(1)
In general. Iowa taxpayers who elect to expense certain
depreciable business assets in the year the assets were placed in service under
Section
179 of the Internal Revenue Code must also
expense those same assets for Iowa income tax purposes in that year. However,
for certain years, the Iowa limitations on this deduction are different from
the federal limitations for the same year. This means that for some tax years,
adjustments are required to determine the correct Iowa section 179 expensing
deduction, as described in this rule.
(2)
Claiming the deduction.
a.
Timing and requirement to follow
federal election. A taxpayer who takes a federal section 179 deduction
must also take the deduction for the same asset in the same year for Iowa
purposes, except as expressly provided by Iowa law or this rule. A taxpayer who
takes a federal section 179 deduction is not permitted to opt out of taking the
same deduction for Iowa purposes. A taxpayer who does not take a federal
section 179 deduction on a specific qualifying asset is not permitted to take a
section 179 deduction for Iowa purposes on that asset.
b.
Qualifying for the
deduction. Whether a specific business asset qualifies for a section
179 deduction is determined by the Internal Revenue Code (Title 26, U.S. Code)
and applicable federal regulations for both federal and Iowa
purposes.
c.
Amount of the
Iowa deduction. Generally, the Iowa deduction must equal the amount of
the federal deduction taken for the same asset in the same year, subject to
special Iowa limitations. The following chart provides a comparison of the Iowa
and federal section 179 dollar limitations and reduction limitations. See rule
701-502.23 (422) for the section
179 rules applicable to corporations (both C and S corporations) and other
entities subject to the corporate income tax, and see rule
701-602.24 (422) for the section
179 rules applicable to financial institutions subject to the franchise tax.
|
Section 179 Deduction Allowances Under Federal and
Iowa Law
|
|
Federal
|
Iowa
|
|
Tax Year
|
Dollar Limitation
|
Reduction Limitation
|
Dollar Limitation
|
Reduction Limitation
|
|
2003
|
$ 100,000
|
$ 400,000
|
$ 100,000
|
$ 400,000
|
|
2004
|
102,000
|
410,000
|
102,000
|
410,000
|
|
2005
|
105,000
|
420,000
|
105,000
|
420,000
|
|
2006
|
108,000
|
430,000
|
108,000
|
430,000
|
|
2007
|
125,000
|
500,000
|
125,000
|
500,000
|
|
2008
|
250,000
|
800,000
|
250,000
|
800,000
|
|
2009
|
250,000
|
800,000
|
133,000
|
530,000
|
|
2010
|
500,000
|
2,000,000
|
500,000
|
2,000,000
|
|
2011
|
500,000
|
2,000,000
|
500,000
|
2,000,000
|
|
2012
|
500,000
|
2,000,000
|
500,000
|
2,000,000
|
|
2013
|
500,000
|
2,000,000
|
500,000
|
2,000,000
|
|
2014
|
500,000
|
2,000,000
|
500,000
|
2,000,000
|
|
2015
|
500,000
|
2,000,000
|
500,000
|
2,000,000
|
|
2016
|
500,000
|
2,010,000
|
25,000
|
200,000
|
|
2017
|
510,000
|
2,030,000
|
25,000
|
200,000
|
|
2018
|
1,000,000
|
2,500,000
|
70,000
|
280,000
|
|
2019
|
1,020,000
|
2,550,000
|
100,000
|
400,000
|
|
2020 and later
|
Iowa limitations are the same as
federal
|
d.
Reduction. Both the federal and the Iowa deductions for
section 179 assets are reduced (phased out dollar for dollar) for taxpayers
whose total section 179 assets placed in service during a given year cost more
than the amount specified (reduction limitation) for that year. Like the
deduction limitation, the Iowa and federal reduction limitations are different
for certain years. See paragraph 302.65(2)
"c" for applicable
limitations.
EXAMPLE: Taxpayer purchases $400,000 worth of qualifying
section 179 assets and places all of them in service in 2018. Taxpayer claims a
section 179 deduction of $400,000 for the full cost of the assets on the 2018
federal return. The Iowa section 179 deduction for 2018 is phased out dollar
for dollar by the amount of section 179 assets placed in service in excess of
$280,000. This means that, for 2018, the Iowa deduction is fully phased out if
the taxpayer placed in service section 179 assets that cost, in total, more
than $350,000. Since the cost of the qualifying assets in this example exceeds
the Iowa section 179 phase-out limit, the taxpayer cannot claim any section 179
deduction on the Iowa return. However, the taxpayer may depreciate the entire
cost of the assets for Iowa purposes.
e.
Amounts in excess of the Iowa
limits.
(1) Recovering the excess.
Due to the differences between the Iowa and federal limitations for certain
years, taxpayers may have a federal section 179 deduction that exceeds the
amount allowed for Iowa purposes. This excess amount is handled in different
ways depending on the source of the deduction.
1. Assets placed in service by the taxpayer
or entity reporting the deduction. The cost of any section 179 assets placed in
service by the taxpayer in excess of the Iowa limitation for a given year may
be recovered through regular depreciation under Section
168 of the Internal Revenue Code, without
regard to bonus depreciation under Section 168(k). The Iowa section 179 and
depreciation deductions and any basis adjustments resulting from the difference
in timing of the recovery between Iowa and federal law are calculated and
tracked on forms made available on the department's website.
EXAMPLE: Taxpayer purchases a $100,000 piece of equipment and
places it in service in 2018. Taxpayer claims a section 179 deduction of
$100,000 for the full cost of the equipment on the 2018 federal return.
Taxpayer is also required to claim a section 179 deduction of $70,000 on the
2018 Iowa return (the full amount of the federal deduction up to the Iowa
limit). The taxpayer can depreciate the remaining $30,000 cost of the equipment
for Iowa purposes.
2.
Special election for assets placed in service by a pass-through entity when the
section 179 deduction is claimed by the owner of that pass-through. See subrule
302.65(3) for information on a special election available to certain owners of
pass-through entities related to any section 179 deductions passed through from
a partnership or other entity that, in the aggregate, exceed the Iowa
limitations.
(2)
Application of limitation to pass-throughs. In the case of pass-through
entities, section 179 limitations apply at both the entity level and the owner
level. Pass-through entities that are required to file an Iowa return and that
actually place section 179 assets in service should follow
302.65(2)
"e" (1) "1" to account for any assets for which the
total federal section 179 deductions for a given year exceeded the Iowa
limitation. Owners of pass-throughs receiving section 179 deductions from one
or more pass-throughs that, in the aggregate, exceed the Iowa limitations
should follow 302.65(2)
"e" (1) "2."
EXAMPLE: Partner A (an individual and an Iowa resident) owns
50 percent interests in each of three partnerships: C, D, and E. Partnership C
does business exclusively in Iowa, places $200,000 worth of section 179 assets
in service during tax year 2019 and claims a federal section 179 deduction for
the full cost of the assets. Because C is required to file an Iowa partnership
return, C is subject to the Iowa section 179 limitations for 2019 and must
adjust its Iowa section 179 deduction as provided in
302.65(2)"e" (1) "1." C passes 50 percent of its section 179
deduction ($100,000 for federal purposes, $50,000 for Iowa purposes) through to
A. A also receives $50,000 each in section 179 deductions from D and E, for a
total of $150,000 in section 179 deductions (for Iowa purposes) in 2019. A is
subject to the $100,000 Iowa section 179 deduction limitation for 2019, but
because A received total section 179 deductions from one or more pass-throughs
in excess of the 2019 Iowa limitation, A is eligible for the special election
referenced in 302.65(2)"e" (1) "2."
f.
Income
limitation. The Iowa section 179 deduction for any given year is
limited to the taxpayer's income from active conduct in a trade or business in
the same manner that the section 179 deduction is limited for federal purposes.
If an allowable Iowa section 179 deduction exceeds the taxpayer's business
income for a given year, any excess may be carried forward as described in
paragraph 302.65(2)"g."
g.
Carryforward. This
paragraph applies only to amounts that do not exceed the Iowa section 179
deduction limitations for a given year but do exceed the taxpayer's business
income for that year. As with the federal deduction, allowable Iowa section 179
deductions claimed in a given year that exceed a taxpayer's business income may
be carried forward and claimed in future years. This carryforward, if any, is
calculated using only amounts up to the Iowa limit. Any federal section 179
deduction the taxpayer claimed in excess of the Iowa limit is not an Iowa
section 179 deduction and therefore is not eligible for the carryforward
described in this paragraph. Such amounts must instead be recovered as
described in paragraph 302.65(2)
"e," or in subrule 302.65(3)
for taxpayers receiving the deduction from one or more pass-through entities
and making the special election as described in that subrule.
EXAMPLE: Taxpayer purchases a $100,000 piece of equipment and
places it in service in 2019. Taxpayer claims a section 179 deduction of
$100,000 for the full cost of the equipment on the 2019 federal return.
Taxpayer is also required to claim a section 179 deduction of $100,000 on the
2019 Iowa return (because the federal deduction is equal to the Iowa limit for
the year, the Iowa and federal deductions are the same). However, the taxpayer
has only $50,000 in business income for 2019, so the allowable deduction for
that year is limited to $50,000. The remaining $50,000 may be carried forward
and applied as a section 179 deduction (subject to all limitations) in 2020,
and in any future years until the amount is fully deducted.
h.
Differences in basis.
Iowa adjustments for differences between the Iowa and federal section 179
deduction limitations may cause the taxpayer to have a different basis in the
same asset for Iowa and federal purposes. Taxpayers are required to use forms
made available on the department's website to calculate and track these
differences.
(3)
Section 179 deduction received from a pass-through entity. In
some cases, an individual or entity that receives income from one or more
pass-through entities may receive a section 179 deduction in excess of the Iowa
deduction limitation listed in paragraph 302.65(2)
"c" for a
given year. The individual or entity may be eligible for a special election
with regard to that excess section 179 deduction, as described in this subrule.
a.
Tax years beginning before January
1, 2018. For tax years beginning before January 1, 2018, the amount of
any section 179 deduction received in excess of the Iowa deduction limitation
for that year is not eligible for the special election.
b.
Special election available for tax
years 2018 and 2019. For tax years beginning on or after January 1,
2018, but before January 1, 2020, an individual or entity that receives a
section 179 deduction from one or more passthrough entities in excess of the
Iowa deduction limitation for that tax year may elect to deduct the excess in
future years, as described in this subrule. See rule
701-502.23 (422) for rules
applicable to corporations (both C and S corporations) and other entities
subject to the corporate income tax, and see rule
701-602.24 (422) for rules
applicable to financial institutions subject to the franchise tax.
(1) This special election applies only to
section 179 deductions passed through to the individual or entity by one or
more other entities.
(2) If the
total Iowa section 179 deduction passed through to the individual or entity
exceeds the federal section 179 deduction limitation for that year, the
individual or entity may only use the amount up to the federal limitation when
calculating the deduction under this election. Any amount in excess of the
federal limitation shall not be deducted for Iowa purposes.
c.
Section 179 assets of
an individual or entity. An individual or entity that makes the
special election may not claim an Iowa section 179 deduction for any assets the
individual or entity placed in service during the same year but must instead
depreciate such assets using the modified accelerated cost recovery system
(MACRS) without regard to bonus depreciation under Section
168(k) of the Internal
Revenue Code. To the extent the individual or entity claimed a federal section
179 deduction on those assets, the Iowa depreciation deductions and any basis
adjustments resulting from the difference in timing of the recovery between
Iowa law and federal law are calculated and tracked on forms made available on
the department's website.
EXAMPLE: A is a sole proprietor who places in service $20,000
worth of section 179 assets in tax year 2018 and claims the deduction for the
full amount for federal purposes. A is also a partner in Partnership B, an
out-of-state partnership with no Iowa filing obligation. Partnership B also
places section 179 assets in service, properly claims a federal section 179
deduction, and passes a total of $100,000 of that deduction through to A. For
federal purposes, A has a total of $120,000 in section 179 deductions. Because
A has section 179 deductions from a pass-through that exceed the Iowa
limitation for the year, A is eligible for the special election. A makes the
special election and claims the maximum Iowa section 179 deduction of $70,000
on the amount passed through from Partnership B. Under the special election, A
will be allowed to deduct the remaining $30,000 passed through from Partnership
B over the next five years, as described in paragraph
302.65(3)"e." However, because A made the special election, A
will be required to depreciate the entire $20,000 cost of the assets A placed
in service as a sole proprietor.
d.
Calculating the special
election. An eligible individual or entity electing to take advantage
of the special election must first add together all section 179 deductions
which the individual or entity received from all relevant pass-through
entities. The individual or entity must claim an aggregate Iowa section 179
deduction equal to the Iowa limit for the tax year. This amount must be
subtracted from the total. Whatever remains is the amount the individual or
entity will be permitted to deduct (special election deduction) in future
years.
e.
Special election
deduction.
(1) Calculation. The
remaining amount from paragraph 302.65(3)"d" must be divided
into five equal shares.
(2)
Claiming the special election deduction. The individual or entity may deduct
one of the five shares in each of the next five years. The dollar limitations
and reduction limitations on section 179 deductions do not apply to special
deduction amounts allowed over the five-year period under this
paragraph.
(3) Excess special
deduction. The special election deduction for a given year is limited to the
taxpayer's business income for that year. Any excess may be carried forward to
future years. Any amounts carried forward under this subparagraph shall be
added to, and treated in the same manner as, regular Iowa section 179 deduction
carryforwards as described in paragraph 302.65(2)
"g."
EXAMPLE: A is an Iowa resident who is a partner in a
partnership that does not do business in Iowa. In 2019, the partnership passes
through a $600,000 federal section 179 deduction and does not recalculate the
deduction for Iowa purposes, because the partnership has no obligation to file
an Iowa return. A claims an Iowa section 179 deduction of $100,000 (the 2019
Iowa limitation) and elects the five-year carryforward for the rest, meaning A
will be allowed to take a $100,000 Iowa deduction in each of the next five
years.
In 2020, A is eligible for the $100,000 deduction carried
forward under the election, but A only has $50,000 in business income. The
deduction is limited to business income, so A can only use $50,000 of the
deduction in this year. However, A will be permitted to treat the excess
$50,000 as a section 179 carryforward and use it to offset business income in
future years until the deduction is used up.
f.
Basis. The individual's
or entity's basis in the pass-through entity assets is adjusted by the full
amount of the section 179 deduction passed through in the year that the section
179 deduction is received and is therefore the same for both Iowa and federal
purposes.
g.
Later tax
years. For tax years beginning on or after January 1, 2020, Iowa fully
conforms to the federal section 179 deduction and special Iowa treatment for
excess section 179 deductions received from pass-throughs is not
available.
