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LEGISLATURE STIMULATES TAX PREP BUSINESS!

September 07, 2004

As the tax preparation business goes, so goes the state. At least that's the way it looks to us tax preparers. The Iowa General Assembly must think so too, based on the text of the tax provisions of the compromise economic development bill being considered in today's special session.

HOW WE GOT HERE

The tax provisions of the bill stem from Iowa's decision to not conform with the federal "bonus depreciation" tax rules for assets acquired after September 11, 2001. The "bonus" depreciation alloed taxpayers to deduct 30% of the cost of many new equipment purchases in the year of purchase, rather than over the depreciable life of the asset. The remaining cost is depreciated the usual way. Effective May 5, 2003, the federal rules became more generous, increasing the first-year deduction for qualifying property to 50% of its cost. The federal bonus depreciation allowance expires for assets placed in service after December 31, 2004.

To make things yet more complicated, Iowa opted out of another federal provision - the increase in the "Section 179" deduction to $100,000 (from the prior $25,000). Section 179 enables qualifying taxpayers to deduct up to $100,000 per year in equipment or software costs that would otherwise be depreciated and deducted over a period of several years.

These rules require Iowans to maintain separate Iowa depreciation schedules for regular tax and Iowa alternative minimum tax.

WHY THE SPECIAL SESSION?

When Iowa Supreme Court struck down the "Grow Iowa Values Fund" because of Governor Vilsack's attempted line-item veto, many GIVF projects had already been funded or authorized. The special session is the result of compromises between the Governor and the legislature over some of the items that triggered the attemped item vetoes -- including some tax reductions.

WHAT THEY'RE DOING

The bill (HF 2581) does two things of interest to tax folk:

- It adopts federal bonus depreciation rules retroactively for Iowa, but only for property placed in service after May 5, 2003.

- It adopts the federal increase in Section 179 depreciation retroactively to the federal effective date of tax years beginning after December 31, 2002.

- Both of these provisions are adopted retroactively, so taxpayers who have already filed their 2003 returns can now file amended returns to claim the federal amounts.

The result is rather strange.

Because the bill only conforms federal and Iowa depreciation starting May 6, 2003, taxpayers will still have to maintain separate Iowa depreciation records and basis schedules for "bonus" depreciation property placed in service between September 11, 2001 and May 6, 2003.

What's worse, many taxpayers will have to file an extra return to take advantage of the provisions, as they will have to amend their 2003 returns. As partial consolation, Iowa will probably have to pay interest on refunds claimed based on the addtional depreciation.

WHY DID THEY DO IT THIS WAY?

It's hard to guess what the lawmakers were thinking. It would have been simpler to let taxpayers "catch up" to federal accumulated depreciation with a one-time special deduction - perhaps spread over two or three years. This option would have avoided the hassle and expense of filing amended returns, eliminated separate Iowa depreciation records, and eliminated the need for the state to pay interest on refunds. Perhaps the state's revenue estimators decided that such a move would be too "costly."

Or perhaps they decided to throw a little work to the state's tax preparer community this fall. Thanks, guys, for remembering our economic development!

UPDATE! They passed HF 2581 and its companion appropriation bill, SF 2311, and sent them to the Governor. They've gone home now. It's safe to go outside again.

UPDATE II KCRG's web site says the Governor signed the bill last night. The Governor's web site is so far silent on the issue. The state website does reveal the breaking news that the state's new Poet Laureate was named yesterday.

For our prior coverage of this legislation, click here.

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