Reform Guidance: Iowa Section 179 Expensing
NOTICE: On March 15, 2019, Governor Reynolds signed Senate File 220, which made the same ($70,000) section 179 deduction limitation applicable to all taxpayers for 2018. Earlier legislation only applied this limit to individuals and entities taxed as partnerships. Under that prior law Corporations subject to the income tax, entities that file as S-Corporations for income tax purposes, and financial institutions subject to the franchise tax were subject to a lower ($25,000) section 179 deduction limit for 2018. The earlier legislation also provided the Special Election described below to individuals and partnerships, but not to Corporations (including entities taxed as S-Corporations) and financial institutions. This Special Election has now been extended to all taxpayers. This guidance was updated on March 15, 2019, to reflect these changes.
Under section 179 of the Internal Revenue Code, taxpayers can deduct from their federal income tax the cost of qualifying property used in a trade or business in the year the property was placed in service. This allows businesses to deduct the cost of qualifying tangible personal property purchased for business use in one year, rather than deducting the cost of the tangible personal property over a number of years using depreciation. More information on the federal treatment of section 179 deductions may be found on the Internal Revenue Service’s website and in IRS Publication 946, Chapter 2.
The election to expense qualifying property under section 179 of the IRC is made at the federal level. Once the taxpayer makes this federal election, the same election automatically applies to the same property for Iowa purposes as well, except under specific circumstances. The amount of the Iowa section 179 deduction is the same as the amount of the federal section 179 deduction, up to the Iowa limit.
Iowa taxpayers who elect the federal section 179 deduction must also take a section 179 deduction for the same assets for Iowa income tax purposes in that year. However, for certain years, the Iowa limitations on this deduction are different from the federal limitations for the same year. This means that for some tax years, adjustments are required to determine the correct Iowa section 179 expensing deduction.
Phase-in of Dollar Limitation
Over the next several years, Iowa will phase in the full federal section 179 deduction amount ($1 million dollars for 2018, adjusted annually for inflation). For 2018, the maximum Iowa section 179 deduction is $70,000. For 2019, the Iowa limitation is $100,000 for all taxpayers, but is still less than the federal limitation ($1,020,000). For tax years 2020 and later, the Iowa section 179 deduction will be the same amount as the federal limitation for all Iowa taxpayers. See below for more specific information about Iowa limitations by year.
Both the federal and the Iowa dollar limitations for section 179 assets are reduced (phased out dollar for dollar) for taxpayers whose total section 179 assets placed in service during a given year cost more than the amount specified by statute—known as the reduction limitation—for that year. Like the dollar limitation, the Iowa reduction limitation is different from the federal reduction limitation for certain years.
What happens if a taxpayer’s 179 deduction exceeds the Iowa limitations described above?
If a taxpayer’s total federal section 179 deduction exceeds the Iowa limitations, the cost of section 179 property that the taxpayer placed in service may instead be recovered through regular depreciation (without bonus depreciation). As in previous years, federal section 179 deduction amounts allocated to the taxpayer from passthrough entities are not eligible to be recovered through regular depreciation, even if they cause the taxpayer to exceed the Iowa limitations. However, if the total section 179 deduction amounts allocated from passthrough entities exceeds the Iowa limitations, taxpayers may be eligible for a special election described later in this publication.
Business Income Limitation
As in previous years, the Iowa section 179 deduction for a given year is also limited to the amount of the taxpayer’s income from active conduct in a trade or business, just as it is for federal purposes. If a taxpayer’s otherwise-allowable Iowa section 179 deduction (based on the dollar and reduction limitations) exceeds that taxpayer’s income from active conduct in a trade or business (after applying all Iowa nonconformity adjustments other than the 179 adjustment), the taxpayer may only deduct an amount equal to the amount of income from the trade or business for that year. However, any otherwise-allowable section 179 deduction that remains may be carried forward and deducted in future years. Any carryforward amounts available for deduction in future years must be combined with any new section 179 deduction for that year, and the Iowa dollar and reduction limitations, and business income limitation apply to the total for that year.
Section 179 Deduction Allowances Under Federal and Iowa Law
|Tax Year||Dollar |
2020 & Later: Iowa Limitations are the same as federal
Taxpayers are required to adjust their deduction for Iowa purposes using the IA 4562 A/B Iowa Depreciation Adjustment Schedule.
Special Note for Married Filing Separate Filers: Federal law provides that taxpayers who file married filing separately must calculate the section 179 deduction limitations as if they were one taxpayer, meaning that they must combine the values of section 179 property placed in service by (or passed through to) both spouses in determining the dollar limitation and the reduction limitation, if any, and then apportion the allowable deduction limitation between them. The default is to allocate 50% of the deduction limitation to each spouse, but the couple may elect a different ratio if they so choose.
This rule also applies to spouses filing separate returns for Iowa purposes, whether on a combined return (status 3) or separate returns (status 4). Spouses filing separate Iowa returns are treated as one taxpayer for purposes of calculating the Iowa 179 deduction limitations, and are assumed to have split the total allowable deduction limitation evenly between them. However, the couple may elect to apportion their deduction limitation by some other ratio for Iowa purposes if they so choose. This apportionment only applies to the couple’s deduction limitation, not to the business income limitation or to the allocation of their actual section 179 deduction amount. A spouse may not deduct more in section 179 expensing than is actually attributable to that spouse.
Partnerships, including LLCs and other entities that file as partnerships for income tax purposes, are permitted to claim a section 179 deduction at the entity level for property placed in service by the entity itself, as well as for section 179 deduction amounts allocated to the partnership from other passthrough entities. The deduction is then passed through to the owners based on their share of the entity’s income. Both the federal and the Iowa section 179 deduction limitations and the business income limitation apply at the entity level when an entity claims this deduction. Entities with federal section 179 deductions in excess of the Iowa limitations are required to adjust their deduction for Iowa purposes using the IA 4562 A/B Iowa Depreciation Adjustment Schedule before passing the deduction through to their owners.
S-Corporations (S-Corps) are permitted to claim a section 179 deduction at the entity level for property placed in service by the entity itself, as well as for section 179 deduction amounts allocated to the partnership from other passthrough entities. The deduction is then passed through to the shareholders based on their share of the S-Corp’s income. Both the federal and the Iowa section 179 deduction limitations and the business income limitation apply at the entity level when an S-Corp claims this deduction. S-Corps with federal section 179 deductions in excess of the Iowa limitation are required to adjust their deduction for Iowa purposes using the IA 4562 A/B Iowa Depreciation Adjustment Schedule before passing the deduction through to their shareholders.
C-Corporations, other entities subject to the Iowa corporate income tax, and financial institutions subject to the Iowa franchise tax are all subject to the same section 179 deduction and reduction limitations each tax year. C-Corps and other entities described in this paragraph with federal section 179 deductions in excess of the Iowa limitation are required to adjust their deduction for Iowa purposes using the IA 4562 A/B Iowa Depreciation Adjustment Schedule.
Owners of Pass-through Entities
This section contains general information applicable to all passthrough entity owners (partners, LLC members, and S-Corp Shareholders, whether such owner is an individual or separate business entity).
The Iowa section 179 dollar limit applies to a passthrough entity as well as to each owner. The owner’s allowable Iowa section 179 deduction is based on the aggregate of all of the owner’s own available section 179 deductions and all section 179 deductions passed through to the owner from all sources. An owner may not claim more than the applicable limit in Iowa section 179 deductions on an Iowa tax return in a tax year regardless of the source.
An owner’s pass-through section 179 deduction is shown on the owner’s K-1 from the passthrough entity. If an owner receives more than the Iowa limit in section 179 deductions from pass-through entities, the owner must adjust their section 179 deduction on the IA 4562A to comply with the Iowa limit. The owner may not depreciate any amount of section 179 expensing passed through even if it exceeds the Iowa limit, nor may the owner carry forward an excess amount unless the special election is available to the taxpayer for that tax year. See “Special Election” below.
The cost of section 179 property a passthrough entity places into service during the tax year does not pass through to the owner for purposes of applying the reduction limitation. For purposes of applying the reduction limitation at the owner level, the owner includes only section 179 property the owner personally places into service during the tax year. The owner does not include the cost of section 179 property that the passthrough entity places into service during the tax year for purposes of determining whether the owner exceeds the Iowa section 179 reduction limitation.
The owner’s basis in their passthrough entity interest is reduced by the amount of the section 179 deduction passed through from the entity to the owner, even if the owner is not allowed to claim the full deduction passed through for Iowa purposes. The owner’s basis in their ownership interest in the entity may be different for Iowa and federal purposes.
Beginning in tax year 2018 eligible taxpayers have the option to make a special election to avoid losing the ability to deduct section 179 amounts allocated from any passthrough(s) in excess of the taxpayer’s applicable Iowa dollar limitation. Eligible taxpayers making the special election must claim the section 179 deduction received from the passthrough(s) up to the Iowa dollar limitation. They may then divide the total excess deduction received from the passthrough(s) by 5, and claim one-fifth (0.20) of the excess deduction in each of the next five years, subject to the business income limitation. An eligible taxpayer who makes the special election may not claim an Iowa section 179 deduction for any property that taxpayer placed in service themselves during the tax year in which the special election is made, even if the eligible taxpayer was able to claim a federal section 179 deduction for that property. The eligible taxpayer must instead depreciate the full value of such property under section 168 of the Internal Revenue Code, without regard to bonus depreciation under section 168(k).
The special election is only available for certain tax years. See the tax year-specific information below for more information about which taxpayers are eligible to claim the special election, and in which tax years.
The IA 4562 A/B Iowa Depreciation Adjustment Schedule provide for the necessary adjustments to account for the special election.
- 2018-2019: For tax years beginning on or after January 1, 2018, and before January 1, 2020, the special election is available to all individuals, corporations, and other entities filing an Iowa income or franchise tax return.
- 2020 and later: For tax years beginning on or after January 1, 2020, there is no special election for new section 179 property placed in service. However, Iowa taxpayers may still have a carryforward from a special election made in 2018 or 2019.
Prior to the changes enacted in SF 220, some C-Corporations, entities filing as S-Corporations, and financial institutions subject to the franchise tax may have filed 2018 Iowa income or franchise tax returns claiming a 179 deduction based on the old ($25,000) limitation. Entities that filed an Iowa return based on the $25,000 limitation must file an amended return to correct their expensing and depreciation deductions based on the new ($70,000) limitation unless:
- The entity’s Iowa 179 deduction would be fully phased out even under the higher limitations; or
- The entity’s total allowable 179 deduction under the old limits was $25,000 or less and was not partially phased out.
S-Corporations required to amend Iowa returns may need to issue amended Iowa K-1s to reflect the change. Shareholders receiving amended K-1s are required to amend their own Iowa returns accordingly.
For more information about section 179 expensing deductions, including information on Iowa limitations and the special election, see Iowa Administrative Code Rules 701—40.65 (Individuals), 701—53.23 (Corporations), and 701—59.24 (Financial Institutions). (Note: These rules have not yet been updated to reflect the retroactive changes included in SF 220.)
Limitations Prior to 2015