Notice: This guidance was updated on 05/03/2021 to describe required adjustments and reporting procedures in tax years beginning on or after January 1, 2019 and before January 1, 2020, for partnerships and their partners that had business interest expense that was disallowed as a deduction for federal purposes under section 163(j) of the Internal Revenue Code in tax year 2018, but that was allowed as a deduction for Iowa purposes in tax year 2018 because of nonconformity. See Business Interest Expense Deduction for more information about adjustments to the business interest expense deduction required for tax years beginning on or after January 1, 2020.
Beginning in 2018, the deduction for business interest expense is limited for federal purposes under section 163(j) of the Internal Revenue Code. This limitation is calculated and reported on 2018 federal form 8990. Taxpayers are generally allowed to carry forward the disallowed portion of their business expense and deduct these amounts in future years.
Iowa did not conform to this new federal limitation on the business interest expense deduction for tax year 2018. Taxpayers whose business interest expense deduction was limited for federal purposes needed to make certain adjustments to claim the larger Iowa deduction for 2018. For individuals, these adjustments were reported on the IA 1040, line 14, code u. For all other taxpayers, these adjustments were reported on the 2018 Nonconformity Adjustments Worksheet, line 3.
In the case of partnerships, the entity is not allowed to carry this deduction forward to future tax years for federal purposes. Instead, partnerships reported the excess amount to their partners on the 2018 federal schedule K-1 (Form 1065), Line 13, Code K, and the partners used this amount to make adjustments to the partner’s own interest expense limitation (if any) in future years, following the instructions on the federal forms.
Iowa conformed to the thirty percent federal business interest expense deduction limitation for tax year 2019 only. This means that taxpayers who were subject to the 50% business interest expense deduction limitation for federal purposes may need to make Iowa adjustments to account for the difference. It also means that taxpayers who were allowed to deduct the full amount of interest expense in tax year 2018 may have to make adjustments to account for any federal 2018 carryforward amounts claimed in tax year 2019. These adjustments are described generally in the Department’s guidance on Business Interest Expense Deduction, but special rules relating to partnerships and partners are described below.