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COMBINED REPORTING: WHAT THE NEW IOWA RULES WILL DO

March 01, 2007

The legislature is likely to pass combined corporation reporting this year. It's part of the governor's budget, and bills arre in the hopper in both the Iowa House (HF 326) and the Iowa Senate (SSB 1074).

The bills would apply to groups eligible to file a federal consolidated return. They attempt capture income steered to affiliated corporations in low-tax states by means of management fees and other intercompany income-shifting devices.

Example: Roy, Inc. is incorporated in Delaware; it has no Iowa nexus (taxable presence) and Iowa sales are $0 of its $90 million gross receipts. It has taxable income of $1 million, aside from management fees. It owns 100% of Gately Inc.

Gately has Iowa nexus. It has $5 million Iowa sales of its $10 million gross receipts. It has net income of $1 million before management fees. Gately pays Roy Inc. management fees of $1 million.

Without combined reporting, Gately allocates 50% ($5 mm ÷ $10 million) of $0 net income to Iowa and pays $0 tax.

With combined reporting, the Roy Inc. group allocates 5% ($5 mm ÷ $100 mm) of $2 million of income to Iowa, resulting in approximately $10,100 in Iowa tax.

A bolder and wiser move would be to repeal the state corporation income tax, which contributes insignificantly to Iowa's tax revenues (@3%), even though it imposes the highest tax rate of any state - 12%. Boldness and wisdom aren't in surplus this year, it seems.

We are tracking all tax bills in the legislature at our 2007 Iowa Tax Legislation page.

 • Eye on the Legislature: 2007 ~ • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit