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Weekend Update: No resolution yet for 2010 Iowa tax depreciation, Section 179 rules

March 19, 2011

The conference committee trying to reconcile the different "tax coupling" bills passed by the two houses of the Iowa General Assembly has now gone a full week without finishing its work.

Meanwhile, thousands of Iowa business tax returns are in limbo, awaiting the word on what rules apply for 2010. The House bill conforms Iowa's tax law for bonus depreciation and the Section 179 deduction to the federal rules effective for 2010. The Senate bill adopts federal Section 179 rules for 2010, but bonus depreciation for 2011.

Many business returns already filed could be affected by the conference decision; these returns might have to be amended to comply with any retroactive tax law changes.

The bills in conference also include "supplemental appropriations" for several state programs, including indigent defense. Attorneys for paupers are scrambling to pay their bills; prosecutors, in contrast, won't miss a paycheck.

The hangup is a proposed bookkeeping account to hold any surplus state funds after the end of the budget year. Republicans want the account to get all surplus funds after reserve funds are restored, to be used for general tax reduction. Democrats want a limited effective date, with only 25% of the surplus to be set aside, and only for property tax relief.

The Governor entered the debate yesterday. In a town hall meeting in Columbus Junction, he came out for splitting the non-contentious issues from the bill so they can be enacted without more delay, reports Kathie Obradovich:

Branstad today, at a town hall meeting to promote his jobs plan, came down on the side of Democrats who want to push through the $45.7 million needed for human services, corrections and indigent defense.
“Since the House and Senate can’t agree on those other things, let’s just pass the things that are essential for now,” Branstad said. “So we can pay the indigent defense bills. So that we can meet the obligations of the people who are in the corrections system and the mental-health institutes. And then work out the other issues where philosophically we have these big differences, before the end of the session.”

This is another example of the Republican House acting independently of the Republican Governor. Earlier the House passed a 20% across-the-board individual rate cut. They haven't acted on the Governor's proposal to halve Iowa's highest-in-the-nation tax rate and increase the tax on casinos.

Rep. Tom Sands, the House Ways and Means Committee chairman, was in the audience. He said after the meeting that House Republicans feel they’ve already conceded on some issues that were important to them. He said supporters of the Taxpayers First Fund will lose leverage if they allow it to be separated from efforts to fill budget holes.
“We feel at this time we should not give on the Taxpayers First Act, because this is something we campaigned on,” he said. “I understand the urgency of getting some of that other stuff passed, but all of it is important.”

Branstad said he understands that, but he added: “I have the most leverage of anybody, because I have the veto.

What happens now? A lobbyist yesterday told me that if the conference fails to reach a deal this coming Monday, the impasse may continue indefinitely. The lobbyist said the most likely resolution on the tax deals is coupling with Section 179, but not bonus depreciation, and the Section 179 coupling may not be retroactive. If it is not, the Section 179 deduction -- which allows businesses to deduct currently fixed asset costs that would otherwise have to be capitalized and depreciated -- would be limited to $134,000 on 2010 Iowa returns. The federal limit for 2010 is $500,000.

Bonus depreciation allows taxpayers to accelerate deductions for new property placed in service in 2010 -- 50% of the cost, plus the normal depreciation, for property put in service before September 9, and 100% of the cost for property placed in service after that date. Failure to conform would leave Iowa businesses under the old regular rules for tax depreciation.

If they would just embrace the Tax Update's Quick and Dirty Tax Reform Plan, they would never have to have this silly debate.

Conference committee makes little progress on Iowa bonus depreciation bill

On the federal rules:

500K Section 179, extended bonus depreciation enacted

Bush-rate extension passes; what it means

Tags: bonus depreciation.Iowa bonus depreciation.Iowa tax policy.Kathie Obradovich.Section 179.