Reform Guidance - Domestic Production Activities Deduction

NOTICE: This guidance was updated on December 13, 2019 to describe the calculation of the Domestic Production Activities Deduction in Iowa for taxpayers with a fiscal tax year that begins in calendar year 2018, and to describe the application of the deduction in Iowa for tax years beginning on or after January 1, 2019, including allowable deductions for owners, patrons, or beneficiaries of an S corporation, partnership, cooperative, or estate or trust with a fiscal tax year beginning in calendar year 2018.

On December 22, 2017, President Donald Trump signed Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act, which included a repeal of the federal Domestic Production Activities Deduction (DPAD) for tax years beginning on or after January 1, 2018.

Iowa, however, did not conform with this repeal for tax years beginning on or after January 1, 2018, but before January 1, 2019 (referred to herein as “tax year 2018”). As a result, the DPAD will be available as a deduction for Iowa tax purposes for tax year 2018, even though this deduction is not available at the federal level. The deduction will not be available for Iowa purposes for tax years beginning on or after January 1, 2019, except under certain circumstances described below.

  • Prior to its repeal at the federal level, the DPAD was available under section 199 of the Internal Revenue Code (IRC) and was generally equal to a percentage of a business’s net income attributable to certain production activities in the United States. The DPAD was limited by certain items, such as the income of the taxpayer and wages paid by the business that are allocable to domestic production.

    Taxpayers should calculate their tax year 2018 DPAD for Iowa tax purposes using federal form 8903 as a worksheet and should retain a copy of the completed form for their records. This calculation should be made for the taxpayer’s entire tax year 2018, even if such tax year ends after December 31, 2018. However, the DPAD for Iowa tax purposes will generally be calculated using the IRC in effect on January 1, 2015, so nonconformity adjustments may apply.

    The most common areas that may require adjustments include:

    • The federal bonus depreciation is not allowed for Iowa tax purposes.
    • The federal section 179 deduction is limited for Iowa tax purposes.
    • Iowa has not conformed with the DPAD changes made in Public Law 114-113 (Protecting Americans from Tax Hikes Act of 2015) relating to the treatment of transportation costs of independent refiners (previous IRC § 199(c)(3)(C)).
    • Iowa has not conformed with the DPAD changes made in Public Law 114-113 (Protecting Americans from Tax Hikes Act of 2015) or in Public Law 115-123 (Bipartisan Budget Act of 2018) relating to the extension beyond 2014 of the DPAD allowable with respect to activities in Puerto Rico.

    To the extent any nonconformity adjustment affects the calculation of the DPAD, including but not limited to the calculation of federal adjusted gross income or federal taxable income on line 11 of federal form 8903, the taxpayer should calculate the DPAD with these adjustments. Taxpayers are responsible for properly calculating the DPAD and for obtaining and keeping adequate records to substantiate their eligibility for the deduction.

    For tax year 2018, taxpayers (including those with a fiscal tax year beginning in calendar year 2018) should follow the same procedures for calculating and reporting the DPAD for Iowa tax purposes that were used prior to the federal repeal. This includes:

    • Pass-through businesses such as partnerships and S corporations that determine the DPAD at the owner level will need to make the same calculations and report the same information to owners as previously required by the Internal Revenue Service (IRS) to enable each owner to properly calculate the allowable DPAD.
    • Trusts, estates, and agricultural or horticultural cooperatives that intend to distribute DPAD amounts to beneficiaries and patrons will need to make the same calculations and provide beneficiaries or patrons with the same information as previously required by the IRS to enable each beneficiary or patron to properly calculate the allowable DPAD. See other special instructions below for agricultural or horticultural cooperatives.
    • An expanded affiliated group of corporations required to compute the DPAD as one taxpayer and then allocate proportionate shares of its total DPAD among members of the expanded affiliated group must calculate the DPAD in the same manner as previously required by the IRS.

    An agricultural or horticultural cooperative should take note of the new IRC § 199A(g) deduction when calculating, claiming, and allocating the DPAD for Iowa tax purposes for tax year 2018. The federal Consolidated Appropriations Act of 2018 (Public Law 115-141) created this new deduction available to a cooperative and its non-corporate patrons for income attributable to domestic production activities.

    Iowa has not conformed with this new IRC § 199A(g) deduction for tax year 2018, so it is not an allowable deduction for Iowa tax purposes. It is, however, similar to the DPAD, so a cooperative may be able to calculate its DPAD using similar amounts and calculations as were used in determining a federal IRC § 199A(g) deduction for the same tax year, provided the cooperative makes any applicable nonconformity adjustments as discussed above.

    Taxpayers who would like to find out more information on the DPAD may reference federal form 8903, as well as the instructions for federal form 8903 as revised in January 2013.

  • Although the DPAD is repealed in Iowa for tax years beginning on or after January 1, 2019 (“tax year 2019”), taxpayers are permitted to claim DPAD amounts on Iowa tax returns in tax year 2019 or later under two circumstances:

    1. 1. The DPAD results from being a shareholder, partner, patron, or beneficiary in an S corporation, partnership, cooperative, or estate or trust with a tax year that began prior to January 1, 2018, and those amounts were properly reported and claimed on the taxpayer’s appropriate federal income tax return for the same tax year.
    2. 2. The DPAD results from being a shareholder, partner, patron, or beneficiary in an S corporation, partnership, cooperative, or estate or trust with a tax year that began on or after January 1, 2018, but prior to January 1, 2019, and those amounts were properly calculated by the taxpayer as described in this guidance and properly reported to the shareholder, partner, patron, or beneficiary as described in this guidance.

    For tax year 2019 or later, individual taxpayers who have DPAD from one or more of the circumstances described above should claim such qualifying amounts on the IA 1040, line 24, code “i”. All other taxpayers should claim such qualifying amounts on the form IA 101 Nonconformity Adjustments, line 12, and should include that form and a supporting schedule explaining the DPAD adjustment with their appropriate tax return. The form IA 101 Nonconformity Adjustments will be available on the Department’s website in the near future.

    • The DPAD continues to apply for Iowa tax purposes for tax years beginning prior to January 1, 2019.
    • The DPAD will be available as a deduction for Iowa tax purposes for tax year 2018, even though this deduction is not available at the federal level for the same tax year, and these tax year 2018 DPAD amounts may be available as a deduction to certain owners, patrons, or beneficiaries in tax year 2019 or later under certain circumstances.
    • Certain entities like pass-through businesses, trusts, estates, agricultural or horticultural cooperatives, and expanded affiliated groups of corporations will need to make certain calculations and provide certain information to their owners, beneficiaries, patrons, or members in order for those persons to properly calculate and claim the DPAD for Iowa tax purposes for tax year 2018 or later.
    • The tax year 2018 DPAD for Iowa tax purposes should be calculated by a taxpayer using federal form 8903 as a worksheet, making any adjustments required because of Iowa’s nonconformity with provisions of federal law that affect the DPAD calculation. The taxpayer should retain this worksheet for their records.