Federal Tax Code Changes Makes Changes to Iowa Tax Code Necessary
I sit on the Ways & Means Committee which is working on tax reform this session. Due to some of the changes made in the Federal Tax Reform Act that passed late last year, we need to review our tax policies also. The goal is to more money in the taxpayer’s pocket and does so in a fiscally responsible way.
Due to tax reform at the national level, Iowans will pay $1.8 billion less in federal taxes in tax year 2018. However, due to the fact that Iowa has federal deductibility, Iowans will pay additional state taxes totaling $107 million in tax year 2018 and grow to $153 million in tax year 2019.
One of the changes at the Federal level was like-kind exchanges. They are now limited to real property. For example, farmers can still swap land for other land tax-free, but equipment trade-ins will no longer be a tax-free event. This is a pretty drastic change that is not being discussed. Let’s assume a farmer buys $500,000 of equipment but trades in $350,000 of equipment. The used equipment that is being traded in still has $50,000 remaining in basis to be depreciated. Under old law the $150,000 would treated as the purchase and the $50,000 remaining will be added to the basis so that $200,000 can be depreciated. This would eligible for Section 179 and / or bonus depreciation. Under old law the whole amount could be written off on the Federal return and only $25,000 plus normal depreciation on the Iowa return.
Under new law and without any changes to the Iowa tax code the $350,000 is now considered a sale (recapture and or capital gains on $300,000) and the $500,000 is a new capital purchase. The taxpayer will not be hurt at all in regards to the Federal return as they can use section 179 or bonus depreciation. However, under Iowa tax code, the taxpayer will only get a ¼ or ½ life first year depreciation (no bonus or Section 179 as they purchased over the $200,000 phase out limit) and will only receive normal depreciation of around $35,715. Thus, the taxpayers difference in income between the federal and the state in this example is $265,000. This would result in approximately $24,000 of extra taxes paid to the state of Iowa.
Small business across Iowa, not just farmers, will be affected by those changes. This is just one of the reasons why it is necessary to make changes to Iowa’s tax code.
Governor Reynolds Signs Future Ready Iowa Act
Gov. Kim Reynolds signed House File 2458, the Future Ready Iowa Act, on Tuesday at the Future Ready Iowa Summit in Des Moines.
Future Ready Iowa is the Governor’s plan to train Iowans for the jobs of today and tomorrow. The goal of Future Ready Iowa is for 70 percent of Iowa workers to have education or training beyond high school by 2025. In order to reach that goal, another 127,700 Iowans need to earn post-secondary degrees or other credentials.
This bill changes lives by helping Iowans earn credentials that prepare them for rewarding careers in advanced manufacturing, computer science, finance, health care and many other fields. It also helps employers hire the skilled workers they need to grow, which means Iowa communities will be even more prosperous.
The Governor called on the legislature to pass the Future Ready Iowa Act in her Condition of the State address in January. The bill passed both the Iowa House and Iowa Senate with unanimous, bipartisan support. It passed the Iowa House on March 13, 98-0 and the Iowa Senate on March 19, 47-0.