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IOWA DEPARTMENT OF REVENUE REVERSES ITSELF, LIMITS 2003 SECTION 179 DEDUCTION TO $25,000

January 30, 2004

The Iowa Department of Revenue and Finance gave practitioners on its email list an unhappy surprise this afternoon with the following message:

"The department is directing taxpayers to file their returns assuming that the Section 179 limit is $25,000."

That statement is hard to reconcile with the announcement originally posted on the Department's web site June 24, 2003:

"Iowa is planning to adopt the provisions of the federal Jobs and Growth Tax Relief Reconciliation Act of 2003 which relates (sic) to increasing the expensing amount under Section 179 of the Internal Revenue Code from $25,000 to $100,000 for assets placed in service during 2003, 2004 and 2005."

The Department e-mail says that if the legislature decides to go with the $100,000 deduction, you may file an amended return and claim a refund. They will be happy to send it to you in, oh, six months or so.

This news is sure to go over well with Iowans who may have recently purchased an SUV with the $100,000 number in mind.

The full text of the department email is available here .

NOW WHAT?

The DOR e-mail probably is a signal that the Governor doesn't want to allow the $100,000 Section 179 deduction. In the face of the Governor's expansive interpretation of his item veto powers, the Legislature may not want to fight him on this issue. But then again, given the frosty relations between the Legislature and the Governor, they may want to fight over just about anything.

Still, we have returns to file. What to do? That depends on your own situation. Some thoughts to keep in mind:

The Iowa Legislature is in session, and they usually adjourn around April 30 - which just happens to be the deadline for Iowa individual and corporate returns. Taxpayers taking a Federal Section 179 deduction over $25,000 on their 2003 returns have to choose whether to file now or wait to see whether the lawmakers will help them out.

If you owe tax on your 2003 Iowa return, the answer is easy: you sit tight and see whether the Legislature acts to allow the $100,000 deduction by April 30. By then we should have a pretty good idea whether the $100,000 deduction will be allowed on Iowa returns, even if the legislature isn't quite finished. There's no point filing a balance-due return early anyway; if you file early and the $100,000 deduction is allowed, you will have to file an amended return and wait six months for a refund.

Taxpayers expecting a big Iowa refund regardless of their Section 179 deduction who are ready to file before, say, March 15, probably want to go ahead and file anyway. If you have, say, $50,000 coming back from Iowa, you don't want to delay just because you might get an additional $6,735 from your Section 179 deduction. If your return isn't ready by, say, March 15, and it looks as though the legislature might allow the $100,000 deduction, it may make sense to wait to file to avoid the need to file an amended return. This is especially true if you file electronically - electronic refunds take only two weeks or so, while amended return refunds take six months.

Taxpayers who have only a small Iowa refund, or who will only have an Iowa refund if the Iowa Section 179 deduction is increased to $100,000, also probably want to wait until the legislature sorts things out.

WHAT ABOUT S CORPORATIONS AND PARTNERSHIPS?

Individuals need their K-1 forms from "pass-through entities" - S corporations and partnerships - to prepare their Iowa individual returns. Shareholders and partners can get impatient for their K-1s, especially when they expect a refund, so pass-throughs can't really wait to see what the lawmakers will do.

Their best solution may be to report Iowa information using the lower Section 179 limit, while also providing pro-forma K-1 information showing what the Iowa income (and related items) will be if the legislature decides to permit the full $100,000 deduction. This should enable the pass-through entity to avoid the amended returns while giving owners the information they need for their 1040s.

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