In the Iowa Legislature last week, both the Senate and the House Ways and Means Committees passed legislation calling for a one-year, full coupling of state income taxes with portions of Section 179 of the federal tax code. The bill will now move to the House and Senate floors for debate, possibly this week.
The Iowa Corn Growers Association and the Iowa Cattlemen’s Association both released statements on March 10 encouraging the state Legislature to pass both the Senate version (SSB 3171) of the bill, and the House version (HSB 642). If this legislation is passed by the full Senate and the House, then it must be signed into law by the governor for coupling to go into effect.
Without coupling, farmers would have to pay a lot more income tax
Coupling with federal bonus depreciation was not included in the bill that emerged from the Ways and Means Committees last week.
There is an ongoing debate among Iowa lawmakers, about matching the state’s tax code with federal tax law, explains Kristine Tidgren, staff attorney for the Center For Ag Law and Taxation at Iowa State University. Section 179 of the Internal Revenue Code would allow farmers and business owners to deduct as an expense up to $500,000 of purchased assets, such as farm equipment, all at once instead of over several years. Without coupling, Iowa farmers and business owners could deduct up to $500,000 on their federal tax returns, but only up to $25,000 on their state returns.
The past few years, Iowa has matched or “coupled” its tax code with much of federal law, she notes. The state has coupled with Section 179’s $500,000 limit every year since 2010, according to the Iowa Department of Revenue. But so far this year, Iowa hasn’t approved the tax coupling, which would cost the state about $97.6 million in the current fiscal year, according to the non-partisan Legislative Services Agency.
Debate on coupling puts conflicting priorities against each other
The debate pits two conflicting priorities against each other. On the one hand, is the Iowa Legislature’s desire to support small business owners and farmers who could use the extra money from the tax break to buy more equipment, make renovations or hire more employees. On the other hand, there is the concern that Iowa needs to tighten its belt financially and focus on bolstering other priorities such as school funding, rather than giving away tax revenue.
In 2015, Congress permanently extended key federal tax breaks
“In 2015, Congress permanently extended several key tax breaks including an enhanced $500,000 Section 179 deduction limit,” says Justine Stevenson, director of government relations for the Iowa Cattlemen’s Association. “Last year Iowa coupled with federal tax law for the enhanced deduction limit. Many ICA members are awaiting action from the 2016 Iowa Legislature to reduce the tax liability for farmers in the 2015 tax year. If state tax returns are not coupled with federal provisions, Iowans are only allowed a $25,000 Section 179 deduction limit with an annual $200,000 threshold.”
Earlier this year, the March 1 deadline (when farm tax returns are typically due) was extended to April 30 by Gov. Branstad and the Iowa Department of Revenue. Iowa taxpayers who earn at least two-thirds of their income from farming or commercial fishing qualify for the filing extension. If a coupling law is passed, those who filed returns by March 1 will have to file amended returns to take advantage of the new provisions.
"In 2015, cow/calf and feedlot cattle operators had record prices that allowed them to reinvest in their operations through equipment or facilities," says Stevenson. "They made those investments banking on the state to couple with federal deduction limits."
Legislation calls for coupling state, federal income tax provisions
The Iowa Corn Growers Association is also supporting this bill that calls for coupling state taxes with portions of the federal tax code Section 179.
“On behalf of Iowa's corn farmers, the Iowa Corn Growers Association would like to thank the Iowa Senate and House Ways and Means Committees for passing a one year, full coupling of Section 179 to the federal provision,” says Bob Hemesath, president of ICGA. “This bill would allow farmers and small businesses to expense and depreciate capital expenses on their tax returns. ICGA thanks the legislators who voted for this measure when it was in the committee. Both bills, HSB 642 and SSB 371, will move to the floor as early as this week.”
Iowa farm families rely on these tax provisions to manage their cash flow and reinvest in their businesses which supports Iowa's rural economy. In a year when taxable income will be lower, reliable tax deductions are extremely important, notes Hemesath.
Section 179 is important tool for farmers and small businesses
The federal tax relief measure passed both the U.S. House and U.S. Senate as part of the Protecting Americans from Tax Hikes (PATH) Act in late 2015. These steps taken by the Iowa Senate and Iowa House Ways and Means Committees would allow coupling Iowa's tax code with this recent change to the federal code, including Section 179 expensing and bonus depreciation for tax year 2015. Section 179 is a key tool for farmers and small businesses alike as it allows businesses to deduct the full purchase price of qualifying equipment (new or used) and/or software purchased or financed during the tax year from gross income.
“Thanks to all the ag groups, business groups, bankers, accountants and especially to the many farmers and ICGA members who made contact with their legislators to make this happen,” says Hemesath. “ICGA will continue to stand up and use our voice in support of these important tax provisions for farmers. We urge Iowa corn farmers to continue to communicate to legislators and to Gov. Branstad, regarding the importance of the Section 179 coupling to Iowa's farmers, until the bill is signed.”