer’s
21pro rata share of the franchise tax paid by the financial
22institution, is the amount of the franchise tax credit allowed.
232. For a taxpayer making an election to apply the provisions
24of section 422.16C that is also a financial institution subject
25to the franchise tax under subchapter V, the tax imposed under
26section 422.16C shall be reduced by a franchise tax credit
27equal to the amount of franchise tax paid by the taxpayer for
28the same year.
29 Sec. 2. NEW SECTION. 422.16C Pass-through entity —
30election — entity-level tax — credit.
311. As used in this section, unless the context otherwise
32requires:
33a. “Partnership” means the same as defined in section
34422.25A, except a “partnership” does not include a pass-through
35entity that is a publicly traded partnership as defined in
-1-1section 7704 of the Internal Revenue Code.
2b. “Taxpayer” means a partnership or an S corporation.
32. a. Except as provided in paragraph “b”, for tax years
4ending on or after December 31, 2022, and beginning prior to
5January 1, 2026, notwithstanding any other provision of law to
6the contrary, a taxpayer may elect to apply the provisions of
7this section.
8b. This section only applies to tax years for which the
9limitation on individual deductions applies under section
10164(b)(6) of the Internal Revenue Code.
113. a. A separate election shall be made for each tax year
12on a form and at a time prescribed by the department. An
13election shall be irrevocable once made and shall be binding on
14the taxpayer and all partners or shareholders of the taxpayer.
15b. If an election is made, a taxpayer shall not be required
16to file a composite return for the same tax year pursuant to
17section 422.16B.
184. a. A taxpayer electing to apply the provisions of this
19section shall be subject to tax in an amount equal to the
20applicable rate under section 422.5A for tax years beginning
21before January 1, 2026, and the rate under section 422.5,
22subsection 1, paragraph “a”, for tax years beginning on or after
23January 1, 2026, imposed against the taxable income of the
24taxpayer for the taxable year properly determined under this
25chapter and allocated and apportioned to the state under the
26rules adopted by the department.
27b. The tax under this section shall be reduced by the credit
28provided in subsection 5, paragraph “b”, and the franchise tax
29credit in subsection 422.11, subsection 2, and the composite
30credit in section 422.16B, subsection 4. Any other tax
31credits shall not be claimed by the taxpayer against the tax
32imposed under this section. A net operating loss or other loss
33carryback or carryforward shall not be claimed by the taxpayer.
345. a. For a taxable year in which a taxpayer made an
35election under this section, for the partners or shareholders
-2-1of the taxpayer, the taxes imposed under this subchapter,
2less the credits allowed under section 422.12, shall be
3reduced by a credit equal to the ratio of the partner’s or
4shareholder’s share of taxable income over the total taxable
5income multiplied by the state tax liability actually paid by
6the taxpayer.
7b. If the taxpayer is itself a partner or shareholder of
8another taxpayer making an election to apply the provisions
9of this section, the credit under this subsection shall be
10allowed.
11c. If the amount of credit allowed under this subsection
12exceeds the tax liability of the partner or shareholder for the
13tax year, the excess may be credited to the tax liability of
14the partner or shareholder for the following five tax years or
15until depleted, whichever occurs first.
166. A nonresident individual who is a partner or shareholder
17of a taxpayer for a tax year in which an election is made under
18this section shall not be required to file a tax return for
19such tax year if the only source of income of the individual is
20from a taxpayer making the election under this section and the
21credit allowed to the partner or shareholder equals or exceeds
22the tax liability of the partner or shareholder for the tax
23imposed in the tax year the election is made.
247. A taxpayer making an election under this section is
25liable for the entity-level tax imposed pursuant to this
26section, including applicable penalties and interest. If
27the electing taxpayer fails to timely pay the full amount of
28the tax, the partners or shareholders shall be jointly and
29severally liable, along with the electing taxpayer, to pay the
30unpaid tax.
318. The department shall adopt rules pursuant to chapter 17A
32to administer this section.
33 Sec. 3. Section 422.85, Code 2023, is amended to read as
34follows:
35422.85 Imposition of estimated tax.
-3- 1A taxpayer subject to the tax imposed by sections 422.16C,
2 422.33, and 422.60 shall make payments of estimated tax for the
3taxable year if the amount of tax payable, less credits, can
4reasonably be expected to be more than one thousand dollars for
5the taxable year. For purposes of this subchapter, “estimated
6tax” means the amount which the taxpayer estimates to be the tax
7due and payable under subchapter II, III, or V of this chapter
8for the taxable year.
9 Sec. 4. ESTIMATED TAX PAYMENTS FOR TAX YEARS BEGINNING PRIOR
10TO EFFECTIVE DATE OF ACT. Notwithstanding sections 422.16 and
11422.85, a taxpayer electing to apply the provisions of section
12422.16C shall not be required to make estimated tax payments
13for a tax year beginning prior to the effective date of this
14Act.
15EXPLANATION
16The inclusion of this explanation does not constitute agreement with
17the explanation’s substance by the members of the general assembly.
18This bill relates to an entity-level taxation election for
19pass-through entities and allows a partner or shareholder to
20claim a credit against the individual income tax.
21For tax years ending on or after December 31, 2022, and
22beginning prior to January 1, 2026, a taxpayer (a partnership,
23other than a publicly traded partnership, or a subchapter S
24corporation), may elect to be subject to tax at the partnership
25or S corporation level in an amount equal to the applicable tax
26rates under Code section 422.5A imposed against the taxable
27income of the taxpayer for the taxable year. Currently, the
28taxable income of a partnership or S corporation passes through
29to the partners or shareholders of the entity and is subject to
30the individual income tax at the partner or shareholder level.
31The bill only applies to tax years as long as the limitation
32on individual deductions applies under section 164(b)(6) of the
33Internal Revenue Code.
34If an election is made, the partners or shareholders are
35allowed a credit against the individual income tax equal to
-4-1the ratio of the partner’s or shareholder’s share of taxable
2income over the total taxable income multiplied by the state
3tax liability of the electing taxpayer.
4The bill limits the number of credits the taxpayer is
5eligible for if the taxpayer elects to be subject to tax at the
6partnership or S corporation level. The bill also prohibits
7the taxpayer from claiming a net operating loss or electing to
8carryback or carryforward a loss.
9The bill does allow the taxpayer, if the taxpayer is a
10financial institution, to claim the franchise tax credit in
11Code section 422.11 equal to the amount of franchise tax paid
12by the taxpayer.
13If the amount of credit allowed under the bill exceeds the
14tax liability of the partner or shareholder for the tax year,
15the excess may be credited to the tax liability of the partner
16or shareholder for the following five tax years or until
17depleted, whichever occurs first.
18The bill specifies that the partners or shareholders shall
19be jointly and severally liable to pay any unpaid tax.
20For tax years where an election is made, the withholding
21requirements of Code section 422.16 do not apply. The bill
22does require the taxpayer to make estimated tax payments
23pursuant to Code section 422.85, if applicable. However, a
24taxpayer electing to be taxed at the partnership level or at
25the S corporation level is not required to make estimated tax
26payments for a tax year beginning prior to the effective date
27of the bill.
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2pass-through entities and allowing a partner or shareholder
3to claim a credit against the individual income tax.
4BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA:
1 Section 1. Section 422.11, Code 2023, is amended to read as
2follows:
3422.11 Franchise tax credit.
41. The taxes imposed under this subchapter, less the credits
5allowed under section 422.12, shall be reduced by a franchise
6tax credit. A taxpayer who is a shareholder in a financial
7institution, as defined in section 581 of the Internal Revenue
8Code, which has in effect for the tax year an election under
9subchapter S of the Internal Revenue Code, or is a member of a
10financial institution organized as a limited liability company
11under chapter 524 that is taxed as a partnership for federal
12income tax purposes, shall compute the amount of the tax credit
13by recomputing the amount of tax under this subchapter by
14reducing the taxable income of the taxpayer by the taxpayer’s
15pro rata share of the items of income and expense of the
16financial institution and subtracting the credits allowed
17under section 422.12. This recomputed tax shall be subtracted
18from the amount of tax computed under this subchapter after
19the deduction for credits allowed under section 422.12. The
20resulting amount, which shall not exceed the taxpayer’s
21pro rata share of the franchise tax paid by the financial
22institution, is the amount of the franchise tax credit allowed.
232. For a taxpayer making an election to apply the provisions
24of section 422.16C that is also a financial institution subject
25to the franchise tax under subchapter V, the tax imposed under
26section 422.16C shall be reduced by a franchise tax credit
27equal to the amount of franchise tax paid by the taxpayer for
28the same year.
29 Sec. 2. NEW SECTION. 422.16C Pass-through entity —
30election — entity-level tax — credit.
311. As used in this section, unless the context otherwise
32requires:
33a. “Partnership” means the same as defined in section
34422.25A, except a “partnership” does not include a pass-through
35entity that is a publicly traded partnership as defined in
-1-1section 7704 of the Internal Revenue Code.
2b. “Taxpayer” means a partnership or an S corporation.
32. a. Except as provided in paragraph “b”, for tax years
4ending on or after December 31, 2022, and beginning prior to
5January 1, 2026, notwithstanding any other provision of law to
6the contrary, a taxpayer may elect to apply the provisions of
7this section.
8b. This section only applies to tax years for which the
9limitation on individual deductions applies under section
10164(b)(6) of the Internal Revenue Code.
113. a. A separate election shall be made for each tax year
12on a form and at a time prescribed by the department. An
13election shall be irrevocable once made and shall be binding on
14the taxpayer and all partners or shareholders of the taxpayer.
15b. If an election is made, a taxpayer shall not be required
16to file a composite return for the same tax year pursuant to
17section 422.16B.
184. a. A taxpayer electing to apply the provisions of this
19section shall be subject to tax in an amount equal to the
20applicable rate under section 422.5A for tax years beginning
21before January 1, 2026, and the rate under section 422.5,
22subsection 1, paragraph “a”, for tax years beginning on or after
23January 1, 2026, imposed against the taxable income of the
24taxpayer for the taxable year properly determined under this
25chapter and allocated and apportioned to the state under the
26rules adopted by the department.
27b. The tax under this section shall be reduced by the credit
28provided in subsection 5, paragraph “b”, and the franchise tax
29credit in subsection 422.11, subsection 2, and the composite
30credit in section 422.16B, subsection 4. Any other tax
31credits shall not be claimed by the taxpayer against the tax
32imposed under this section. A net operating loss or other loss
33carryback or carryforward shall not be claimed by the taxpayer.
345. a. For a taxable year in which a taxpayer made an
35election under this section, for the partners or shareholders
-2-1of the taxpayer, the taxes imposed under this subchapter,
2less the credits allowed under section 422.12, shall be
3reduced by a credit equal to the ratio of the partner’s or
4shareholder’s share of taxable income over the total taxable
5income multiplied by the state tax liability actually paid by
6the taxpayer.
7b. If the taxpayer is itself a partner or shareholder of
8another taxpayer making an election to apply the provisions
9of this section, the credit under this subsection shall be
10allowed.
11c. If the amount of credit allowed under this subsection
12exceeds the tax liability of the partner or shareholder for the
13tax year, the excess may be credited to the tax liability of
14the partner or shareholder for the following five tax years or
15until depleted, whichever occurs first.
166. A nonresident individual who is a partner or shareholder
17of a taxpayer for a tax year in which an election is made under
18this section shall not be required to file a tax return for
19such tax year if the only source of income of the individual is
20from a taxpayer making the election under this section and the
21credit allowed to the partner or shareholder equals or exceeds
22the tax liability of the partner or shareholder for the tax
23imposed in the tax year the election is made.
247. A taxpayer making an election under this section is
25liable for the entity-level tax imposed pursuant to this
26section, including applicable penalties and interest. If
27the electing taxpayer fails to timely pay the full amount of
28the tax, the partners or shareholders shall be jointly and
29severally liable, along with the electing taxpayer, to pay the
30unpaid tax.
318. The department shall adopt rules pursuant to chapter 17A
32to administer this section.
33 Sec. 3. Section 422.85, Code 2023, is amended to read as
34follows:
35422.85 Imposition of estimated tax.
-3- 1A taxpayer subject to the tax imposed by sections 422.16C,
2 422.33, and 422.60 shall make payments of estimated tax for the
3taxable year if the amount of tax payable, less credits, can
4reasonably be expected to be more than one thousand dollars for
5the taxable year. For purposes of this subchapter, “estimated
6tax” means the amount which the taxpayer estimates to be the tax
7due and payable under subchapter II, III, or V of this chapter
8for the taxable year.
9 Sec. 4. ESTIMATED TAX PAYMENTS FOR TAX YEARS BEGINNING PRIOR
10TO EFFECTIVE DATE OF ACT. Notwithstanding sections 422.16 and
11422.85, a taxpayer electing to apply the provisions of section
12422.16C shall not be required to make estimated tax payments
13for a tax year beginning prior to the effective date of this
14Act.
15EXPLANATION
16The inclusion of this explanation does not constitute agreement with
17the explanation’s substance by the members of the general assembly.
18This bill relates to an entity-level taxation election for
19pass-through entities and allows a partner or shareholder to
20claim a credit against the individual income tax.
21For tax years ending on or after December 31, 2022, and
22beginning prior to January 1, 2026, a taxpayer (a partnership,
23other than a publicly traded partnership, or a subchapter S
24corporation), may elect to be subject to tax at the partnership
25or S corporation level in an amount equal to the applicable tax
26rates under Code section 422.5A imposed against the taxable
27income of the taxpayer for the taxable year. Currently, the
28taxable income of a partnership or S corporation passes through
29to the partners or shareholders of the entity and is subject to
30the individual income tax at the partner or shareholder level.
31The bill only applies to tax years as long as the limitation
32on individual deductions applies under section 164(b)(6) of the
33Internal Revenue Code.
34If an election is made, the partners or shareholders are
35allowed a credit against the individual income tax equal to
-4-1the ratio of the partner’s or shareholder’s share of taxable
2income over the total taxable income multiplied by the state
3tax liability of the electing taxpayer.
4The bill limits the number of credits the taxpayer is
5eligible for if the taxpayer elects to be subject to tax at the
6partnership or S corporation level. The bill also prohibits
7the taxpayer from claiming a net operating loss or electing to
8carryback or carryforward a loss.
9The bill does allow the taxpayer, if the taxpayer is a
10financial institution, to claim the franchise tax credit in
11Code section 422.11 equal to the amount of franchise tax paid
12by the taxpayer.
13If the amount of credit allowed under the bill exceeds the
14tax liability of the partner or shareholder for the tax year,
15the excess may be credited to the tax liability of the partner
16or shareholder for the following five tax years or until
17depleted, whichever occurs first.
18The bill specifies that the partners or shareholders shall
19be jointly and severally liable to pay any unpaid tax.
20For tax years where an election is made, the withholding
21requirements of Code section 422.16 do not apply. The bill
22does require the taxpayer to make estimated tax payments
23pursuant to Code section 422.85, if applicable. However, a
24taxpayer electing to be taxed at the partnership level or at
25the S corporation level is not required to make estimated tax
26payments for a tax year beginning prior to the effective date
27of the bill.
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