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McNulty: Iowa will stop taxing investment income of non-resident partners

October 21, 2009

Iowa appears to have quietly dropped its indefensible policy of attempting to tax non-residents on interest, dividends and capital gains of Iowa-based investment partnerships. Jim McNulty, a tax policy wonk at the Iowa Department of Revenue, yesterday told the tax policy committee of the Iowa Association of Business and Industry that the Department has "backed off" its position that all investment income of an investment partnership is "business income" apportionable to Iowa. This is consistent with stories we've heard from other Iowa tax pros.

Asked whether the Department will provide written guidance making its new position public, Mr. McNulty said Iowa may rewrite its regulations in this area.

Iowa should also rewrite the instructions to its S corporation and partnership non-resident K-1 forms, which now treat all interest and dividend income as business income. It should do so before the next filing season so everybody knows the new policy, not just those who happen to attend meetings with DOR employees.

Tags: Iowa tax policy.Jim McNulty.