(1)
In
general.
Public Law
115-97,
Section
13303, repealed the deferral of gain or loss
from exchanges of like-kind personal property for federal purposes under
Section
1031 of the Internal Revenue Code. This
federal repeal applies to exchanges completed after December 31, 2017, unless
the taxpayer began the exchange by transferring personal property or receiving
replacement personal property on or before that date. Iowa did not conform to
this federal repeal for Iowa franchise tax purposes for tax periods beginning
before January 1, 2019. For tax years beginning on or after January 1, 2019,
but before January 1, 2020, Iowa generally conforms to the federal treatment of
gain or loss from exchanges of like-kind personal property, but eligible
taxpayers may elect the treatment that applied under prior federal law for Iowa
purposes. For tax years beginning on or after January 1, 2020, Iowa fully
conforms to the federal treatment for these exchanges, and no special election
is available. This rule governs exchanges of like-kind personal property
completed after December 31, 2017, but before tax periods beginning on or after
January 1, 2020. This rule does not apply to exchanges completed during any tax
year beginning on or after January 1, 2020.
(2)
Qualification. Section
1031 of the Internal Revenue Code in effect
on December 21, 2017, and any applicable federal regulations govern whether
transactions involving the disposition and acquisition of personal property
qualify for Iowa franchise tax purposes as a like-kind exchange of personal
property subject to the deferral of gain or loss and also govern the date and
tax period during which an exchange is considered completed. The treatment of
such transactions as a like-kind exchange for Iowa franchise tax purposes is
either mandatory or permissive depending on the date the like-kind exchange is
completed.
a.
Like-kind exchanges
completed after December 31, 2017, but before tax periods beginning on or after
January 1, 2019. Transactions involving the disposition and
acquisition of personal property that qualify under this subrule as a like-kind
exchange completed after December 31, 2017, but before tax periods beginning on
or after January 1, 2019, are required to be treated as a like-kind exchange
for Iowa franchise tax purposes.
b.
Like-kind exchanges completed during tax periods beginning on or after
January 1, 2019, but before January 1, 2020. For tax periods beginning
on or after January 1, 2019, Iowa is conformed to the federal repeal of
deferral of gain or loss from exchanges of like-kind personal property, so the
federal and Iowa treatment of such transactions under Section
1031 of the Internal Revenue Code will
generally be the same. However, transactions involving the disposition and
acquisition of personal property that qualify under this subrule as a like-kind
exchange completed during tax periods beginning on or after January 1, 2019,
but before January 1, 2020, may at the election of the taxpayer be treated as a
like-kind exchange for Iowa franchise tax purposes. The election is made by
completing the necessary worksheets and forms and making the required
adjustments on the Iowa return as described in subrule 602.10(3). No special
attachment or statement is required. The election only applies to the
transactions involved in the like-kind exchange, and the taxpayer may elect or
not elect to treat other qualifying transactions as a like-kind exchange for
Iowa purposes.
(3)
Calculation and Iowa adjustments. A taxpayer required to or
electing to treat qualifying transactions as a like-kind exchange for Iowa tax
purposes must make certain Iowa calculations and adjustments on forms and
worksheets made available on the department's website. The IA 8824 Worksheet
described in this subrule need not be included with the Iowa return but must be
kept with the taxpayer's records. The taxpayer is responsible for providing
documentation at the department's request to substantiate a like-kind exchange
under this rule.
a.
Like-kind exchange
calculation. The taxpayer must complete Parts I and II of the IA 8824
Worksheet to compute the Iowa recognized gain, if any, the Iowa deferred gain
or loss, and the Iowa basis of the like-kind personal property received in the
like-kind exchange.
Example 1: X, a financial institution filing on a
calendar-year basis, trades a computer system with a fair market value (FMV) of
$25,000 along with $75,000 in cash to Y for a new computer system with an FMV
of $100,000. For purposes of this example it is assumed that the computer
system trade occurs in 2019 and qualifies as a like-kind exchange and that X
elects such treatment under paragraph 602.10(2)"b." At the
time of the trade, the adjusted basis of X's old computer system is $0 for
federal tax purposes and is $13,680 for Iowa tax purposes. X realizes a gain
for Iowa purposes on the exchange of the old computer system in the amount of
$11,320 ($100,000 FMV of new computer system - $75,000 cash paid - $13,680 Iowa
adjusted basis of old computer system). Because X did not receive any cash or
other property that was not like-kind, or assume any liabilities from Y, the
entire amount of X's $11,320 realized gain qualifies for deferral, so X
recognizes $0 of gain on the exchange for Iowa tax purposes. As a result, X's
basis in the new computer system for Iowa tax purposes is $88,680 ($13,680 Iowa
adjusted basis of old computer system + $75,000 cash paid by
X).
b.
Iowa
nonconformity adjustment.
(1) The
taxpayer must complete Part III of the IA 8824 Worksheet to adjust for the
difference between any recognized Iowa gain from the exchange as calculated on
the IA 8824 Worksheet, Part II, and any gain or loss (including gain or loss
recaptured as ordinary income) recognized on the taxpayer's federal return.
Example 2: Assume the same facts as given in Example 1.
Because the computer trade occurred in 2019, it will not qualify as a like-kind
exchange for federal tax purposes but will instead be treated as two separate
transactions: a sale of the old computer system and a purchase of the new
computer system. X recognizes a gain for federal tax purposes on the sale of
the old computer system in the amount of $25,000 ($25,000 sales price of old
computer system - $0 federal adjusted basis of old computer system), the entire
amount of which is recaptured as ordinary income because of prior depreciation.
X reports the $25,000 of income on the federal return. X is required to report
the same $25,000 as income on the Iowa return but is also allowed a $25,000
subtraction on the same Iowa return because X's recognized gain for Iowa tax
purposes is $0 as calculated in Example 1. X's nonconformity adjustment of
-$25,000 must be reported on the Iowa return in the manner prescribed on the IA
8824 Worksheet.
(2) If the
total recognized federal gain is reported using the installment sale method
under Section
453 of the Internal Revenue Code, the total
amount of any Iowa nonconformity adjustment related to that federal gain must
be claimed over the same installment period, and the proportion of the total
Iowa nonconformity adjustment claimed for each tax year shall equal the same
proportion that the federal gain reported for that tax year bears to the total
amount of federal gain that will ultimately be reported for all tax years
resulting from the disposition of the personal property. The taxpayer must
complete an IA 8824 Worksheet for each tax year that an Iowa nonconformity
adjustment is claimed.
c.
Cost recovery adjustments.
(1) The taxpayer must complete the IA 4562A
to account for any differences between the federal and Iowa cost recovery
deductions related to the like-kind personal property involved in the like-kind
exchange, including if the taxpayer's basis in the like-kind personal property
received is different for federal and Iowa purposes, or if the taxpayer claimed
additional first-year depreciation or a section 179 deduction for federal
purposes on the like-kind property received in the exchange. See rule
701-602.23 (422) for
requirements related to the disallowance of additional first-year depreciation
for Iowa franchise tax purposes. See rule
701-602.24 (422) for the section
179 limitations imposed under the Iowa franchise tax.
(2) Treasury Regulation §1.168(i)-6
prescribes rules related to the calculation of depreciation for certain assets
involved in a like-kind exchange, but a taxpayer may elect to not have those
rules apply pursuant to Treasury Regulation §1.168(i)-6(i). A taxpayer may
choose to make a similar election under Treasury Regulation §1.168(i)-6(i) for
Iowa tax purposes with regard to a like-kind exchange under this rule if the
personal property otherwise would have qualified for such federal election
notwithstanding the fact that no like-kind exchange occurred for federal
purposes or the fact that no election was actually made for federal tax
purposes in accordance with Treasury Regulation §1.168(i)-6(j). The election is
made by calculating depreciation for Iowa tax purposes on the personal property
involved in the like-kind exchange using the method described in Treasury
Regulation §1.168(i)-6(i) on the timely filed Iowa return, including
extensions, for the same tax year that the like-kind exchange was completed. No
special attachment or statement is required.
Example 3: Assume the same facts as given in Examples 1 and
2. X elects additional first-year depreciation on the new computer system and
claims a depreciation deduction on the federal return of $100,000 (100 percent
of X's federal basis). X is required to add back the total amount of the
federal depreciation on the Iowa return because Iowa does not allow additional
first-year depreciation. But X is permitted deductions for regular depreciation
on the new computer system with an Iowa basis of $88,680 ($13,680 carryover
basis from old computer system + $75,000 excess basis from cash paid) under
Section 168 of the Internal Revenue Code, without
regard to bonus depreciation under Section 168(k). See rule
701-602.23 (422) for more
information on the disallowance of additional first-year depreciation.
Example 4: Assume the same facts as given in Examples 1 and
2. X elects to expense the entire cost of the new computer system under Section
179 of the Internal Revenue Code and claims
a deduction on the federal return of $100,000. X is also required to claim the
section 179 deduction on the new computer system for Iowa tax purposes pursuant
to subrule 602.24(2). However, the amount that represents the carryover basis
from the old computer system ($13,680) is not eligible for the deduction under
Section 179(d)(3) of the Internal
Revenue Code, so the cost of the new computer system that is eligible for the
section 179 deduction for Iowa purposes is only $75,000 (excess basis from cash
paid). This is the amount of section 179 deduction that X must claim on the
Iowa return, subject to the applicable Iowa dollar limitation and reduction
limitations in rule 701-602.24 (422). Because X is
the taxpayer who placed the new computer system in service, X is permitted
deductions for regular depreciation on the carryover basis in the new computer
system ($13,680) under Section
168 of the Internal Revenue Code, without
regard to bonus depreciation under Section 168(k).
This rule is intended to implement 2019 Iowa Acts, chapter
152 [House File 779], section 11.
