Iowa Composite Returns for Tax Year 2022 and Later

For tax years 2022 and later, pass-through entities with nonresident members will be required to file Iowa composite returns under Iowa Code section 422.16B and pay Iowa income or franchise tax on behalf of their nonresident members on the nonresident members’ Iowa-source income from the pass-through entity. The composite return tax will be computed by multiplying each nonresident member’s Iowa-source income from the pass-through entity by the top Iowa tax rate applicable to that nonresident member (for tax year 2022: 8.53% for individuals and pass-through entities; 9.8% for C corporations; 5% for financial institutions).

The composite return tax payment will be due by the due date of the pass-through entity’s Iowa income tax return (IA 1065, IA 1120S, or IA 1041), not including extensions. For calendar-year filers, the tax year 2022 composite return tax payment will be due on May 1, 2023. Pass-through entities may, but are not required to, make quarterly estimated composite tax payments. As stated above, the Department will update Iowa tax forms in the future to facilitate the new Iowa composite return tax requirements. The Department’s existing composite tax form, the IA 1040C, will be discontinued for tax year 2022 and later.

Beginning in tax year 2022, pass-through entities are no longer required to additionally withhold and remit Iowa income tax on a nonresident member’s Iowa-source income from the pass-through entity, because that nonresident member’s Iowa-source income is now subject to the mandatory composite return requirement described above. A pass-through entity may still be required to withhold and remit Iowa income tax, using a valid Iowa withholding permit, on income paid to a nonresident who is not a member of the entity.

For purposes of the composite return requirement, “pass-through entities” are estates, trusts, and any entity taxed as a partnership or S corporation for federal tax purposes. Because these entities are treated similarly for composite return purposes, they are collectively referred to as “pass-through entities” unless otherwise identified.

For purposes of the composite return requirement, “nonresident members” include partners in a partnership, members of a limited liability company taxed as a partnership or S corporation, shareholders of an S corporation, or beneficiaries of a trust or estate who are any of the following:

• An individual who is not a resident of Iowa
• A partnership without a commercial domicile in Iowa
• A trust or estate without a situs in Iowa
• A C corporation or S corporation without a commercial domicile in Iowa
• A financial institution without a commercial domicile in Iowa

Certain pass-through entities are exempt from the requirement to file a composite return. These include:

• Publicly-traded partnerships that meet the reporting requirement of Iowa Code section 422.16B(5)(a)
• Entities prohibited under federal or state law from making distributions to members
• Entities engaged in disaster response work that are not required to file a composite return as provided in Iowa Code section 29C.24

Certain nonresident members are exempt from the requirement to be included on a composite return. These include:

• Publicly-traded partnerships that meet the reporting requirements of Iowa Code section 422.16B(5)(a)
• Tax-exempt entities under either state or federal law, unless the Iowa-source income of the tax-exempt entity is unrelated business income
• Insurance companies subject only to the insurance companies taxes under Iowa law, including Iowa Code sections 432.1, 432.2, 432A.1, 518.18, or 518A.35

A nonresident member who is not exempt from the requirement to be included on a pass-through entity’s composite return as described above may be excluded from the composite return only if the nonresident member and pass-through entity complete and sign the 2022 Nonresident Member Composite Agreement (41-175). The completed agreement does not need to be filed with the Department, but it must be retained by the pass-through entity and provided to the Department upon request.

The nonresident member will be responsible for filing their own Iowa returns and making their own Iowa tax payments, including but not limited to estimated tax payments, on their distributive share of pass-through income. The nonresident member will be subject to personal jurisdiction in Iowa for the purpose of the collection of Iowa income and franchise tax.

The agreement is only valid for tax year 2022. Instructions and forms for electing out of inclusion on a composite return for future tax years will be provided by the Department at a later date.

Yes, a nonresident member will receive a refundable credit for the Iowa income or franchise tax paid on the nonresident member’s behalf by the pass-through entity on the composite return. This refundable composite tax credit will be reported to the nonresident member by the pass-through entity and may be claimed on the nonresident member’s Iowa income, franchise, or composite tax return.

Nonresident members who are individuals and who are included on the composite return will not be required to file an Iowa income tax return if their distributive share of income from the pass-through entity (or multiple pass-through entities) is their only Iowa-source income. However, nonresident members who are individuals may still want to file an Iowa income tax return to claim their refundable composite tax credit. Nonresident members who are not individuals will still be required to file an Iowa income or franchise tax return.