Beginning with Tax Year (TY) 2019 Iowa fully conforms with the business interest expense deduction limitations imposed by Internal Revenue Code (IRC) section 163(j). This means that for tax years beginning on or after Jan 1, 2019, the Iowa and federal business interest expense deduction amounts will generally be the same. However, some taxpayers may still need to make certain adjustments to their federal business interest expense deduction to calculate the correct Iowa deduction amount for a given year. The two most common adjustments are explained in greater detail below.
Iowa did not conform with the federal limitations on the business interest expense deduction for TY 2018. As a result, taxpayers who were eligible for the deduction, but for whom the deduction was limited for federal purposes in TY 2018, would have been allowed a larger Iowa deduction that year. This larger deduction in TY 2018 was claimed as a nonconformity adjustment on the IA 1040, line 14, code “u”, for individuals, or on the 2018 Nonconformity Adjustments Worksheet, line 3, for all other taxpayers.
While IRC section 163(j) does limit the current business interest expense deduction, it also allows taxpayers to carry forward the disallowed amounts and deduct them in future years. This means that in TY 2019 and future tax years, taxpayers may be allowed a federal carryforward deduction for disallowed 2018 federal business interest expense amounts which taxpayers were allowed to deduct for Iowa purposes in TY 2018.
Iowa taxpayers are not allowed to deduct business interest expense amounts that represent federal carryforward amounts from TY 2018 and that were already allowed as an Iowa deduction in TY 2018. For tax years beginning on or after January 1, 2019, taxpayers whose business interest expense deduction was limited for federal, but not for Iowa, purposes in TY 2018 are required to add back any federal carryforward amounts from TY 2018 in the year those amounts are actually deducted for federal purposes on the taxpayer’s Iowa return for that tax year.
These and other carryforward adjustments resulting from 2018 nonconformity are calculated and reported using the IA 101 Nonconformity Adjustments form, Part I. Taxpayers may not be allowed to deduct the entire federal 2018 carryforward amount in a single year, therefore taxpayers may also need to add back the Iowa amount over several years. Part II of the IA 101 provides taxpayers with a way to track the original 2018 carryforward adjustment, the amount already added back in prior years, and the amount left to add back in future years before the taxpayer’s 2018 nonconformity carryforward adjustments are complete.
Special rules for reporting the disallowed business interest expense deduction carryforward apply to partnerships and their partners, both for TY 2018 and for TY 2019 and later. See the Department’s Partnership Interest Expense Nonconformity Adjustment guidance for more information.
Iowa law generally requires each corporation doing business in Iowa to file its own separate Iowa income tax return. Affiliated groups of corporations which file a consolidated federal return are permitted to file a single Iowa consolidated return that includes all members of the affiliated group that are subject to Iowa corporate income tax. Once an affiliated group has elected to file a consolidated Iowa return, the group is required to continue filing consolidated Iowa returns for all future years unless certain criteria are met.
This means that when a corporation, which is subject to Iowa income tax, is included on a federal consolidated return and either;
- Files its own separate Iowa return, or
- Is included on a consolidated Iowa return that does not include all of the same members as the federal consolidated return, because not all members of the federal group are subject to Iowa corporate income taxes (Iowa consolidated group),
the separate Iowa return filer or Iowa consolidated group will likely need to recalculate the business interest expense limitation deduction for Iowa purposes. The Iowa deduction amount is calculated in the same manner the deduction would be calculated for federal purposes, but using only the items of income and interest expense of the separate Iowa entity or Iowa consolidated group.
- Beginning in tax year 2019, Iowa conforms with the business interest expense deduction limitations under section 163(j) of the Internal Revenue Code.
- Because Iowa did not conform to these limitations for tax year 2018, taxpayers whose interest expense deduction was limited for federal, but not for Iowa purposes in 2018 may need to make Iowa adjustments for last year’s federal carryforward amount on the 2019 IA 101 Nonconformity Adjustments form.
- For corporations that file as members of a consolidated group for federal purposes, but which file separate returns, or file as an Iowa consolidated group with fewer members than the federal group, the interest expense limitation under section 163(j) must be recalculated as if the Iowa group or separate entity had filed its own federal return