Iowa Nonconformity: Coronavirus Aid, Relief, and Economic Security Act of 2020

Monday - 06/01/2020

On March 27, 2020, President Donald Trump signed Public Law 116-136, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. The CARES Act includes a number of changes to federal tax provisions that are retroactive to tax years 2018 and 2019 (i.e. tax years beginning in calendar years 2018 or 2019).

Iowa has not conformed with any of these federal tax changes to the extent they apply to any tax year beginning prior to January 1, 2020. The relevant retroactive tax provisions are identified below. The Department is developing nonconformity guidance for release in the near future that will include a detailed description of these provisions and instructions for how to report these differences on Iowa returns.

Also, note that these CARES Act nonconformity issues for tax years 2018 and 2019 are in addition to other retroactive nonconformity issues resulting from the Taxpayer Certainty and Disaster Relief Act of 2019, enacted on December 20, 2019. The Department has already issued nonconformity guidance on that Act, which is available on the Iowa Nonconformity: Taxpayer Certainty and Disaster Tax Relief Act of 2019 page.

If Iowa’s conformity with these or other provisions is changed in the future by the Iowa General Assembly, which is set to reconvene on June 3, 2020, the Department will issue guidance related to those changes.

Iowa generally conforms with tax provisions of the CARES Act to the extent they affect Iowa income taxes for tax years beginning on or after January 1, 2020.
 

Retroactive provisions of the CARES Act with which Iowa does not conform:

Paycheck Protection Program (PPP) under the CARES Act.

Section 1102 of the CARES Act establishes a loan program for qualifying small businesses to incentivize such businesses to keep workers on payroll despite possible financial strain due to the COVID-19 pandemic. Under the PPP, loans may be forgiven if the funds are used as permitted under the CARES Act. A taxpayer’s PPP loan that is forgiven and properly excluded from federal gross income under section 1106 of the CARES Act in a tax year beginning on or after January 1, 2020, will also qualify for exclusion from income for Iowa tax purposes.

However, Iowa is not conformed with section 1106 of the CARES Act for tax years beginning prior to January 1, 2020. If a taxpayer receives PPP loan forgiveness for a tax year beginning prior to January 1, 2020, that discharge of indebtedness may be considered income for Iowa tax purposes, unless the income qualifies for exclusion under another applicable provision of federal or Iowa law.

Modification of Limitation on Losses for Taxpayers Other than Corporations (Excess Business Losses) under the CARES Act.

Section 2304 of the CARES Act temporarily suspended the excess business loss limitation under Internal Revenue Code (IRC) section 461(l) for tax years 2018 through 2020. Iowa was not conformed with the excess business loss limitation for tax year 2018, so the temporary suspension of the excess business loss limitation in the CARES Act should have no effect on the calculation of net income on 2018 Iowa income tax returns. For tax year 2019, the excess business loss limitation will apply for Iowa tax purposes, even though the limitation does not apply for federal purposes.

Modification of Limitation on Business Interest under the CARES Act.

Section 2306 of the CARES Act makes several changes to the limitation on the deduction of business interest under IRC section 163(j). In relevant part, the provision increases, at the election of the taxpayer, the percentage of a taxpayer’s adjusted taxable income (ATI) used in calculating the deduction limitation from 30% to 50% for tax years 2019 and 2020. The provision provides that the ATI increase does not apply to partnerships in tax year 2019, and instead includes special rules that ultimately affect a partner’s business interest limitation calculation beginning in tax year 2020. Iowa is not conformed with this change to the extent it applies retroactively to tax year 2019. Specifically, the ATI percentage used in calculating the deduction limitation is 30% for Iowa tax purposes in tax year 2019, even though many taxpayers have the option to use 50% for federal purposes.

Depreciation of Qualified Improvement Property (QIP) under the CARES Act.

Section 2307 of the CARES Act provides that qualified improvement property, as defined under section 168(e)(6) of the IRC, placed in service after December 31, 2017, may be classified as 15-year MACRS property for federal depreciation purposes and is assigned a class life of 20 years for ADS purposes. Iowa does not conform to this treatment for tax years 2016 through 2019, and instead treats qualified improvement property placed in service during those tax years as 39-year property. Bonus depreciation under IRC section 168(k) is not allowed for Iowa tax purposes for any tax year.

Iowa generally conforms with tax provisions of the CARES Act to the extent they affect Iowa income taxes for tax years beginning on or after January 1, 2020.