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Iowa reduces its research activity credit, enacts contingent corporate rate reduction, and reduces individual tax rates
March 2022
In brief
Enacted on March 1, 2022, H.F. 2317 makes several changes to Iowa’s research activity credit, including aligning a taxpayer's federal alternative simplified credit election with its state computation, reducing the amount of credit that may be refunded, providing apportionment guidance, removing computer use expenses as qualified expenses and phasing out supplies as qualified expenses, and limiting how a taxpayer can claim the credit on amended returns.
H.F. 2317 provides for a contingent corporate income tax rate reduction that is triggered when total corporate income tax revenues exceed $700 million. H.F. 2317 reduces individual income tax brackets and income ranges from 2023 to 2025, ultimately resulting in a 3.9% individual flat income tax rate starting in 2026.
The takeaway: This bill codifies several new provisions that reduce a taxpayer's ability to generate, claim, or use credits in future years. Taxpayers should review their qualifications under existing law and consider the impact of changes in future years.
In detail
Iowa’s research activities credit
Under Iowa Code Sec. 422.33, Iowa generally allows for a refundable 6.5% research activities credit measured by an apportioned share of qualifying expenditures for increasing research activities.
Research activities credit - Alternative calculation
Prior to H.F. 2317, taxpayers qualifying for the credit could elect to calculate the credit under an apportioned manner similar to the federal regular method or in a manner consistent with the alternative simplified credit (ASC) under IRC Section 41(c)(3).
Applicable to tax years beginning on or after January 1, 2023, a taxpayer that elects to use the ASC method federally may only use the ASC method for Iowa research activities credit purposes.
Research activities credit - Refund amount decreases
Prior to H.F. 2317, a taxpayer was allowed a refund equal to the amount of the credit that exceeded its tax liability.
Starting with tax years beginning on or after January 1, 2023, the amount of allowable refund is decreased on an annual basis. The allowed refund amount for the 2023 tax year is 90%. That percentage is decreased by 10% each year until the 2027 tax year when the allowed refund amount is 50% of the amount in excess of Iowa liability.
Taxpayers may elect to carry forward amounts otherwise eligible for a refund to the following tax year in lieu of receiving a refund. Credits generated that are eligible for refund do not appear to be eligible for carryforward treatment.
Research activities credit - Apportionment guidance
Applicable to tax years beginning on or after January 1, 2023, H.F. 2317 provides factors to determine whether expenses qualify as being conducted in Iowa, including wages paid to an employee, contract research expenses paid to a third party, and other activities. Per the employee wage requirements, qualifying research expenses include only wages paid for services performed in the state. As such, if employees are performing research activities remotely, they must be located in the state for those wages to qualify.
The Iowa regular research tax credit is generally based on the federal research tax credit, except that the Iowa credit is calculated using the ratio of Iowa research expenditures over total research expenditures. Under current law, businesses in industries such as manufacturing, life sciences, agriscience, software engineering, or aviation and aerospace are allowed research credits for such qualified research expenses under IRC Section 41 for the same tax year as they are claiming the credit.
Research activities credit - Qualified expenses narrowed
Applicable for tax years beginning on or after January 1, 2023, computer use expenses as described under IRC Section 41(b)(2)(A)(iii) are not qualified research expenditures in Iowa.
Starting with tax years beginning on or after January 1, 2023, the amount of supplies as defined under IRC Section 41(b)(2)(A)(iii) eligible for qualification is being phased out. Starting in tax year 2023, 80% of the amount paid for supplies qualifies as amounts directly related to research performed in Iowa. The percentage is decreased by 20% each year until the percentage is 0% for tax years beginning on or after January 1, 2027.
Research activities credit - Credit amount limited on amended returns
Prior to H.F. 2317, taxpayers were permitted to take the credit on original or amended returns.
Applicable for tax years beginning on or after January 1, 2023, the credit may not be increased on an amended return unless (1) the amended return is filed within six months of the original due date, including extensions or (2) the increase results from an IRS or Iowa Department of Revenue examination.
Additional credit changes
Other changes in credit amendments include the tax credit refundability of the assistive device tax credit, historic preservation tax credit, redevelopment tax credit and third-party developer tax credit are reduced by 5% each year for five years beginning in tax year 2023.
Contingent corporate rate change
For tax years beginning on or after January 1, 2021, Iowa’s corporate income tax is imposed as follows:
- 5.5% of taxable income between $0 and $100,000
- 9% of taxable income between $100,000 and $250,000
- 9.8% of taxable income of $250,000 or more.
Pursuant to H.F. 2317, starting with tax years beginning on or after January 1, 2023, if total Iowa corporate income tax receipts for the prior fiscal year exceed $700 million, then the Department will reduce the top corporate income tax rates pursuant to a formula provided in H.F. 2317. The lowest the tax rate can go is 5.5%.
Individual income tax rate reduction
Prior to H.F. 2317, Iowa imposes its general individual income tax with varying rates aligned with nine income brackets.
Starting with 2023, Iowa reduces the number of brackets and phases down the range of income applicable to each bracket through 2025. Starting in 2026, all individual taxpayers pay the general income tax rate of 3.9%.
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