The Iowa Department of Revenue and Finance today announced that Iowa
will not go along with the new federal law providing a 30% extra depreciation deduction for fixed assets placed in service on or after September 11. This provision is in a bill (HF
2116) expected to be signed by the Governor.
The extra depreciation was included in the federal stimulus bill signed earlier this month by the President.
This is terrible policy for a number of reasons. Iowa already has probably the most complicated income tax system of any Midwestern state; we can now add the need to keep separate state depreciation records to the compliance burden. Combined with some of the highest income tax rates around, the complexity makes Iowa a great place not to have income.
Iowa is also declining to adopt the new federal five-year NOL carryback rule and the new deduction for purchases of school supplies by teachers.
At this point, our only option is to complain to the Governor and the Legislature about this foolish policy. Both houses of the legislature have already passed this provision, so it will take some work to undo it. You can write to the Governor at
Office of the Governor
Des Moines, IA 50319
or email him here: Rose.Mary.Pratt@igov.state.ia.us
Or call 515-281-5211, or send a fax to 515-281-6611.
April 15 is only three weeks away. Over 40% of the 1040s that we will do are not even in our office yet. There is no shame in putting off your tax season visit to your CPA – lots of folks do, in spite of the well-known CPA charisma and charm. You can make the visit pass even more pleasantly, and economically, if you come prepared. If we have to call you back to gather more information, it delays your refund and increases our bill. Some of the items most commonly forgotten:
Many more taxpayers are e-filing their returns this year. Iowa has provided the biggest incentive for e-filing by saying it will take up to 12 weeks to process refunds from paper tax returns. E-filers, in contrast, have been getting their refunds as quickly as one week after filing.
Proposed federal legislation would give taxpayers until April 30 to file returns electronically. A mixed blessing, at best – tax season seems plenty long to us right now.
The state legislature has passed another incentive for venture capital investments. Recently passed H.F. 2586 provides a 6% credit against individual, corporate and bank taxes for investments in venture capital funds. The credit will be available for investments starting this year, but it will not be available to offset taxes before 2005.
The Iowa Department of Economic Development will certify funds as eligible for the credit if they maintain a “physical presence” in Iowa, if the fund
"...makes a commitment to consider equity investments in businesses located within the state of Iowa.”
This is the fourth venture capital credit passed by the state legislature this year. The others:
A credit of up to 20% of direct investment by individuals in “qualifying business.”
These are businesses with a net worth of up to $3,000,000 with principal operations located in Iowa, and with owners who meet certain training or experience requirements. The business cannot be “primarily engaged in retail sales, real estate, or the provision of professional services.
A credit of up to 20% of a cash investment by individuals, corporations or financial institutions in a “community based seed capital fund.”
A credit for investors in a “fund of funds” investing in venture capital funds, to the extent (if any) that the return on the investments falls short of a minimum established when the investments are made.
All of these credits will improve the environment for venture capital in Iowa. Unfortunately, as long as Iowa has higher income tax rates than all of its neighbors, enacting these credits is a bit like turbocharging the engine of a car with a flat tire.
The IRS has issued the minimum rates to be charged for loans made in April, 2002:
DID YOU KNOW?
Roth & Company, P.C. is a “Certified Channel Partner” for Best Software’s MAS90 accounting package. Our Bob Hickok has passed an examination by the software company to qualify to maintain and sell this flexible and popular accounting software package.
Many taxpayers who had already filed their 2001 returns scrambled to take another look at them when Congress this month passed a new law making retroactive taxpayer-friendly changes. Not to be outdone, the IRS will make amended returns worthwhile for many taxpayers with last week’s unheralded announcement (Rev. Proc. 2002-19) changing the procedures for changes in accounting methods. In many cases, these rules are retroactive to 2001 – for the most part on an optional basis.
The IRS requires taxpayers to receive its permission before changing a method of accounting. If permission is not obtained, the IRS gets to undo the method change; if permission is obtained, the IRS cannot challenge the method used in prior years. To save itself the headache of closely evaluating every method change request, the IRS has issued blanket permission for many accounting method changes, provided taxpayers give the IRS proper notice and follows rules set forth by the service. Rev. Proc. 2002-19 is the most recent IRS update of these rules
Many of our community bank clients took advantage of one of these blanket permissions to change from accrual method to cash method with their 2001 tax returns.
The IRS buried a bomb within this seemingly dull Revenue Procedure. A change in accounting methods causes an immediate change in taxable income. For example, taxpayers going from the accrual method to the cash method have to back out of income all of their accrued but not received income. This difference is called, poetically, the “Section 481(a) adjustment.” The IRS has required most such adjustments to be spread over four years, whether they increased or reduced taxable income.
The new rules keep the four-year adjustment period when the adjustment INCREASES taxable income, but require taxpayers to take REDUCTIONS into account in only ONE YEAR.
There are actually times when you might want to spread a deduction over four years. This is especially true if you did your 2001 tax planning assuming the old rules would continue to apply. Problems that could arise from a one-year negative adjustment include, among others:
-- S corporation distributions for 2001 that had been tax-free could become taxable dividends.
-- The deduction could be large enough to create a taxable loss, which could cause an S corporation to be a “tax shelter,” which could make it ineligible to be a cash-method taxpayer.
-- If the adjustment is a “built-in loss,” you might want to spread it to cover anticipated “built-in gains” for S corporation tax purposes.
--Taxpayers who have already changed their 2001 accounting methods have until September 10 to amend their returns to claim a one-year adjustment.
--Taxpayers who have extended returns or have not yet filed for their changes for 2001 have until April 15 to file for an automatic method change if they want to use a four-year spread for a negative adjustment; otherwise the one-year spread is automatic.
--Taxpayers looking to make a method change for 2002 have until April 15 to file a change using a four-year negative spread; otherwise, they will be required to use a one-year adjustment.
Well, maybe “trickle” is more accurate. As of March 13, 75 taxpayers have taken already taken advantage of the IRS so-called tax shelter amnesty program, as set forth in Announcement 2002-2, according to a report by Tax Analysts. The deadline is April 22; as with any such deadline, we can expect filings to come in mostly in the last few days.
The program waives penalties for a number of return positions (not just those involving tax shelters) if they are fully disclosed. The program is attractive to taxpayers who might have an, ahem, aggressive position on their tax return that would not avoid a penalty on examination even if it were fully disclosed. For taxpayers with a high likelihood of audit, the program lowers the stakes when IRS comes looking at the return.
It’s a maxim in the tax world, even though city folk at Roth & Company don’t really understand where it comes from: “pigs get fat, but hogs get slaughtered.” The point is that you should be aggressive on your taxes, but if you go too far, you will get in trouble. The idea behind the saying is sound, even though we’re pretty sure that in the barnyard (or finishing facility) pigs and hogs eventually meet the same fate.
Fortunately, some taxpayers are willing to push the envelope, saving the rest of us from the nicks and scrapes that result from close encounters with the tax enforcement system. The folks at Highway Farms, Inc. in Boone County, Iowa recently tried to expand the use of a quaint relic of our rural past. The tax law allows the payment of some agricultural wages made “in-kind” – with produce of livestock – to escape FICA tax.
The officers of Highway Farms, Inc. arranged to take title to a few hogs shortly before the hogs went to market. The court noted that “The officer employees who received the (hogs) did not market their hogs separately from other Highway Farms hogs. Rather, the transferred hogs and the Highway Farms hogs were loaded on to the same truck and sold to the same buyer on the same terms. Because the hogs were market-ready at the time of transfer, there was little risk that they could not almost immediately be converted into cash.” Apparently the court requires a more traditional relationship with the livestock to avoid FICA taxes: “The hog bonuses were disguised cash transfers whose sole purpose was tax avoidance. The bonuses were the equivalent of cash bonuses, subject to FICA taxes.”
Illinois and Iowa are on the outs over Governor Vilsack’s proposal to end Iowa’s tax reciprocity agreement with Illinois. Under the agreement, taxpayers who live in one state and work in the other are only taxed in their state of residence. The Governor thinks Iowa loses revenue this way, and he wants to end the agreement to help cope with the state’s budget crisis. Iowa estimates that it loses $16,000,000 annually under the agreement; Illinois says the Iowa loss is only about $2,000,000. Colin Powell has declined to intervene thus far.
The Roth & Company, P.C. shareholder group includes alumni from four of the “Big 5” firms. Only Andersen is unrepresented.
If you have been putting off preparing your business returns for 2001, Congress has justified your leisurely approach by changing the rules for 2001. If you have been a prompt and timely taxpayer, you may be rewarded with the opportunity to file an amended return. In a two-day frenzy of legislation, Congress has agreed on the economic stimulus package (H.R. 3090) that has been crawling through the legislative process since September. The Senate approved the bill this morning, and the President says he will sign the bill. With only a week left before the corporate return due date, return preparers couldn’t be more thrilled.
The provision with the broadest reach will allow taxpayers to expense 30% of most depreciable property placed in service after September 10, 2001. This provision only applies to assets that were both acquired AND placed in service after September 10; it does not apply if the purchase commitment was made before that date.
It works like this: a calendar-year taxpayer who purchased and placed in service a depreciable asset with a five-year life in November 2001 for $1,000,000 may expense $300,000 of it – regardless of taxable income or the amount of other assets placed in service during the year. The $700,000 remaining cost is depreciated under normal tax rules, providing a $140,000 depreciation deduction for 2001. The taxpayer recovers $440,000 of the cost in 2001 this way; without the law change, the taxpayer would have only a $200,000 depreciation deduction for 2001.
The provision applies to software and to depreciable assets other than real estate. It applies also to leasehold improvements on buildings less than four years old. Finally, it applies to automobiles, to the extent of $4,600 per car. It does not apply to property financed with tax-exempt bonds.
See whether amending the return will provide enough savings to be worthwhile. If you have questions, your preparer will be delighted to take a break from redoing all of the March 15 returns that were about to be mailed to have a leisurely chat about this new provision.
The new law allows taxpayers with net operating losses in 2001 and 2002 to carry the losses back against prior taxable income for five years. The normal carryback period is only two years. The usual rules that require the payment of some alternative minumum tax in loss carryback years are also waived for 2001 and 2002 carrybacks.
The bill includes a host of tax breaks for New York City taxpayers. It also extends jobless benefits and repeals the “Gitlitz” case for insolvent S corporations for debt forgiveness after October 11, 2001; a March 1, 2002 deadline applies for taxpayers in bankruptcy.
The tax bill passed because it was stripped of all rate reductions, alternative minimum tax relief, capital gain and other business tax breaks.
If the federal bill isn’t stimulating enough, Iowa’s lawmakers have more excitement for you. Governor Vilsack has signed into law the venture capital credit bills discussed in recent Tax Updates. These provisions pale into insignificance in comparison to Senate File 335, which stimulates the Iowa economy by resolving the status of Rheas, Emus and Ostriches as livestock; avian status no longer automatically carries the “poultry” stigma. As a result, certain capital gains on the sales of these big birds by their farmers (ranchers?) qualify as tax-exempt sales of livestock.
In case you have any doubts that the Iowa Legislature is serious about tackling the state’s fiscal problems, they should be erased by Senate File 2307. Introduced by Senator Kitty Rehberg (R-Rowley), the bill provides for a fund to receive contributions from Iowans who think they do not pay enough state tax. The bill also allows the donors to make non-binding suggestions for the use of the funds. Psychiatric evaluations for the donors should be on the list.
Sen. Joe Bolkcom (D-Iowa City) dismissed the bill as "a ridiculous publicity stunt."
Joe Kristan and Kathy Fairchild explain the new cash-basis accounting rules in the March 2002 issue of Iowa Banking magazine.
If anything good comes from the Enron debacle, it might be that it makes us revisit some of the assumptions behind our retirement savings plans. It is easy to assume that tax deferral, or a tax deduction, should always be used as soon as possible.
In the Enron hearings, it has been noted that it occasionally is better to take your tax lumps now and defer your tax benefits. For example, an employee may sometimes be better off foregoing the immediate tax reduction of a 401(k) contribution -- especially when the employee instead could fund a Roth IRA.
This is most true for the youngest employees. They are generally in the lowest tax brackets they ever will be in, and they are also the most likely to switch jobs before vesting in any employer match. By foregoing the 401(k) investment and using a Roth IRA for their savings, their ultimate tax benefit -- the ability to withdraw Roth IRA retirement savings tax-free later in life -- may be worth much more. When they are older, their savings and career advancement are likely to land them in a higher tax bracket.
Of course, it is better to have some savings than no savings, and the automatic withdrawal feature makes 401(k) enables many employees to save money that would otherwise slip through their hands. Unfortunately, there has never been a feature that would enable 401(k) savers to get "Roth IRA" benefits - no current deduction, but complete exemption of retirement withdrawals. The 2001 tax act will allow 401(k) plans to have Roth IRA features, but not until 2006.
Should young employees forego 401(k) plans? Absolutely not. If there is a realistic chance that the employee will vest in a substantial employer match, the employee should take advantage. If the boss is giving away money, take it! After the employer match is maximized, however, a young worker should seriously consider funding a Roth IRA before making additional 401(k) deferrals.
Roth IRA contributions are available to single taxpayers with adjusted gross income (AGI) of $110,000 or less (reduced availability between $95,000 and $110,000), and joint filers with AGI up to $160,000 (reduced availability between $150,000 and $160,000). Qualifying taxpayers may make Roth IRA contributions for 2001 as late as April 15, 2002. The maximum 2001 contribution is $2,000 per person. The maximum increases to $3,000 for 2002; for taxpayers 50 and older, the 2002 maximum is $3,500. The maximum is reduced for any contributions for non-Roth IRAs.
DOES ROTH & COMPANY GET ROYALTIES FOR ROTH IRA CONTRIBUTIONS?
That would sure be nice. No.
Marcia Hunter has joined Roth & Company, P.C. as a bank regulatory compliance specialist. Marcia comes to us from the FDIC. Marcia helps us to provide a full range of service to Iowa’s community banks.
Marcia is a graduate of the University of Nebraska; she earned her MBA at Drake. Her email address is email@example.com.
The New Mexico legislature has unanimously voted to exempt taxpayers aged 100 and over from state income taxes. This will presumably prompt a stampede of tax-savvy centenarians from Scottsdale and Sun City across the border to New Mexico.
A U.S. district court recently rejected a challenge to a 1961 (yes, 1961) tax lien against Joseph Timme of New York.. This closes the book on tax controversies arising in the Kennedy administration, as far as we can tell.
DID YOU KNOW?
Roth & Company serves over 100 of Iowa’s community banks.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to