Notice: This guidance was updated on 12/31/2019 to describe required adjustments and reporting procedures in tax year 2019 and later 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.
Beginning in 2018, the deduction for business interest expenses 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 expenses and deduct these amounts in future years.
Iowa was not conformed 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 use 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 has conformed to the federal business interest expense deduction limitation for tax year 2019 and subsequent tax years. This means that the Iowa interest expense deduction will generally be the same as the federal deduction for a given year, except 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 or later. These adjustments are described generally in the Department’s guidance on Business Interest Expense Conformity for Tax Year 2019 and Later, but special rules relating to partnerships and partners are described below.