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DEPARTMENT OF REVENUE TRIMS S CORPORATION APPORTIONMENT BENEFIT

March 09, 2004

The Iowa Department of Revenue released new rules yesterday that limit the benefits of a tax break for S corporations with out-of-state sales. The new rules are designed to reduce the benefit of the "apportionment credit" claimed on Form 134 when an Iowa resident shareholder has received S corporation distributions exceeding the federal tax on the S corporation income. These rules take effect for years begining on and after January 1, 2004.

BACK TO WHERE WE THOUGHT WE WERE

The new rules work the way most practitioners thought the apportionment credit rules worked before the Department released its Humes declaratory ruling last year. The new rules use a complex formula to reduce the S corporation credit when distributions of current S corporation income exceed a deemed amount of federal taxes attributable to the S corporation.

The Humes ruling held that the Department's prior regulations provided that S corporation AAA distributions - that is, almost all S corporation distributions - were not counted in determining whether distributions exceeded federal taxes. In effect, the ruling held that the Department's regulations failed to achieve their intent. The new rules correct this perceived error.

The old rules remain in effect for prior years. Iowa resident S corporation shareholders have until April 30, 2004 to amend 2000 returns to claim apportionment credit unreduced by AAA distributions, if they haven't already done so.

For a quick overview of current S corporation rules, go here and look under the "current law" column for S corporations.

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