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WILL VALUES FUND EXTENSION FIX IOWA DEPRECIATION RULES?

August 25, 2004

The Des Moines Register today reports that Governor Vilsack will call a one-day legislative session to re-enact the "Grow Iowa Values Fund." The paper cites the Governor as saying he has reached a "general" agreement with legislative leaders on a plan to restore the GIVF in a package that also re-couples federal and Iowa depreciation rules and changes workers compensation rules.

The Iowa Supreme Court nullified the law that originally enacted the GIVF, finding that the Governor's item-veto of tax cuts and other provisions in the enacting legislation rendered the entire bill invalid. The fund has been in limbo since then.

It is not yet clear how the depreciation fix will work. Iowa refused to go along with federal "bonus" depreciation enacted for assets placed in service from 9/12/01 through 12/31/04. Iowa taxpayers have been required to keep separate depreciation records for state regular tax and alternative minimum tax ever since. This affects a number of other Iowa tax computations, including inventory valuation. Iowa has also failed to increase the cap for "Section 179" expensing to the current federal level of $100,000. Section 179 allows taxpayers to deduct in the year of purchase fixed asset costs that would otherwise be recovered by depreciation.

One solution would be to allow taxpayers to file amended returns taking the federal deduction amounts for Iowa; this seems unlikely, as it would cause the state to pay interest on the refunds. A more likely solution would be to allow a "catch-up" deduction for Iowa returns, enabling taxpayers to write off in 2004 the difference between accumulated federal and Iowa depreciation. A truly lame solution would only couple federal and Iowa depreciation for assets purchased from a given date - say, starting 1/1/2004. This solution would require taxpayers to continue to maintain separate federal and Iowa depreciation schedules for years to come, until assets purchased under the federal "bonus" depreciation rules run out their lives.

This depreciation mess could have been avoided, but they just wouldn't listen.

UPDATE: Not everyone wants the fund revived. Good points, but we find the "Cassandra" reference confusing.

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