NOL Fixes and Partnership Audit Rules Highlight Iowa Department of Revenue's Legislative Agenda

February 21, 2020

On the heels of the Governor’s recently introduced tax bill, the Iowa Department of Revenue introduced Iowa House Study Bill 696 that contains a fix for Iowa net operating losses and changes to the partnership audit rules that would piggyback off of Federal.

Highlights of the IDR bill are summarized below.

Iowa Net Operating Losses

When Federal tax reform changed the NOL rules eliminating carrybacks for most losses, Iowans lost their option to forego the carryback but are getting it back in this bill.

When an Iowa taxpayer has a net operating loss (NOL), generally it is first required to be carried back two years for most taxpayers.  Losses not utilized in those carryback periods are then carried forward up to twenty years.  Current Iowa law in part ties the Iowa net operating loss carryback or carryover to Federal rules -- if there is an election to waive an NOL carryback at the Federal level, it also carries forward the Iowa NOL.

The elimination of most federal NOL carrybacks has created a problem for Iowans with losses. With no carryback, there is no Federal option to waive the carryback. That means that there is currently no option to forego the carryback period for Iowa alone.  With no carryback option at the Federal level, Iowans with NOLs have to carry them back, whether or not they want to.

The bill would solve this problem by creating an Iowa election to waive the Iowa NOL carryback period for taxable years beginning on or after January 1, 2020.  If this election is made, the Iowa NOL will then carryforward twenty years.

Partnership Audit Rules

The State is responding to changes brought by the Federal Bipartisan Budget Act (BBA) partnership audit rules by piggybacking them for tax years beginning on or after January 1, 2020.  This means any Iowa audit adjustments made to the partnership will be determined at the partnership or passthrough entity level rather than at the partner level, as it is at the Federal level.

An Iowa partnership will have the ability to identify a state partnership representative, noting this person may be different than the Federal partnership representative if so designated in writing to the IDR. This person will have the sole authority to act on behalf of the partnership or passthrough entity upon audit. 

Increased Penalties

The bill increases penalties and interest for nonfiling of returns with zero tax due and expands the inclusion of activities of a criminal offense related to fraudulent practices.  Nonfiling penalties in the case of specified businesses with no tax shown due increase to the greater of $200 or 10% of Iowa tax liability up to $25,000.  However, if a taxpayer is found to have willfully failed to file with the intent to evade filing or reporting Iowa-source income, the penalty will be the greater of $1,500 or 75% of Iowa tax liability.  An additional $1,000 penalty is imposed if a taxpayer fails to file a return within ninety days of written notice by the department that the taxpayer is required to do so.

Statute of Limitations

An important change was also made to the statute of limitations for examinations in connection with the recovery of an economic incentive or other state assistance from the normal three-year rule to unlimited that is due to failure to meet or maintain the requirements of an EDA program. 

Sales Tax

A new section would permit the IDR to enter into agreements with state, county, or district fairs to collect and remit sales taxes and fees from sellers making retail sales on fairgrounds or events conducted by the fair. 

The bill also specifies that services arising from or related to software sold as tangible personal property are subject to sales tax, and also that retail sales of specified digital products and a services there the specified digital product is essential and exclusive to the use of the service is not subject to sales tax.

Services in connection with a designated exempt entity would also now be exempt from sales tax if pursuant to a written contract.  The bill states that “currently, the construction contract is not required to be a written contract and only building materials, supplies, and equipment used in such a contract are exempt from the sales tax.”

Manufactured housing would see a tax break in the removal of its current 6% excise tax.

What’s Still Missing

The bill does not address several key items that we thought might have been addressed. These include:

  • Taxation of “GILTI” income earned by foreign corporations
  • Taxation of “self-rented” business real estate
  • Partnership and S corporation withholding on non-resident owners
  • Liberalization of rules covering “composite” filings by partnerships and S corporations for income attributable to non-residents
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