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IOWA DEPRECIATION SUMMARY

February 21, 2005

The Iowa Senate passed HF 102 last week to smooth over some of the depreciation confusion caused by last year's special session. While Governor Vilsack has not yet signed it into law, the combined House-Senate approval margin of 148-0 makes a veto unlikely.

WHAT THE SPECIAL SESSION DID LAST YEAR

The 2003 tax law made two big changes in federal depreciation rules:

-It increased the "bonus depreciation" rate to 50% for new assets placed in service after May 5, 2003, and

-it increased the maximum Section 179 deduction to $100,000. Section 179 allows taxpayers to deduct amounts paid for fixed assets that would otherwise have to be capitalized and deducted through depreciaton over a period of years.

Iowa originally declined to go along with these new rules. The special session last finally adopted the new rules, but by then most 2003 Iowa returns had already been filed without using the deductions. The Department of Revenue ruled (unwisely) that the only way to claim the increased deductions was to file amended returns.

WHAT THE NEW LAW DOES

The new law gives Iowans three options for catching up with depreciation:

1. File an amended 2003 return to claim the increased depreciation.
2. "Catch up" the 2003 depreciation on 2004 returns - saving you the headache of filing an extra 2003 return.
3. Continue to compute Iowa depreciation for 2003 asset purchases under the old rules (no bonus depreciation, $25,000 maximum 179 deduction).

WHAT THE BILL DOESN'T DO

The bill does not change the rules for bonus depreciation for assets placed in service before May 6, 2003. Federal bonus depreciation took effect September 11, 2001. Taxpayers must continue to maintain separate federal and Iowa depreciation schedules for assets placed in service from 9/11/2001 through May 5, 2003.

The bill also doesn't give exact procedures for claiming "catch-up" depreciation on 2004 returns. We believe the Department of Revenue will not be too fussy about how this is claimed; we will post any additional guidance they might issue.

The legislature gets some credit for a sensible fix before tax season got entirely away. Of course, they created the mess in the first place, but they fixed what they broke.

It would have been better to allow taxpayer to match up their Iowa depreciation back to 2001, but we can't wish for everything.

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