Tax Update Blog: Iowa Tax Law Archives
FLOOD TAX URBAN LEGEND
July 01, 2008
Claim: Governor Culver has declared that flood victims in Iowa must pay income tax on debit cards received from the American Red Cross.
Status: False.
Roger McEowen says he has received several calls from attorneys in Cedar Rapids asking if this rumor is true. It isn't.
The debit cards will normally be not subject to income tax under Internal Revenue Code Section 139. Iowa income tax rules follow federal law unless the legislature specifies otherwise, and they haven't. Even if the Governor wanted to tax disaster cards (and why would any politician be that stupid?), he doesn't have the authority do do so.
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INTANGIBLE INCOME TAX NEXUS IN IOWA?
June 12, 2008
Can you be required to pay Iowa corporation income tax if your only presence in Iowa is bits and bytes? A memo released this week by the Department of Revenue says "yes."
The memo deals with a taxpayer that licenses software used to prepare some unspecified government reports to Iowa users. From the memo:
As noted in the example, it does not matter if the fee is considered a royalty or something else. If the fee is received for the use of the software, then it was earned from intangible property located or having a situs in Iowa. Therefore, this activity would be sufficient to create Iowa corporation income tax nexus.
So another happy customer gets to pay Iowa's highest-in-the-nation corporation income tax.
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BAIT, MEET SWITCH
April 23, 2008
The Iowa Legislature has voted to replace the 1-cent local option sales tax with a permanent statewide 1-cent increase in the sales tax. This completes the bait-and-switch. The local-option tax was originally sold as a tax that could be rolled back by the voters if it were no longer needed; it had to be renewed by referendum every ten years. Sorry, suckers!
The Governor is sure to sign the sales tax increase, just as he has signed the statewide increase in vehicle registration fees. After all, Microsoft, Google and Hollywood need the money. And Hormel, and...
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GOVERNOR SIGNS BILL MAKING REBATES IOWA TAX-FREE
March 27, 2008
Governor Culver yesterday signed HF 2417, exempting the federal "stimulus" rebates from Iowa income tax. The Des Moines Register has details.
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IOWA SUPREME COURT: PARTNERSHIP INTERESTS DON'T QUALIFY FOR LONG-TERM GAIN BREAK
March 25, 2008
Iowa has a special tax break for certain business interest sales. If you have held an interest in a business for 10 years and "materially participated" in the business for 10 years, you can exclude the gain on a sale of "substantially all" of the business assets, or business real estate, on your Iowa tax return.
Gaylin Ranniger practiced as a CPA for many years with his partner Morrie Heithoff. In 1992 he sold his 50-percent interest to his partner. He claimed the Iowa "10 and 10" exclusion on his tax return, and the Iowa Department of Revenue disagreed.
The Iowa Department of Revenue rules on the capital gain exclusion provide:
Capital gains from the sale of an ownership interest in a partnership, limited liability company or other entity are not eligible for the capital gain exclusion.
The Iowa Department of Revenue rules on the capital gain exclusion provide:
Capital gains from the sale of an ownership interest in a partnership, limited
liability company or other entity are not eligible for the capital gain exclusion.
Mr. Ranniger argued that the rule was unreasonable, but the Iowa Supreme Court upheld the Department of Revenue last week. The court also said that because Mr. Ranniger's sale only was of half the business, rather than "substantially all" of it, it wouldn't qualify even if partnership interest sales did qualify.
IMPLICATIONS
The case shows that the deck is stacked in the Department of Revenue's favor in court:
Our cases require that exclusions from taxation be “construed strictly against the taxpayer and liberally in favor of the taxing body.”
The Ranniger result isn't surprising given the facts in the case. The Department has been holding other cases in abeyance while awaiting the Ranniger decision. Some of the cases involve the Department's old interpretation of what "held for 10 years" means -- an interpretation based (and I'm not making this up) on a misreading of an out-of-context passage in an old "Master Tax Guide." For you lawyers out there, this is like basing an argument over Iowa statutes on a misunderstood quote from Black's Law Dictionary. The Legislature overturned their strange interpretation for sales after 2005; they now conform to federal holding period rules.
The Iowa Supreme Court says it will overturn a Department rule only if it is "...irrational, illogical, or wholly unjustifiable." The Court had little trouble overturning the state's system of taxing casinos under a similar standard. If the Department maintains its "Master Tax Guide" position on pre-2005 holding-period cases, we'll see whether the Court gives the Department of Revenue more deference than it gives the Legislature.
Cite; Ranniger vs. Iowa Department of Revenue and Finance, Sup. Ct. Iowa, No. 11 / 06-0761
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LEGISLATURE SENDS REBATE EXEMPTION TO GOVERNOR
March 12, 2008
The legislature yesterday passed the bill (HF 2417) to exempt the federal "stimulus" rebate checks from Iowa Income tax. Governor Culver is expected to sign the bill.
Unfortunately, there's no sign that the legislature will conform Iowa tax law to adopt the federal depreciation and asset expensing provisions of the federal stimulus bill, forcing Iowa businesses to keep a separate set of fixed asset records at their own expense. Why? Because Microsoft, Google and itinerent filmmakers are more important to the Legislature than your business and your employer.
Related: IOWA DEPARTMENT OF REVENUE OUTLINES IOWA TREATMENT OF STIMULUS PROVISIONS
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IOWA DEPARTMENT OF REVENUE OUTLINES IOWA TREATMENT OF STIMULUS PROVISIONS
March 10, 2008
The Department of Revenue has posted a tentative summary of how the provisions of the stimulus package will affect Iowa taxpayers. The summary is tentative, as the legislature still hasn't passed the bills that address this. Short version:
- Stimulus payments will be exempt from Iowa income taxes, and
- Iowa probably won't conform to federal depreciation and Sec. 179 changes.
That means Iowa taxpayers can look forward to years of notices asking why Iowa and federal income are different, because Iowa's legislators are more concerned about Microsoft than the businesses that have always been here. Oh, and because the Department of Revenue can't be bothered to design a form that reconciles federal and Iowa taxes, so they issue annoying notices asking taxpayers do do their own reconciliations later.
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GOVERNER GIVES MONEY TO MICROSOFT WHILE HOUSE STIFFS OTHER BUSINESSES
February 29, 2008
Governor Culver yesterday signed the big tax break for the server farm Microsoft has been dangling over the state. Meanwhile, the Iowa House yesterday passed two bills that show their attitude to the businesses that are already here.
The House passed a bill to exempt the federal individual tax stimulus checks from Iowa taxes yesterday (HF 2417). The bill doesn't extend to Iowa the federal bonus depreciation and Section 179 asset expensing provisions of the federal stimulus package; nor does the "code conformity" bill passed yesterday in the House (SF 2123) that otherwise adopts federal tax computation rules to Iowa. In doing this Iowa repeats the mistake it made in failing to conform Iowa to similar provisions in the 2001 stimulus bill, a mistake that required a special session to only partially correct. As a result, taxpayers filing Iowa returns will have to keep different sets of fixed asset records for Iowa at their own expense. They will also have to pay for years of idiotic Department of Revenue notices that the differences between federal and Iowa taxes will cause.
The Moral? The politicians love big, headline generating business openings, but they care a lot less less for the small businesses that don't have lobbyists -- the ones that pay the costs of running the government on behalf of Microsoft and Google.
Related: The Race to Feed Microsoft
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IOWA - TAX BREAKS FOR GIANT BUSINESSES ONLY?
February 17, 2008
The big tax news out of the Iowa Legislature last week was the introduction and speedy passage by the House of HF 2233, the big tax giveaway for Microsoft.
Meanwhile, the Iowa Senate was quietly passing another bill that affects every business that files an Iowa tax return. SF 2123 is the annual bill that updates Iowa's tax computations for changes in the Internal Revenue Code. This one updates Iowa's tax law retroactively to the beginning of 2007 for changes made in the federal law up through January 1 of this year
That's all fine, but the federal government has made an important change in business tax rules not covered by the Iowa bill: the "bonus depreciation" and increased "Section 179" deductions in the economic stimulus bill. Unless Iowa updates its "code conformity" rules, businesses will have to compute depreciation and asset writeoffs using different rules for their federal and Iowa taxes.
WHAT HAPPENED LAST TIME
That happened in 2001 when Congress last tried to goose the economy with bonus depreciation and extra Section 179 deductions. Iowa initially refused to match up with the federal rules. Businesses got so annoyed that the legislature finally conformed to the federal rules in a special 2004 session, but it never did match up the rules for 2001 and 2002. Taxpayers are still battling the Department of Revenue as a result.
The Legislature didn't want to go along with the federal rules in 2001 because they were more generous than the rules they replaced. In other words, they needed the money. They need it even more this year. Last week legislative Democrats announced the death of the Governor's only big revenue-raising proposals, combined corporate reporting and the bottle tax, so it's back to the drawing board to find ways to pay for last year's spending spree. With receipts slowing with the economy, they have a problem.
THE TEMPTATION OF EXTRA REVENUE
The legislature will be sorely tempted to "de-couple" Iowa's depreciation computations from the new federal rules to help raise some of that revenue. While legislative leaders and the Governor have said they won't tax the "rebates" in the stimulus plan, they've so far been silent on the depreciation rules.
If Iowa "de-couples," they will add force every business to spend time and money keeping two extra depreciation schedules, and then answering brainless Department of Revenue notices a few years later when the depreciation computations "turn around" and the Iowa deductions exceed the federal write-offs.
Let's hope the legislature doesn't make the same mistake this year that they made in 2001. So far they find it much more urgent to appease Microsoft than to pass a bill that affects every business in the state.
Follow the progress of tax bills through the Legislature on our 2008 Iowa Tax Legislation page.
UPDATE: They really do want to screw this up:
House Speaker Pat Murphy, a Democrat from Dubuque, says Iowans will not pay state taxes on those federal rebate checks headed their way, but Murphy suggests the state can't afford to be as generous as the feds when it comes to the business tax break for equipment depreciation. "We're not like Washington, D.C. We can't print money," Murphy says. "...We are going to be fiscally responsible. We're going to be prudent. We're going to look at what we can afford to do and what not to do."Murphy says Democrats who control the legislature's agenda will make a decision about that business tax break "later" -- perhaps as late as 2009. "We're not going to make any guarantees at this point," Murphy says. "...Stay tuned."
If you can't print money, maybe you shouldn't be giving it away to Microsoft and Google.
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IOWA: TAX POLICY FOR A STAGNANT TOMORROW
January 24, 2008
There seems to be no end to the devotion of Iowa's political class to the ag industry. Let some administrative agency look cross-eyed at farmers, and a host of Iowa Senators and Represenatives rises up to smite the offending bureaucrat. Short of establishing the Cult of the Corn God as Iowa's state religion, there's not too much left for row crop lobbyists to ask from our elected representatives.
Other industries, not so much. And that's puzzling, when you consider what Iowa's biggest industries are, as a percentage of its economy (2006 figures, courtesy of the Federal Reserve Bank of Chicago):
Finance, Insurance and Real Estate: 21.3% Manufacturing: 21% Services: 16.2% Wholesale and Retail: 13.9% ... Agriculture, Forestry, Fishing and Hunting: 3.3%
As the chart below shows, agriculture is much less of the Iowa economy than it was in 1980, while financial industries have become much more important.
Source: Federal Reserve Bank of Chicago. Click chart for larger image.
While Iowa's economy has moved on, the Iowa Department of Revenue and Finance is still partying like it's 1979, at least when it comes to how it taxes investment partnerships.
Partnerships have become an everyday tool in the financial world. The entire hedge fund industry is built around investment partnerships. The private equity world loves partnerships. They allow ownership and allocation flexibility without incurring extra layers of tax.
Except in Iowa.
HOW IOWA TAXES INVESTMENT PARTNERSHIPS
The Iowa Department of Revenue takes the position that investment income of non-resident partners of Iowa investment partnerships is fully taxable in Iowa as "business income." That means a Florida investor in an Iowa investment partnership is expected to pay Iowa tax of up to 8.98% on his share of a dividends, interest and capital gains earned through an Iowa partnership - income that would be free of state income taxes if he earned the money directly.
State tax laws generally distinguish between "business" and "non-business" income. Iowa can tax Iowa business income earned by residents of other states, but non-business income is taxed only by the resident state. Iowa's tax regulations recognize this principle using an example of a farm operation that also has a savings account; the interest earned on the account is non-business because the account isn't used in the day-to-day operations of the business.
The Department of Revenue makes this regulation meaningless for partners by defining all partnership income as business. Their justification? They cite the non-tax definition of "partnership" in the Iowa statutes, which says a partnership is "an association of two or more persons to carry on as co-owners a business for profit." (their emphasis). So the same savings account that is "non-business" for the farmer becomes "business" once the farmer takes on a partner. This is all spelled out in a 1992 "Letter of Findings" ( Re Herman A. & Veneta L. Jensen).
This is absurd.
The Department's position doesn't even make sense on its own terms. While Iowa's partnership statute refers to operating "for profit," the parallel laws for limited liability companies and corporations merely refer to "any lawful purpose." By Iowa's logic, then, an LLC or S corporation should be able to have non-business income; even so, the Department of Revenue insists that investment LLCs and S corporations generate "business income," just like partnerships.
The Iowa Supreme Court has rejected the implication that a pass-through entity can't have non-business income in the Comacho case, though the taxpayers lost on the facts.
OTHER STATES DON'T TRY TO TAX NONRESENTS ON PARTNERSHIP INVESTMENT INCOME
New York state uses language identical to Iowa its tax law defining business and non-business income, but, tellingly, they don't try to tax non-resident partners on their investment income. Not coincidentally, there are hundreds of hedge funds based in New York. If there are any in Iowa, I haven't seen them.
Why does the Department do this? I'm guessing it's because the state needs the cash, and because they can get away with it. For most non-resident partners, the tax involved is too small to make it worth hiring a lawyer to fight. More importantly, anybody who has enough partnership income to fight over is staying out of Iowa altogether.
So in the pursuit of a few pennies from non-resident partners, the Department stifles a critical tool of the industry that provides 20% of the state's economy and much more than 20% of its growth. Meanwhile, Iowa's politicians, who should be all over the Department for this, instead look to beat up even more on non-resident taxpayers.
Many states, including California and Illinois, have laws that exempt non-resident partners of investment partnerships from their income tax; Iowa is one of the few states that even tries to tax nonresidents on investment partnership income. It's especially sad when Iowa's laws already exempt such income, but the Department of Revenue insists otherwise. But so far our Legislature is more interested in subsidizing Hollywood than in removing tax shackles from Iowa's most dynmamic economic sector.
Maybe it's just a branding issue. If partnerships were to call themselves, say, "corn heritage funds," the legislature might leap into action.
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IOWA AMNESTY FIZZLES; IT'S MY FAULT
November 02, 2007
It looks like the Iowa Tax Amnesty has fallen far short of its authors' expectations, says the Des Moines Register:
A program that temporarily allowed Iowans to skip all penalties and half of their unpaid interest on delinquent taxes collected less than 25 percent of what state officials had predicted, preliminary estimates show.The program, known as tax amnesty, ended at midnight Wednesday. State officials had hoped to collect $54 million in the program that began Sept. 4. As of Thursday, they had collected $13 million.
Practitioners who have worked with both amnesties say that the one that ended Wednesday was much less attractive than the 1986 version. The Branstad amnesty allowed taxpayers to continue to contest their tax liability if they paid under the amnesty; the Culver amnesty requires the taxpyer to surrender on contested issues. That's why the Branstad amnesty was able to raise $35 million, while the Culver one hasn't acheived half that amount in inflated 2007 dollars (of course, the Branstad $35 million was probably overstated, as some taxpayers were surely successful in their challenges).
But House Majority Leader Kevin McCarthy says the real fault is with critics of the amnesty, like the Tax Update and House Minority Leader Rants:
House Majority Leader Kevin McCarthy, a Des Moines Democrat, blamed the skimpy collection in part to "over-the-top and fairly reckless statements" from opponents of the program, who had called it a "tax break for tax cheats."
Right. People didn't take advantage of the amnesty because of those of us who pointed out that it makes chumps out of folks who pay their taxes, or who came forward to get out of trouble before the amnesty was enacted. That intimidated people who would otherwise straighten out their taxes. Who knew that people who don't pay their taxes were so sensitive?
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AMNESTY COMING UP SHORT?
November 01, 2007
The Iowa Tax Amnesty ended on Halloween. So far the state hasn't filled its trick-or-treat bag:
The program, known as tax amnesty, ended at midnight Wednesday. State officials had hoped to collect $54 million in the program that began Sept. 4. As of 10 a.m. today, they had collected less than $10.5 million.State revenue employees will continue to accept payments that were postmarked by the deadline, which could boost the total to as high as $16 to $20 million, said Stuart Vos, who is heading the amnesty program for the Department of Revenue.
Which state officials thought they would collect $54 million? It would to know who missed the mark so badly.
The state collected $35 million in the amnesty program in 1985, the last time it was used.
And the last time it was used, you could pay under the amnesty and still contest the tax. The new amnesty didn't let you do that. And they're surprised it's less popular now?
The next amnesty program cannot take place before 2025, according to state law.
Unless, of course, they enact another amnesty.
The current state budget counts on $16 million from the amnesty. It looks like even that will be a close call.
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PUMPKIN AMNESTY
November 01, 2007
Bowing to nationwide ridicule, the Iowa Department of Revenue reversed itself on the contentious pumkin tax yesterday. The Department had ruled that pumpkins purchased for carving would be subject to sales tax, but those purchasing pumpkins for food could get a sales tax exemption by filling out an exemption form.
Now we can turn our attention to another gross sales tax injustice: the disparate treatment of Milky Way bars.
The Iowa sales tax law says the following about candy:
"Candy" means a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces. Candy shall not include any preparation containing flour and shall require no refrigeration.
The ingredients in the classic Milky Way bar:
MILKY WAY® Bar ingredients: milk chocolate (sugar, cocoa butter, skim milk, chocolate, lactose, milkfat, soy lecithin, artificial flavor), corn syrup, sugar, partially hydrogenated soybean oil, skim milk, less than 2% milkfat, cocoa powder processed with alkali, lactose, malted barley, wheat flour, salt, egg whites, artificial flavor
Tax-exempt.
The ingredients in the Milky Way Midnight Bar:
MILKY WAY® MIDNIGHT® Bar ingredients: semisweet chocolate (sugar, chocolate processed with alkali, cocoa butter, chocolate, milkfat, soy lecithin, vanilla extract, artificial and natural flavors), corn syrup, sugar, skim milk, partially hydrogenated soybean oil, less than 2% butter, milkfat, lactose, salt, egg whites, vanilla extract, artificial flavor.
Taxable.
So: Milky Way Midight: subject to Iowa sales tax. Milky Way classic: exempt in Iowa.
No justice, no peace!
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HAPPY HALLOWEEN!
October 31, 2007
But not if you sell pumpkins in Iowa.
The Department of Revenue has cracked down on jack-o-lantern scofflaws:
The Iowa Department of Revenue is taxing jack-o'-lanterns this Halloween. The new department policy was implemented after officials decided that pumpkins are used primarily for Halloween decorations, not food, and should be taxed, said Renee Mulvey, the department's spokeswoman."We made the change because we wanted the sales tax law to match what we thought the predominant use was," Mulvey said. "We thought the predominant use was for decorations or jack-o'-lanterns."
Previously, pumpkins had been considered an edible squash and exempted from the tax. The department ruled this year that pumpkins are taxable — with some exceptions — if they are advertised for use as jack-'o-lanterns or decorations.
Iowans planning to eat pumpkins can still get a tax exemption if they fill out a form.
And speaking of scary, today is the last day to apply for the Iowa Tax Amnesty.
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$5 MILLION DOWN, $11 MILLION TO GO
October 30, 2007
The Iowa Tax Amnesty ends tomorrow. The Cedar Rapids Gazette reports that 3,000 taxpayers have taken advantage of the program, paying over $5 million in back taxes. The state is counting on $16 million in revenue from the program for the current fiscal year budget.
Delinquent taxpayers using the amnesty avoid prosecution and penalties, and pay only half the normal interest rate. Those who pay their taxes on time every get a big "Thanks, Chump!" from the state.
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IOWA TAX AMNESTY: $2 MILLION DOWN, $14 MILLION TO GO
October 08, 2007
The Iowa Tax Amnesty has so far raised $2 million of the $16 million in tax revenue that the state budgeteers are counting on. Presumably the bulk of the revenue will come in during the last week of the 2-month amnesty period that ends October 31.
There are no figures yet for the amount of revenue to be lost in the future to taxpayers who will expect Iowa to go for another amnesty the next time a new governor wants to spend some money.
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IOWA LEGISLATURE PLOTS LAMENESS
September 12, 2007
Speaking of clueless tax policy in a place where the population has been migrating away for some time, the Iowa legislature is pondering its moves for the next legislative session. It looks like more of the same:
House Speaker Pat Murphy, D-Dubuque, was optimistic that lawmakers would address the state's property tax system, even if only in a limited fashion.
Commercial property tax rates are at the heart of the issue. All sides agree that Iowa's commercial rates are out of line with other states, but resolving the problem without shifting the burden to either farmland taxes or residential rates has been difficult -- lawmakers couldn't agree on a solution last session.
"I think we will do something this session," said Murphy. "We may not do something statewide, but we may get some pilot projects started that would be very beneficial."
Oooh, a pilot project! Expect the "pilots" to be well-connected at the statehouse.
Like in Mexico, the Iowa politicians may have their eye on gas tax increases:
Lawmakers could look in a limited number of places for highway construction -- primarily gasoline taxes, vehicle registration fees or license fees. Murphy added another potential source to the mix: a "severance tax" on renewable fuels.
"Why not do it like Texas?" Murphy asked. "Texas has a tax on fuel when it leaves the state so consumers throughout the United States pay for their education system."
Brilliant. Subsidize ethanol with one hand, tax it with the other. I can hardly wait for the legislature to convene to show off their bold leadership again.
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IOWA TAX AMNESTY UNDER WAY
September 05, 2007
The Des Moines Register reports that the Iowa Tax Amnesty collected $150,000 in back taxes by early in the day yesterday, the first day of the program. Taxpayers have until October 31 to pay back Iowa taxes without penalty and at a special 1/2 interest rate.
It applies to most taxpayers who owe back Iowa taxes. The exceptions:
The program does not apply to taxpayers currently under active criminal investigation, to taxpayers who are part of a criminal proceeding pending in the Iowa court system, or to those with settlement agreements. Amnesty will also not apply if you have a settlement agreement with the department.
You should contact a tax pro if you want to take advantage of the amnesty, but for do-it-yourself-ers, here is an application form.
You can learn more at www.iowataxamnesty.gov.
And for those of you who paid your taxes on time all these years? The State of Iowa says "thanks, chumps!"
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HOW HAROLD HILL CLAIMS HIS IOWA FILM CREDITS
August 22, 2007
The Iowa Department of Revenue has proposed rules for the film industry tax breaks enacted this spring. There are two main sets of breaks -- an exclusion from income for taxpayers who provide goods and services for filmmakers, and a tax credit for 25% of the filmmakers costs. The credit can be sold, so the credit functions as a cash subsidy for filmmakers.
The credit will be claimed by submitting a new Iowa "Form Z" listing the film expenses to the Iowa Film Office. The production company can then sell the 25% credit at a discount to cover its own costs.
No other industry gets such a double-barreled break. So next time you write a check to Iowa to pay taxes so Tom Arnold doesn't have to, remember: out-of-state filmmakers are more important to the Legislature and the Governor than you are.
The proposed rules are here; scroll about halfway down or search "film" on your browser.
Link: Complete Tax Update Film Credit Coverage.
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TAX CREDITS AND THE RIPPLE EFFECT
August 20, 2007
The Des Moines Business Record examines Iowa's 33 tax credit programs in a piece called "The Ripple Effect." It's an appropriate title, as economic development credits are to economic development as Ripple wine is to healthy hydration.
The Business Record piece isn't shy about drawing conclusions; the author thinks that they just magically create jobs:
It's hard to argue with incentive programs that lead to hundreds of millions or even billions of dollars in new capital investment and the creation of thousands of new jobs in the state. The investments spurred by tax credit awards have been particularly valuable to many of Iowa's rural communities, said Michael Tramontina, director of the Iowa Department of Economic Development.
Actually, it's not that hard to argue with them. The argument starts with the idea of "opportunity costs." The piece says that there have been $1.23 billion of economic development credits issued over the past ten years. What else could have been done with that money? What if it had been left in the hands of the taxpayers, instead of doled out to well-connected businesses? What if it had been used to keep a key highway bridge from falling down?
Another issue is whether the credits reward taxpayers for things they would already do. While the economic development folks always claim responsibility for projects that get credits, many, perhaps most, of those projects would have happened anyway. The recent changes in Iowa's rehab tax credit actually issued new credits for rehabilitation work that had already been done.
The piece quotes economic development director Tramontina:
"You really have to consider how big those (ethanol plant) investments are," he said. "For a rural county to get an investment of $175 million to $225 million, that's more than the equivalent of adding an 801 Grand (building) in one of those counties." The dollar amount of the tax credits awarded to those plant projects has averaged about 7 percent of the total private investments, he said.
Time will tell whether this was a benefit. If these ethanol plants end up bankrupt and shuttered in a few years - a very real possibility, as they can survive only as long as they are richly subsidized by the taxpayers - all of these economic development funds will turn out to have been poured down a rathole.
The whole idea of tax credits implies that statehouse politicians are some kind of economic supergeniuses who can funnel taxpayer funds into the optimal economic activity for the state -- or at least better than private equity and credit markets. That's ridiculous. If they were so smart, they would be making millions as investment bankers rather than $21,380 as state legislators.
That doesn't bother the politicians:
What isn't slowing is the pace at which tax credits are being claimed. State officials estimate that by 2011, businesses and individual taxpayers will claim about $400 million in credits against their taxable income, compared with $157 million in credits actually used in fiscal 2004, the latest year for which data is available.
As a recent report by the State Auditor's office shows, these credits often fail to meet their hype. For example The report showed that of 30,732 "pledged" jobs from the Grow Iowa Values fund credit program, only 13,730 had really been pledged under the terms of the program, and many of those were receiving other funding.
Bottom line? Economic development credits make Iowa business and employees that lack good statehouse connections pay higher taxes to lure and subsidize their wired-in competitors.
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YEPSEN ON TAX REFORM
May 21, 2007
Des Moines Register columnist David Yepsen takes on the Iowa tax system. He is correct in noticing that we have a problem, but his solution just scratches the surface.
Mr. Yepsen suggests a big bipartisan solution:
One device for doing that would be to call a political "summit" to be held this summer and fall. Culver would bring together key lawmakers and interest groups in an effort to forge a compromise tax-reform plan to submit to the Legislature next January.
This has little hope because the Governor is committed to an anti-tax reform agenda of special interest tax breaks. Until those go on the chopping block, there's not much to talk about.
What might a compromise change look like?
- Income tax. Iowa could get rid of federal deductibility and adopt lower but graduated rates. (Liberals and business recruiters win.) Or, Iowa could adopt a flat or two-rate tax system. (Conservatives and business recruiters win.)
Mr. Yepsen misunderstands the dynamics of "business recruiters," the local and state "economic development professionals." They like high rates and loopholes because they peddle special interest tax credits. If you have a simple, low rate tax system, they become redundant, because businesses no longer have to be bribed to come to Iowa.
To protect taxpayers from future rate increases, a constitutional supermajority vote of the Legislature or a vote of the people could be required for future tax increases. (Conservatives win.)
Better still would be a constitutional limit on the growth in state government, based on population and economic growth. Just a dream, I know.
Each income-tax credit and deduction should be examined to see if it is doing what was intended. (Liberals win.)
Eh? Not so much. Tax credits are backdoor industrial policy, which is what liberals are all about. Witness the witless biofuel, film and investment subsidies that flew through the last session of the legislature. About the only liberal who stands up against these giveaways (with rare exceptions) is Ed Fallon, and he's not even in the legislature anymore .
Mr. Yepsen also has a strange take on sales taxes:
And it might be good tax policy. According to the Iowa Taxpayers Association, Iowa's sales-tax burden ranks 33rd among the 50 states per $1,000 of personal income. That's below average. But Iowa's property tax ranks 17th, which is above the national average.
So, it makes sense to increase a below-average sales tax that people don't mind paying to relieve the property tax they hate - and that perhaps impedes economic growth.
If we have a low sales tax burden, it's not because we have a low rate. We already have a relatively high rate at 6%, and a 7% rate would give us the highest in the nation.
One thing Mr. Yepsen says is absolutely true:
Just as it took several years to win approval of a cigarette-tax increase, it might take several years to win a rewrite of the tax code, because it might take that long for people to understand the change and grow comfortable with it.
Every special interest credit, from ethanol to rehab credits to film subsidies, creates a vocal constituency against change. Until these giveaways are ended, a simple system with lower rates is impossible. Only strong leadership by the Governor, maintained over a period of years, can prevail. It doesn't seem likely anytime soon.
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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.
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IT'S OUR DESTINY: IOWA NEAR TOP IN INCOME, SALES TAX RATES
February 15, 2007
The Tax Policy Blog has a post linking a number of state-by-state tax comparision charts. You can go here for the corporation income tax rates, individual income tax rates, sales tax rates, and property tax and tax burden comparisions.
Iowa has the highest corporate rate in the country, at 12%, and the 5th highest individual tax rate, at 8.98%. Sure, we we get lots of special interest breaks and federal deductibility, but that just means we have a lot of complexity to go with our high rates.
The highest sales tax rate among the states is 7%, in Mississippi, Tennessee, Rhode Island and New Jersey. Central Iowans will vote on whether to join this elite group in the "Project Destiny" referendum this spring. With all Iowa counties now having a local option sales tax, we have a 6% statewide sales tax rate. The 1-cent Project Destiny tax will put central Iowa in the same 7% league as Tupelo and Newark for economic and cultural dynamism.
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IOWA CORPORATION COMBINED REPORTING BILL INTRODUCED
February 14, 2007
The bill to impose combined reporting of income of "unitary" corporations filing consolidated returns (HF 326) has been introduced in the Iowa House. It's a key part of the Governor's budget and seems certain to pass. From the bill explanation:
This bill requires that the net income of affiliated groups of corporations engaged in a unitary usiness be computed on a combined return basis for corporate tax purposes if the group meets the requirements for filing a consolidated return for federal tax purposes. The affiliated group would include corporations with common ownership whereby one or more corporation sown 80 percent or more of another corporation. The bill would require that one Iowa corporate income tax return be filed that would include all unitary members of an affiliated group. Any nonunitary member that is subject to Iowa tax would file its own separate corporate return. Only Iowa sales of those corporations doing business in Iowa would be included in the numerator of the Iowa sales ratio. The bill also provides that only those corporations doing business in Iowa are jointly and severally liable for the tax of the combined return.
The bill applies retroactively to January 1, 2007, for tax years beginning on or after that date.
Because the bill is retroactive, it will affect estimated tax payments this year for many coporations.
Track all Iowa 2007 tax legislation at our 2007 Iowa Tax Legislation page.
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IOWA TAX AMNESTY BILL INTRODUCED
February 08, 2007
The legislative language of the tax amnesty proposed in Governor Culver's budget was introduced in the Iowa Senate this week. From the bill explanation:
This bill provides for a state tax amnesty program to be administered by the department of revenue from September 4, 2007, through October 31, 2007. The program covers tax liabilities delinquent as of December 31, 2006, and authorizes a taxpayer, during the period of the tax amnesty program, to pay this tax with one=half of the interest which would ordinarily be due without being subject to further penalty or civil and criminal prosecution. The taxpayer must agree to relinquish all administrative and judicial rights to challenge the imposition of the tax and its amount.
The taxes that are covered under the tax amnesty program are the individual and corporate income taxes; franchise tax; sales and use taxes; hotel and motel tax; local city, county, and school district sales and services taxes; automobile rental tax; equipment tax; petroleum diminution charge; inheritance and estate taxes; motor fuel and special fuel taxes; cigarette and tobacco taxes; and controlled substance tax.
This is likely to pass, as the legislature's desire to have a bit more money right now will trump the interests of sound tax policy. If you have unpaid taxes that Iowa hasn't noticed, you'd be crazy to 'fess up before this bill is signed. If you have been paying your taxes on time, well, you are allowed to feel a bit like a sap now. Meanwhile, Iowa is setting a pattern for tax amnesties every 20 or so years.
You can follow the progress of all 2007 Iowa tax legislation at our 2007 tax legislation tracking page.
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BEG YOUR PARDON, GOV'NOR
January 31, 2007
The Des Moines Register has some new details about the proposed Iowa tax amnesty:
Under an Iowa Department of Revenue proposal, Iowans would be given roughly a two-month window of opportunity - from Sept. 4 through Oct. 31 - to pay delinquent taxes that are free of penalties, and with a 50 percent reduction in the amount of interest due.
The amnesty would cover the state income, sales, cigarette and motor fuel tax as well as other types of taxes collected by the state government. However, the program would not include property taxes or liquor taxes.
As a cheap gimmick to raise revenue, it's a bad enough idea to get support from both sides of the aisle:
Leaders of the 2007 Legislature agree it's worth a try to offer a new tax amnesty program - one of the budget recommendations that Culver, a Democrat, made Tuesday.
"I think it's a good thing to do. You don't have enough enforcement to catch everyone," said Senate Minority Leader Mary Lundby, a Marion Republican. "If you have an amnesty and get some money back from it, why not try it?"
This, of course, sends a bold bi-partisan message to the taxpaying public: "So you've paid your taxes on time all these years? Ha, ha, ha, Sucker!"
Prior coverage:
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IOWA CAPITAL GAINS DEDUCTION NOT REDUCED BY OTHER LOSSES
December 18, 2006
An email to preparers from the Iowa Department of Revenue has this nugget:
Capital Gains Deduction: Beginning January 1, 2006, Iowa follows Federal holding period rules. The material participation requirements have not changed.In addition to the legislative change, the department has revised its position on another aspect of the capital gains deduction. Previously, the department had taken the position that in order to claim a capital gain exclusion for individual income tax, a taxpayer must be in a net capital gain position on the federal return. If a taxpayer was in a net capital gain position, then the capital gain exclusion could exceed the capital gains reported on the federal return if the qualifying gain was offset by non-qualifying capital losses (such as stock sales). After a review by the Attorney General's office, the department has changed its position on this issue and will allow a capital gain exclusion from qualifying gains even if the taxpayer was in a capital loss position on the federal return.
This is helpful. If you have a big capital gain, standard tax planning suggests that you harvest capital losses in your portfolio to offset them on the federal return. Now it is clear that doing so won't cost you your Iowa "10 and 10" capital gain exclusion. This exclusion applies to sales of business land and assets if you have "materially participated" in the business for 10 years and have held the property for at least that long.
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IOWA: CRP 'MATERIAL PARTICIPATION' FOR CAPITAL GAIN EXCLUSION
October 31, 2006
Unlike the federal government, Iowa has no special tax rate for long-term capital gains. For a few taxpayers, though, it has something much better: a complete exclusion from income for long-term gains. Very long term.
Iowa allows taxpayers to exclude gains where they meet two ten-year requirements:
- The gain is on business property held for at least ten years; and
- The taxpayer "materially participated" in the business for ten years.
For retired farmers, there is a special rule: you are considered to have "materially participated" in any year if you materially participated for five of the eight years you farmed before retirement. "Material participation" is generally determinined under the federal tax law's "passive activity" rules.
Yesterday the Iowa Department of Revenue released a policy letter holding that participation in the Conservation Reserve Program (CRP) counts as "material participation." The fact pattern from the policy letter:
The situation posed in your letter involves farmland that was owned by the taxpayer for 41 years, the last 18 years as part of an S corporation. The taxpayer farmed the land until 18 years ago when it was put into CRP (Conservation of Reserve Program) for 10 years. The land was then taken out of CRP and farmed for one year, and then was put back into CRP seven years ago. The taxpayer retired three years ago, and has been cash renting his remaining land since retirement.
Citing two private letter rulings, the Department ruled that CRP participation counts as material participation, and the retired farmer was allowed to sell his farmland at a gain without tax.
So - if you are being paid to not farm, you are materially participating in farming. Is this a great country, or what?
Related:
IOWA'S REALLY LONG-TERM CAPITAL GAIN DEDUCTION
IOWA'S SUPER-LONG TERM CAPITAL GAINS DEDUCTION: IF YOU QUIT, DON'T WAIT TOO LONG TO RETIRE
You can find a recap of the basic rules defining "material participation" below in the extended entry.
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LOW RATES VS. TARGETED TAX BREAKS IN SIOUX CITY SENATE RACE
October 27, 2006
If you're looking for a lab experiment on whether low tax rates are better for economic health than high tax rates with lots of targeted incentives, you don't have to look past Sioux City, Iowa. Sioux City "enjoys" Iowa's 8.98% top individual rate and our highest-in-the-land 12% corporate tax rate. This tax misery is treated with over 20 economic development tax credits under Iowa law.
Across the river, Sioux Falls, South Dakota has no income tax credits to offer; they have no personal or corporate tax at all.
These two approaches to tax policy are the focus of a State Senate race in Sioux City. From the KTIV website:
Thursday night, Republican Barbara Blanchard squared off with Democratic incumbent Steve Warnstadt on this and other issues, at a candidate forum sponsored by the League of Women Voters.
Both Barbara Blanchard and Steve Warnstadt say they have a solution to make Iowa more attractive to business.
While Blanchard says Iowa needs to lower corporate and property taxes to stay competitive with border states like South Dakota, Warnstadt says Iowans need to turn to Ethanol for job growth.
Yes, that will help us compete with South Dakota; they don't grow any corn there, do they? Corn alcohol is only a cure for Iowa's economy if you're a bartender.
It will create jobs that will not be exported. That can't be said for a lot of other industries. The state needs to take a leading roll. There's other tax credits that we could be pursuing in a targeted way, such as historic preservation tax credits, that would again be a boon to Sioux City," says Warnstadt.
If tax credits would be a "boon" to Sioux City, why is Sioux City not booming with the historic preservation credits and 20+ targeted tax credits we already have?
Blanchard disagreed saying, We haven't begun to become competitive with South Dakota. We absolutely have to here in Northwest Iowa, go for zero corporate taxes. We have begun with some tax incentives. Those are going to wear out eventually, or have to be renewed and they are not going to be competitive with the zero corporate taxes in South Dakota."
Anybody who advocates more targeted tax incentives should have to explain just how many more it will take.
Related: IOWA'S TAX CLIMATE: STILL IN THE BOTTOM TEN
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IOWA'S TAX CLIMATE: STILL IN THE BOTTOM TEN
October 11, 2006
Iowa retains its firm hold as one of the states with the 10 worst business climates, according to a new report by the Tax Foundation.
The Foundation's State Business Tax Climate Index rated Iowa's business tax climate 43rd out of 50 states this year. We are a hair ahead of Nebraska, but a mile behind #2-rated South Dakota.
Click to enlarge.
How did Iowa get such a lame ranking? Consider what the Foundation uses as criteria for a good tax system:
Good state tax systems levy low, flat rates on the broadest bases possible, and they treat all taxpayers the same. Variation in the tax treatment of different industries favors one economic activity or decision over another. The more riddled a tax system is with these politically motivated preferences the less likely it is that business decisions will be made in response to market forces.
Without "politically motivated preferences" Iowa would hardly have an income tax. And it looks like our candidates for governor like that just fine.
The top 10 states in the rankings were:
1. Wyoming
2. South Dakota
3. Alaska
4. Nevada
5. Florida
6. Texas
7. New Hampshire
8. Montana
9. Delaware
10. Oregon.
Our companions at the bottom of the barrel:
41. Minnesota
42. Maine
43. Iowa
44. Nebraska
45. California
46. Vermont
47. New York
48. New Jersey
49. Ohio
50. Rhode Island.
The Foundation also has a piece on their site linking tax climates and economic growth. They note:
In fact, between 2000 and 2005, income in the top 10 states in the 2007 Index grew 44 percent faster than in the bottom 10 states. Employment in the top 10 states grew 115 percent faster, output 52 percent faster and population 164 percent faster.
Yet our candidates for governor think that what we really need are more tax breaks for old folks and more targeted tax credits. Look out, Nebraska!
UPDATE: Chris Atkins from the Tax Foundation sends us specifics on why Iowa has a rotten tax climate.
Tax Foundation Tax Climate Links:
Full Study (pdf)
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GOVERNOR CANDIDATES: SAME OLD, SAME OLD
October 10, 2006
Iowa's two major party candidates for governor had their first debate. Any voters looking for a new direction for Iowa's tax policy will need to wait at least another four years.
From the Des Moines Register:
Democrat Chet Culver and Republican Jim Nussle disagree on whether Iowans ought to be able to vote on major tax increases, one of several markers in the candidates' limited tax plans.
Neither candidate for Iowa governor has proposed wholesale changes to Iowa's tax law. Both have said they would leave the heavy lifting of restructuring the tax system to the task forces each has proposed be convened after the election.
Punting an issue to a "task force" shows that the candidate has no serious thoughts on tax policy of his own. If you need a panel to give you a policy approach, you haven't done much thinking for yourself.
NUSSLE: MORE LOOPHOLES FOR OLD FOLKS
"If I come out with a tax-cut plan ... half the Legislature will be against it. So I start off with one foot in the hole," Nussle told Des Moines Register editors and reporters.
Nussle has said he would earmark about one-third of surplus revenue for tax relief. It would be up to a commission, chosen by Nussle and the Legislature, to recommend how to apply it, Nussle said.
That's leadership for you...
He has also suggested eliminating taxes on Social Security and pensions in Iowa, saying they prompt Iowa seniors to leave the state.
Of course, the resulting high taxes on those of us still working prompt businesses to stay the heck out of the state.
CULVER: MORE TARGETED LOOPHOLES
Culver supports getting rid of federal deductibility, which would raise the tax burden on some Iowans, while Nussle supports keeping it.
Culver has proposed $40 million in property tax relief through increasing state aid to schools. He would also seek to allow more Iowans to receive the state's earned-income tax credit, estimating $21 million in income tax relief to low- and middle-income families.
He has also proposed tax credits for child care and to promote energy conservation.
Still more social policy through the tax law.
Culver says his tax proposals could be financed through $1 billion he estimates would be available through surplus revenue, a higher tobacco tax and savings achieved by gutting government of waste.
More government, less waste. That's sort of like saving gas by buying a bigger car.
And what about Iowa's highest-in-the-nation corporate tax rate? Or our state tax law that rivals California and New York in baroque complexity? Our high individual tax rates? Our 20-plus targeted tax credits for the well-connected? We'll just have to wait for the "task force" to complete its doomed-to-be-ignored study.
Additional Links:
Radio Iowa Coverage of Culver Tax Plan
Related Tax Update Coverage:
OLDSTERS THRASH WHIPPERSNAPPERS
TAX FOUNDATION: IOWA NINTH WORST STATE FOR BUSINESS TAXES
DES MOINES REGISTER HIGHLIGHTS TAX INCENTIVES
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IOWA: REMAINDER INTERESTS DON'T QUALIFY FOR TEN-YEAR GAIN EXCLUSION
September 13, 2006
When Myron Hass's father died in 1964, he left his widow with a life estate in some Sioux County farmland. Myron and his three siblings were left a remainder interest - they would get full title upon the death of Myron's widow.
Myron farmed the land until his mother's death in 2001. He sold the land in 2002 and claimed Iowa's super-long-term capital gain exclusion. This provision allows taxpayers to exclude from income capital gains from property held for 10 years if they meet certain "material participation" requirements.
This week the Department of Revenue released a ruling that the ten-year holding period didn't begin until Myron's mother died in 2001. Result: no capital gain exclusion.
Related: FARMERS AND ULTRA LONG-TERM CAPITAL GAINS
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HOW SOFTWARE DEVELOPERS FIND THEMSELVES TAXED IN IOWA
June 29, 2006
The Iowa Department of Revenue this week released a letter responding to a software developer's questions about Iowa taxes. It shows how little contact a company needs in Iowa to be taxable here. It's also worth looking at because other states apply similar standards to drag companies into their income tax system. Public Law 86-272 is the federal statute that sets the bar for when you are subject to income tax in the state. The way Iowa applies the rules, taking care of your Iowa customers can have unpleasant tax side effects.
The facts:
Your scenarios assume that the software developer does not have an office in Iowa or a permanent sales staff in Iowa. The software is not sold, but the developer licenses the right to use software to an end user. As part of the transaction, the software developer may or may not send someone to the users office for installing the software and training the user on the software. The developer also contracts to provide continuous support and maintenance to each customer, and the contract typically breaks out a separate fee for each service.
So - does simply licensing software for use in Iowa make you taxable here? No:
The mere grant of the right to use the developers software does not, by itself, create Iowa corporation income tax nexus.
OK, what if you actually provide service to a customer? Bad news:
Sending an employee into Iowa to install and/or train the use does create Iowa corporation income tax nexus. As noted previously, the protection of Public Law 86-272 does not apply in this instance, so any physical presence in Iowa by an employee of the software developer is sufficient to create corporation income tax nexus.
Even if you only send them in for a day?
There is no minimum period of time needed to be in Iowa to create corporation income tax nexus. As noted previously, the de minimus exception in Public Law 86-272 does not apply in this instance, so any period of time spent in Iowa is sufficient to create nexus.
This can create unpleasant results. Iowa apportions taxable income here based solely on sales; most states also take property and payroll into account. That's a great formula for Iowa-based companies, but it can make non-Iowa companies taxable quickly at rates up to 12% - the highest in the nation.
The entire contract with an Iowa customer will be considered an Iowa receipt for corporation income tax purposes. Once nexus is established, the entire amount of income received from an Iowa customer will be considered Iowa receipts.
Well, Mr. Software Company won't ever make that blunder again; they'll avoid us forever. Do they ever get off the hook here?
Nexus for corporation income tax is determined on a year-to-year basis, and if a nexus activity occurs during the year, then the corporation has nexus for the entire year. For example, if on-going service and maintenance is performed by employees in Iowa, then the software developer has nexus in Iowa for that year. Also, if the service and maintenance occurred outside Iowa for a particular year, but nexus was created in that year due to installation, any income received from the on-going service and maintenance would be considered an Iowa receipt.
So if they steer clear of the land between the rivers from now on, they're off the hook. But it's not easy.
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IDED: THE MORE YOU SPEND, THE MORE YOU SAVE
June 20, 2006
Everyone has seen department store sale ads breathlessly intoning "the more you spend, the more you save!" The arithmetic seems almost plausible, until you think about it for a half-second. Then you realize the "savings" exist only if you assume away every possible use of your money other than buying things at that store.
The Iowa Department of Economic Development yesterday released a report trumpteting the successes of the Iowa Values Fund grants and incentives for small businesses. The report identifies the number of jobs "created and retained" by the IVF tax credits and incentives.
The math behind these claims is a lot like the math of the department store circular. The IDED assumes away other possible uses for the money spent on the funds. It also ignores the effects on other businesses whose competitors are subsidized by the IVF and who have to pay the higher taxes to fund it. The IDED also has no way to tell how many jobs would have been created in other ways absent the IVF funding, via banks or investors.
When all of the hidden costs are taken into account, there's no way that taxing Iowans and their businesses to lure and subsidize their competitors is a net gain to Iowa's economy.
Link: Des Moines Register Coverage
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IOWA WILL CUT YOUR HOLDING PERIODS INTO LITTLE PIECES
June 16, 2006
Iowa has an unusual tax break for capital gains on business property held for a long time. You don't have to pay Iowa taxes on certain capital gains from the sale of business assets if you have both
1. Held the property for 10 years, and
2. "materially participated" in the business for 10 years.
This week the Iowa Department of Revenue ruled that if you buy your interest in the business in pieces, your holding period is also measured in pieces, and only the pieces held for 10 years qualify for the capital gains break.
THE COLOR CONVERTING SAGA
Chandrakant Shah began working for Color Converting Industries, an S corporation, in November 1978. He first acquired an ownership interest in the business in 1983. The S corporation later contributed the assets of the business to a limited liability company, Color Converting LLC; the S corporation continued in existence as an owner of the LLC.
He acquired additional interests in 2001 by setting up a new S corporation to buy additional interests in Color Converting LLC. At this point he had interests in two S corporations owning interests in the same LLC.
When the business sold its assets in 2003, the gain was taxed on the returns of its owners, including Mr. Shah. Mr. Shah claimed the Iowa exemption for all of the capital gain passing through to his 1040 through his two S corporations. The Department disagreed:
Because Protesters seek a deduction for capital gain resulting from the sale of their entire interest in the business, and not merely a portion of the interest, the period of time that Protesters held that interest is relevant. The Department does not dispute that the portion of the sale representing Protesters interest in the business that was acquired in 1983 meets the requirements of 422.7(21). Protesters maintained an ownership interest in the business despite the fact that the business entity changed. At the time of the sale of the business, Protesters held this interest in the business for more than ten years and materially participated in the business for more than 10 years. Protesters contend however, that because the capital gain from the sale of their interest acquired in 1983 qualifies for the capital gain exclusion, that the property interest acquired in 2001 should also qualify for the exclusion.
Iowa enacted new holding period legislation this year that applies federal holding period rules to the capital gain exclusion. As federal law would treat the two interests acquired as having their own holding periods, the Iowa holding here likely would have been the same under the new law.
Link: Iowa Letter of Findings dated February 8, 2006
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LIBERAL IOWA TAX THINK TANK: MEND, DON'T END, CORPORATE TAX
May 22, 2006
Today I learned of the existence of an liberal Iowa tax policy think tank, "Iowa Fiscal Central." The organization web page says it's a collaboration between David Osterberg's Iowa Policy Project and the Child & Family Policy Center. Among their recent articles is "Revitalizing Iowa's Corporate Income Tax," which suggests ways to make Iowa's corporation tax useful. I think the idea of reviving Iowa's useless corporation tax is misguided - repeal makes more sense - but the piece makes thoughtful arguments and would probably be part of the tax policy of a Fallon governership. I plan to address the article in more detail soon.
I'm not aware of direct conservative/libertarian counterpart to Iowa Fiscal Central, though the Public Interest Institute does some work in this area. Iowans for Tax Relief is more a loophole lobby rather than a coherent tax policy shop.
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OLDSTERS THRASH WHIPPERSNAPPERS
May 03, 2006
The Iowa General Assembly scored one for age and cunning yesterday. They the old folks tax exemption that was part of last week's budget agreement between Governor Vilsack and legislative leaders. The bill passed the Senate 46-4 and the House 89-6.
Youth and ability struck out in last year's session, when a bill to exempt youth from Iowa taxes died without a floor vote.
BREAKS BEGIN TO APPLY IN 2007
The old folks bill has two parts: a large exemption for all income, and an additional exemption for social security income.
Starting in 2007, the blanket exemption excuses taxpayers who are 65 or older from income tax if their "net income" is $24,000 ($18,000 for single filers). The exemptions increase to $32,000 for married filers, surviving spouses and heads of household in 2009, and $24,000 for single filers.
"Net income" is roughly equivalent to federal adjusted gross income, except it is reduced by the the Iowa capital gain deduction, the deduction for college savings Iowa contributions, and the additional Iowa health insurance dedu