Although exempt from the regular Iowa corporate income tax, financial institutions doing business in Iowa are subject to the Iowa financial institution franchise tax. The tax is measured by net income and is levied at the rate of 5 percent on that net income apportionable to Iowa.
The franchise tax was established for tax years beginning on or after January 1, 1970 to tax those financial institutions operating within Iowa for the "privilege of doing business in the state." This privilege cost Iowa banks $28,500,000 in the June 30, 2001 fiscal year. The franchise tax accounted for 1.22% of all net income taxes (individual, corporate and franchise) collected by the State during the June 30, 2001 fiscal year.
Not all of the franchise tax collected each year remains in the State's general fund. For the fiscal years ended June 30, 2001 and June 30, 2000, $8,800,000 per fiscal year was returned by the State of Iowa to the counties and communities where the financial institutions have their office and branch locations. These funds are allocated among communities based on deposits in offices in each town.
A financial institution, whether an S corporation or a C corporation, computes its income for the Iowa franchise tax like that of any other corporation - but there are a few critical differences:
There is no franchise tax deduction for Federal tax paid or accrued during the tax year.
The Iowa taxation of income from Federal securities is unusual. While Federal law prohibits states from imposing taxes on Federal securities or interest on them, there is an exception for nondiscriminatory state franchise taxes. Iowa's franchise tax includes income from obligations issued by Iowa and its political subdivisions in its net income base to meet the nondiscrimination requirement. The inclusion of Federal interest in the franchise tax base accounts for a significant amount of franchise tax revenue.