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CAN IOWANS TAKE ADVANTAGE OF 2003 BONUS DEPRECIATION WITHOUT AMENDED RETURNS?

September 16, 2004

The Iowa legislature last week decided to allow Iowans to use "Bonus" depreciation for property placed in service after May 3, 2003, and to use up to $100,000 of "Section 179 depreciation" on Iowa 2003 tax returns. As most of these have already been filed, this would seem to require that Iowans file amended returns to take advantage of this.

There may be another way. We feel the Department of Revenue has the authority to treat these changes as "accounting method" changes. In a letter we drafted and sent to to the Department today, we outline why the Department has this authority.

If the Department views the depreciation change as a change of accounting method, taxpayers may be able to make up their 2003 depreciation in 2004. This would save them the time and expense of filing amended returns to use the additional 2003 depreciation and Section 179 deduction. This would be especially helpful to small taxpayers, and to partnerships and S corporations whose depreciation is split among many owners.

Stay tuned.

Click "Read more" to see the letter.

September 16, 2004

Mr. Michael Ralston
Iowa Department of Revenue
1305 E. Walnut
Des Moines, Iowa 50319

Dear Mr. Ralston:

The recently-passed economic development legislation presents a number of challenges to taxpayers, the Department, and to tax practitioners. This letter presents for your consideration suggestions for meeting these challenges. They relate to two areas: standardizing refund requests, and authorizing treatment of changes in depreciation as changes in methods of accounting.

While the ideas presented here were circulated among members of the Tax Committee of the Iowa Society of CPAs, this letter is not intended to present the views of the Committee or the Society.

Refunds:

We suggest the issue the following substantive guidance with respect to refunds:

1. Taxpayers have the option to continue to use their old state depreciation schedules; bonus depreciation and extra Section 179 deduction is optional for Iowa, not mandatory.

2. Iowa will respect “30% elections” under Sec. 168(k)(4)(e) - that is, elections to take 30% bonus depreciation, rather than 50%, for post 5/5/03 property.

3. There will be no adjustment for alternative minimum tax for post-5/5/03 property for which Sec. 168(k)(4) depreciation is used.

4. Taxpayers who properly claimed federal Section 179 deduction for years beginning after 2002 and before 2004 in excess of $25,000 will be allowed, but not required, to claim the excess on an amended Iowa return.

We also suggest the Department issue refund claim checklists to simplify processing and to help taxpayers know how to comply. These checklists are included in an appendix to this letter.

                               -2-

Regulatory authority for accounting method change treatment

The legislature passed HF 2581 to encourage economic development. If amended returns are required to take advantage of the HF 2581 change, many taxpayers will find the expense of filing amended returns will offset any gain from bonus depreciation or additional Section 179 deductions.

We feel the Department has available tools to make this benefit available for taxpayers without the need to file amended returns. IAC Section 701-41.2(422) gives the Department authority to adopt IRS regulations or rulings as appropriate for determining taxable income:

   In determining whether “taxable income,”
   “net operating loss deduction” or any 
   other deductions are computed for 
   federal tax purposes under, or have 
   the same meaning as provided by, the 
   Internal Revenue Code of 1954, the 
   Department will use applicable rulings
   and regulations that have been duly 
   promulgated by the commissioner of 
   internal revenue, unless the director 
   has created rules and regulations or 
   has exercised discretionary powers as 
   prescribed by statute which calls for
   an alternative method for determining 
   “taxable income,” “net operating loss 
   deduction” or any other deduction, or 
   unless the Department finds that an 
   applicable internal revenue ruling or 
   regulation is unauthorized according 
   to the Iowa Code.

We suggest the Department can use this authority to treat the conversion to Sec. 168(k)(4) depreciation and the $100,000 Section 179 limit used on 2003 federal returns as an Iowa-only accounting method change. This would enable taxpayers to take the adjustment into account on their 2004 returns, avoiding the need to redo prior returns. This would be presented as a voluntary alternative to claiming the federal deduction via amended Iowa returns.

Background

The IRS has consistently permitted or required changes in depreciation method to be treated as changes in accounting method. Rev. Proc. 2002-9 allows taxpayers to automatically change depreciation methods without advance consent.

The Department should permit taxpayers to make the change to the methods used for federal taxation as permitted by HF 2581 under the terms and conditions of Appendix 2.02 of Rev. Proc. 2002-9. As updated by Rev. Proc. 2002-54, this enables taxpayers to take the change into account in the year of change – 2004, for a calendar-year taxpayer. This method change would be automatically permitted. Taxpayers would write “HF 2581 – Rev. Proc. 2002-9” across the return to notify the Department of the change and reflect the change

                               -3-

as a separate item attached to their return – or on a separate line or section of the return, should the Department appropriately modify its forms.

Partnerships and S corporations would make such a change on their returns; partners and shareholders would be bound by the S corporation election with respect to their distributive shares.

The Department has precedent for such an adjustment. For example, the Department has required Section 481(a) adjustments to be computed on the basis of Iowa rules for purposes of computing the Franchise tax. In 1991, the Iowa State Board of Tax Review required a taxpayer going from the cash method of accounting to the accrual method to compute a Section 481(a) adjustment using Iowa tax rules (In the Matter of First National Bank, Ames). Also, the Department permitted an Iowa-only change of accounting method for the deduction of federal taxes in an October 7, 1997 policy letter.

By exercising its authority under IAC 701 41.2, the Department can effect the change of depreciation method under HF 2581 at a great savings of compliance costs to taxpayers and the Department alike. These savings will facilitate the improved economic activity that the legislature seeks.

Summary

HF 2581 presents unique challenges. There is need for prompt guidance, and we suggest that any changes be made in the most expeditious manner available under Department procedures. Once a course of action is decided, the Department should issue an announcement pending final regulatory action to its email list, on its web site, and to tax publishers as to its intentions so taxpayers can know how to proceed.

We thank you for the opportunity to present our thoughts, and we would be pleased to discuss them with you at your convenience.

Sincerely:

Joe Kristan, CPA                         	Michael R. Helm, CPA, CSEP
Roth & Company, PC                         	Brooks Lodden, P.C.
666 Walnut, Suite 1450                     	1441 - 29th Street, Suite 305
Des Moines, IA 50309			West Des Moines, IA  50266-1357
(515) 244-0266			(515) 223-7300

cc: Judy Chaplin

APPENDIX

Draft checklists:

Form 1120

•Describe return appropriately as “Refund Claim – HF 2581.” If the refund claim is solely a result of changes in K-1s received by the corporation, label it “Refund Claim – HF 2581, K-1”

•Attach copies of any original and amended schedules (marked “original” and “amended”) changed to reflect HF 2581. These will generally include IA 4562A. Others may include:
o Schedule IA 4626 (Alternative minimum tax.)
o Schedule IA 8827 (AMT credit)
o Schedules F and G (Regular and AMT loss carryforwards)
o Schedule H (Federal tax deduction and refund inclusion)
o IA 133 and 133A (new jobs credit)
o IA 2220 (underpayment of estimated tax)
o IA 3468 (investment tax credit)

•Attach a schedule reconciling any differences between change in depreciation and change in taxable income (for example, depreciation required to be capitalized, such as under Sec. 263A).

Form 1120S:

• Describe return appropriately as “Amended return – HF 2581.”

• Attach copies of any original and amended schedules (marked “original” and “amended”) changed to reflect HF 2581. These will generally include IA 4562A and schedule S. Others may include:
o IA 133 and 133A (new jobs credit)
o IA 3468 (investment tax credit)

• Attach a schedule reconciling any differences between change in depreciation and change in taxable income (for example, depreciation required to be capitalized, such as under Sec. 263A).

• Attach copy of information provided to shareholders showing their distributive shares of the corrected income and credits.

Form 1065:

• Describe return appropriately as “Amended return – HF 2581.”

• Attach copies of any original and amended schedules (marked “original” and “amended”) changed to reflect HF 2581. These will generally include IA 4562A and schedule S. Others may include:
o IA 133 and 133A (new jobs credit)
o IA 3468 (investment tax credit)

• Attach a schedule reconciling any differences between change in depreciation and change in taxable income (for example, depreciation required to be capitalized, such as under Sec. 263A).

• Attach copy of information provided to shareholders showing their distributive shares of the corrected income and credits.

Form 1040:

• If return is amended to change items other than pass-through items, write across the top “Refund Claim - HF 2581.” If all changes are a result of changes in the taxpayer’s K-1s, write “Refund Claim – HF 2581, K-1”

• If changes are made as a result of Schedule C, Schedule E or Schedule F depreciation, attach the original and amended form IA 4562A. If the IA 4562A is no longer required as a result of the amended return (for example, only Section 179 deprecation changes), then attach instead a copy of the federal form 4562.

• Reconcile any difference between depreciation changes and changes in taxable income. These may include capitalization rules, such as under Sec. 263A.

• If changes are made only to reflect K-1 changes, attach original and amended K-1 copies, or information provided by pass-throughs, to reflect changes.

• Attach copies of any other forms or schedules that change as a result of the K-1 changes. These may include:

o IA 133 and 133A (new jobs credit)
o Form 134 (S corporation apportionment credit)
o IA 3468 (investment tax credit)
o IA 6251 (AMT)
o IA 8801 (AMT credit)
o Computation of Iowa franchise tax credit.

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