For tax years beginning on or after January 1, 2020, the
limit on the amount of business interest expense that a taxpayer may deduct in
a taxable year under Internal Revenue Code (IRC) Section 163(j) does not apply
for Iowa purposes. This rule provides information on how taxpayers must
calculate and report their business interest expense deduction for Iowa
purposes, for tax year 2018 (subrule 502.29(2)), when Iowa did not conform to
the limitation; tax year 2019 (subrule 502.29(3)), when Iowa did conform to the
limitation; and tax years 2020 and later (subrule 502.29(4) et seq.), when Iowa
again does not conform to this limitation. All references to the Code of
Federal Regulations (Treas. Reg.) and certain other information in this rule
are based on final Internal Revenue Service (IRS) regulations and guidance in
effect on January 13, 2021.
(1)
Definitions. The following terms apply to the interpretation
and application of this rule.
"Current-year business interest expense"
means the same as defined in Treas. Reg. Section 1.163(j)-1(b)(9).
"Excess business interest expense" means the
same as defined in Treas. Reg. Section 1.163(j)-1(b)(16).
"Iowa partnership" means any partnership
required to file an Iowa return (IA 1065) for the relevant tax year.
"Iowa S corporation" means any S corporation
required to file an Iowa return (IA 1120S) for the relevant tax year.
"Non-Iowa partnership" means any partnership
that is not required to file an Iowa return (IA 1065) for the relevant tax
year.
"Non-Iowa S corporation" means any S
corporation that is not required to file an Iowa return (IA 1120S) for the
relevant tax year.
(2)
Tax year 2018. For tax years beginning on or after January 1,
2018, but before January 1, 2019 (tax year 2018), Iowa conforms with the IRC in
effect on January 1, 2015, meaning the 30 percent limitation on the business
interest expense deduction first imposed by IRC Section
163(j) under
Public Law
115-97 (TCJA) does not apply for Iowa purposes.
a.
In general. For tax year
2018, Iowa taxpayers are permitted to deduct current-year business interest
expense without regard to the limitations imposed by IRC Section
163(j) under the TCJA. The
taxpayer's additional deduction is computed on the 2018 Nonconformity
Adjustments Worksheet. Taxpayers who qualify for these higher Iowa deductions
in 2018 may need to make further adjustments in 2019 for amounts deducted under
this subrule for Iowa purposes but disallowed and carried forward for federal
purposes. See subrule 502.29(3) for more information about these 2019
adjustments.
b.
Special
rules for partnerships and S corporations.
(1) Iowa partnerships and S corporations.
Partnerships and S corporations required to file Iowa returns in tax year 2018
are required to make adjustments for Iowa's nonconformity with IRC Section
163(j) at the entity level,
meaning they can deduct the full interest expense on the entity's own Iowa
return and the reduction to the partner's or shareholder's share of the
entity's income will be included in the all source modifications line of the
partners' or shareholders' Iowa Schedules K-1.
EXAMPLE 1: P, a partnership doing business in Iowa, has
$100,000 in current-year business interest expense in 2018. For federal
purposes, $20,000 of that amount is disallowed under IRC Section
163(j). The partnership
deducts $80,000 at the entity level in 2018, and the remaining disallowed
$20,000 is allocated to the partners to be deducted in future years. For Iowa
purposes, the $80,000 of business interest expense allowed for federal purposes
is included in the partnership's non-separately stated ordinary business income
(loss), and the partnership will make an adjustment on the entity's IA 1065 to
deduct the $20,000 of current-year business interest expense that was
disallowed for federal purposes. The $20,000 additional Iowa deduction will be
reported to the partners as an all source modification on the partners' IA 1065
Schedules K-1, and partners will receive the benefit of this all source
modification item when the partners report their Iowa partnership income on
their own Iowa tax return for the year. The partners will not be permitted to
make further Iowa adjustments on their own Iowa tax return for the excess
business interest expense amounts passed through to them from the partnership
for federal purposes.
(2)
Owners of partnerships and S corporations with no entity-level 2018 Iowa filing
requirement.
1. Non-Iowa partnerships. Iowa
partners who received interest expense deductions from partnerships which were
not required to file 2018 Iowa returns may claim the larger Iowa deduction for
business interest expenses passed through from the partnership on the partner's
own 2018 Iowa return by including in the partner's Iowa deduction the amount of
disallowed business interest expense deduction shown on the 2018 federal
Schedule K-1 (Form 1065), line 13, code K, received from the non-Iowa
partnership.
EXAMPLE 2: ABC, Inc. is a corporation doing business in Iowa
and a partner in P2, an out-of-state partnership with no business in Iowa and
no Iowa filing obligation. In 2018, P2 has $100,000 in current-year business
interest expense and is subject to the IRC Section
163(j) limitation for
federal purposes. At the entity level, P2 is permitted to deduct $80,000 on its
2018 federal partnership return. The $20,000 in excess business interest
expense is then allocated to P2's partners. ABC, Inc. is allocated $5,000 in
excess business interest expense from P2. Because P2 is not required to file an
Iowa return, and therefore ABC, Inc. did not receive a 2018 IA 1065 Schedule
K-1 from P2, ABC, Inc. is permitted to deduct the $5,000 allocated from P2 as
current-year business interest expense on ABC, Inc.'s 2018 Iowa income tax
return.
2. Non-Iowa S
corporations. Iowa shareholders of S corporations that have no Iowa filing
requirement are limited to the deduction actually passed through to them on the
federal Schedule K-1 received from the S corporation for Iowa purposes in tax
year 2018. These shareholders are not permitted to make adjustments for
interest expense disallowed at the entity level for the non-Iowa S corporation.
See Example 3 in 701-subrule 302.85(2) for an example of how Iowa shareholders
of non-Iowa S corporations should report the business interest expense
deduction allocated to them from the S corporation.
(3)
Tax year
2019. For tax years beginning on or after January 1, 2019, but before
January 1, 2020 (tax year 2019), Iowa conforms to the IRC in effect on March
24, 2018.
a.
Applicable
limitation. For tax year 2019, Iowa conforms to the 30 percent
limitation on the business interest expense deduction imposed by IRC Section
163(j). Because of Iowa's
fixed conformity date, Iowa did not conform with the higher 50 percent
limitation retroactively imposed by the Coronavirus Aid, Relief, and Economic
Security (CARES) Act,
Public Law
116-136, to the extent that increased limitation
applied in tax year 2019 for federal purposes. For tax year 2019 only,
taxpayers are required to calculate their Iowa business interest expense
deduction by applying the limitations of IRC Section
163(j) without regard to
IRC Section
163(j)(10).
EXAMPLE 3: XYZ Corp. has an adjusted taxable income (ATI) of
$100,000 for tax year 2019 and $80,000 in deductible business interest expense.
For federal purposes, XYZ Corp.'s business interest expense deduction is
limited to $50,000 (50 percent of ATI) under the CARES Act. However, because
Iowa only conforms to the 30 percent limitation imposed by the TCJA, and not
the higher CARES Act limitation for 2019, XYZ Corp.'s Iowa business interest
expense deduction for the year is limited to $30,000. XYZ Corp. will report
this difference by making a $20,000 adjustment on IA 101, line 3 (XYZ Corp. may
have additional adjustments on this line if the current-year federal deduction
included amounts carried forward from 2018).
b.
Addition to income for tax year
2018 federal carryforward amounts deducted in tax year 2019. To the
extent a taxpayer's tax year 2019 federal business interest expense deduction
includes amounts that were disallowed and carried forward to future years under
IRC Section
163(j) in tax year 2018 for
federal purposes, but allowed as a deduction in tax year 2018 for Iowa purposes
under paragraph 502.29(2)
"a" (in general), subparagraph
502.29(2)
"b"(1) (Iowa partnerships and S corporations), or
numbered paragraph 502.29(2)
"b"(2)"1" (non-Iowa partnerships),
these carried-forward amounts must be added back in computing Iowa income.
These prior deductions and current adjustments are calculated and tracked on
the IA 101 Nonconformity Adjustments form. Note that shareholders of non-Iowa S
corporations should not be required to add back 2018 carryforward amounts
deducted by the S corporation in 2019, because the shareholders were not
permitted to deduct these excess amounts for Iowa purposes in 2018. See
numbered paragraph 502.29(2)
"b"(2)"2."
EXAMPLE 4: QRS, Inc. is a partner in P under the same facts
described in Example 1 above. For tax year 2019, QRS, Inc. completes federal
Form 8990 and is eligible to deduct $1,000 of the excess business interest
expense allocated to QRS, Inc. from P in 2018 on QRS, Inc.'s 2019 federal
income tax return. This $1,000 federal deduction for prior-year excess business
interest expense allocated from P must be added back in computing QRS, Inc.'s
2019 Iowa income. The same add-back would be required if this scenario was
applied to the facts in Example 2 above.
(4)
Tax years beginning on or after
January 1, 2020. For tax years beginning on or after January 1, 2020,
Iowa does not conform with the IRC Section
163(j) business interest
expense deduction limitation.
a.
Current-year business interest expense. For tax years
beginning on or after January 1, 2020, a taxpayer's current-year business
interest expense is fully deductible to the extent permitted by IRC Section
163 for Iowa purposes without regard to any
limitation under IRC Section
163(j).
Even though Iowa does not conform to IRC Section
163(j), provisions of the
IRC other than Section 163(j) may subject interest expense to disallowance,
deferral, capitalization, or other limitations, and those other provisions of
the IRC still generally apply for Iowa purposes. No additional Iowa adjustments
are permitted for federal limitations such as those described in Treas. Reg.
Section 1.163(j)-3(b)(4), which are determined after the application of IRC
Section
163(j) for federal
purposes. See Treas. Reg. Section 1.163(j)-3 for examples of other provisions
of the IRC that may restrict interest expense deductions for federal and Iowa
purposes, independent of the IRC Section
163(j)
limitation.
b.
Carryforward.
(1) Special
one-time carryforward catch-up (tax year 2020 only). For tax years beginning on
or after January 1, 2020, but before January 1, 2021 (tax year 2020), taxpayers
who filed a 2019 Iowa return are permitted to deduct all interest expense
deduction amounts that were disallowed and carried forward under IRC Section
163(j) for Iowa purposes in
tax year 2019. This deduction shall be calculated and reported on the
taxpayer's 2020 Iowa income tax return using form IA 163A. Excess business
interest expense amounts carried over from tax year 2018 at the federal level
shall not be deducted for Iowa tax purposes in tax year 2020.
EXAMPLE 5: In 2019, QRS, Inc. had $100,000 in current-year
business interest expense. QRS, Inc.'s business interest expense deduction was
limited to $50,000 for federal purposes and limited to $30,000 for Iowa
purposes due to Iowa's nonconformity with the CARES Act for that year. See
paragraph 502.29(3)"a." In 2020, QRS, Inc. is a gain subject
to an IRC Section 163(j) limitation and is
not permitted to deduct any prior-year carryforward amounts for federal
purposes. However, because Iowa does not conform to the IRC Section
163(j) limitation for 2020,
QRS, Inc. may deduct all of the company's current-year business interest
expense and all $70,000 ($100,000 - $30,000) of QRS, Inc.'s disallowed Iowa
interest expense carried over from 2019. QRS, Inc. must complete the IA 163 in
order to calculate the company's current-year business interest expense
deduction, and the IA 163A to determine the total amount of 2019 disallowed
Iowa interest expense amounts, which may be deducted in full on QRS, Inc.'s
2020 Iowa return.
(2)
Addition to income for prior-year federal carryforward amounts deducted in the
current year. When current-year interest expense is limited at the federal
level, the disallowed business interest expense is carried forward to be
deducted in future years for federal purposes, when certain conditions are met.
See Treas. Reg. Section 1.163(j)-1(b) (10) for the definition of "disallowed
business interest expense." Iowa law allows taxpayers to fully deduct
current-year business interest expense, and no amounts are carried forward for
Iowa purposes. Disallowed business interest expense carryforward amounts from
prior years, including excess business interest expense allocated to a partner
in a prior year, cannot be deducted for Iowa purposes except as described in
subparagraph 502.29(4)
"b"(1). All prior-year disallowed
business interest expense carryforward amounts deductible under IRC Section
163(j) in the current year
at the federal level, including excess business interest expense allocated to a
partner in a prior year, must be added back in computing the taxpayer's Iowa
income for the year.
EXAMPLE 6: In 2020, QRS, Inc. has $100,000 in current-year
business interest expense. For federal purposes, QRS, Inc. is subject to the
IRC Section 163(j) limitation. QRS,
Inc. deducts $70,000 in business interest expense on QRS, Inc.'s 2020 federal
return and carries the remaining $30,000 forward to be deducted in future
years. For Iowa purposes, QRS, Inc. deducts the full $100,000 in current-year
business interest expense in 2020.
In 2021, QRS, Inc. has $50,000 in current-year business
interest expense. For federal purposes, QRS, Inc. is permitted to deduct the
full $50,000 in interest expense generated in 2021, plus $5,000 of the amount
that was disallowed in 2020 for a total federal deduction of $55,000 in 2021.
QRS, Inc. must add the federal carryforward amount ($5,000) back on the
company's 2021 Iowa return, limiting QRS, Inc.'s 2021 Iowa deduction to the
$50,000 in current-year business interest expense.
c.
Consolidated groups.
Corporations that were included on a federal consolidated return but that
either file separate returns for Iowa purposes or file an Iowa consolidated
return that does not include all members of the federal consolidated group are
required to recalculate their proper current-year business interest expense
deduction as described in paragraph 502.29(4)
"a," and the
amount of any prior-year disallowed business interest expense carryforward
which must be added back for Iowa purposes as described in paragraph
502.29(4)
"b," for the separate entity or Iowa consolidated
group by completing pro forma federal interest expense deduction forms for the
separate entity or Iowa consolidated group. Treas. Reg. Section 1.163(j)-4(d)
and any other applicable federal regulations or guidance govern how Iowa
consolidated groups should make this pro forma calculation. For more
information about the election to file Iowa consolidated returns and group
membership requirements, see rule
701-502.15 (422).
(1) Departure from group. In the event that a
member leaves the consolidated group, both the newly separated member and the
remaining group shall be required to include any carryforward amounts allocated
to them under Treas. Reg. Section 1.163(j)-5(b)(3)(iii) in their respective
Iowa incomes in the year or years the separate company or group actually
deducts those amounts for federal purposes.
(2) Carryforwards from separate return
limitation years (SRLY). A consolidated group is not permitted to deduct any
disallowed business interest expense carryforward amount of a member arising in
a SRLY for Iowa purposes and must add back such amounts on the Iowa return in
the same year in which the consolidated group is permitted to deduct the SRLY
carryforward amount for federal purposes. See 26 Treas. Reg. Section
1.163(j)-5(d) for more information about the federal treatment of these
carryforward amounts.
(5)
Partners and
partnerships.
a.
Partnership-level adjustments. For tax years beginning on or
after January 1, 2020, partnerships that file an Iowa income tax return for a
tax year in which the partnership is subject to the IRC Section
163(j) limitation for
federal purposes are permitted to deduct all current-year business interest
expense at the partnership level in that tax year. See 701-paragraph
302.85(5)
"a" for more information about the calculation and
reporting of partnership-level adjustments.
b.
Partner-level
adjustments.
(1) Interest expense
from Iowa partnerships. Iowa adjustments related to excess business interest
expense of an Iowa partnership are made at the entity level as described in
701-paragraph 302.85(5)"a" and are reported to partners on an
IA 1065 Schedule K-1. Partners are not permitted to make any Iowa adjustment at
the partner level to their federal interest expense deduction for amounts of
excess business interest expense allocated from an Iowa partnership on the
partner's federal Schedule K-1 related to that Iowa partnership. See Example 1
above.
(2) Interest expense from
non-Iowa partnerships. For tax years beginning on or after January 1, 2020,
partners may include as part of their Iowa business interest expense deduction
the total amount of current-year excess business interest expense deduction
passed through to them from all non-Iowa partnerships as shown on the federal
Schedule K-1 (Form 1065), line 13, code K. See Example 2 above.
(3) Partnership basis. A partner's basis is
reduced (but not below zero) by the amount of excess business interest expense
the partnership passes through to the partner each year. See Treas. Reg.
Section 163(j)-6(h) for detailed information about how to make these basis
adjustments. For federal purposes, immediately before disposition of the
partnership interest, the partner's basis is then increased by the amount of
any passed-through business interest expense which has not yet been treated as
paid or accrued by the partner as described in Treas. Reg. Section
163(j)-6(h)(3). No basis increase at the time of disposition is allowed for
Iowa purposes for passed-through business interest expense amounts that were
deducted for Iowa, but not for federal, purposes due to Iowa's nonconformity
with IRC Section
163(j).
(6)
S
corporation adjustments. For federal purposes, IRC Section
163(j) limitations are
applied at the S corporation level. Unlike partnerships, disallowed business
interest expense amounts are carried forward and deducted in future years at
the entity level rather than being passed through to shareholders. S
corporations should calculate their entity-level business interest expense
deduction for Iowa purposes under the provisions of this rule. See also Treas.
Reg. Section 1.163(j)-6(l) for more information about the application of IRC
Section
163(j) to S corporations
for federal purposes.
This rule is intended to implement Iowa Code section
422.35(27).
