At the direction of Gov. Terry Branstad, the Iowa Department of Revenue announced February 27 it will grant an extension to certain taxpayers to file and pay 2015 Iowa individual income tax returns without penalty. Taxpayers who earn at least two-thirds of their income from farming have until April 30 to file and pay their 2015 income tax returns.
The deadline was previously scheduled for March 1. State revenue officials say the filing of the extension was ordered by Branstad. His 11th hour move was prompted because of negotiations in the Iowa Legislature to “couple” Iowa tax laws with federal tax provisions. The federal tax provisions were approved in 2015 and include raising the deduction limit for business expenses such as equipment purchases.
Many Iowa taxpayers have delayed filing 2015 tax returns
Iowa Code section 422.21 allows the director of the Iowa Department of Revenue to allow further time for filing returns if good cause exists. Many Iowa taxpayers have delayed filing their 2015 tax returns to see if the Legislature acts on the coupling issue.
The Republican controlled Iowa House approved a bill earlier in 2016 (House File 2092) that generally conforms Iowa’s tax laws with the changes to federal tax law. Republican lawmakers have warned that thousands of Iowa farmers and small business people will face significant burdens if the Democrat-led Iowa Senate doesn’t approve the House bill. However, the changes would cost the state nearly $100 million in revenue for the current state budget year.
Senate Majority Leader Mike Gronstal, a Democrat from Council Bluffs, has opened the door for a political compromise to address the tax issue, but he hasn’t provided details of the closed-door negotiations. The “coupling” in the House bill is temporary and if the bill becomes law as currently written, would only apply to tax year 2015. The House bill doesn’t couple with a federal tax provision known as “bonus depreciation.”
Tax coupling bill in Legislature gains Branstad’s support
Gov. Branstad in late February changed course and said he would support a coupling of Iowa tax rules with the federal tax code, which includes the section 179 business expensing. While the Iowa House has already passed its tax coupling bill, the measure has not come up yet in the Senate. Branstad did not include the tax coupling provision in his budget for the upcoming fiscal year beginning July 1, but last week Branstad said he supported the measure.
Iowa Farm Bureau members participated in a press conference last week at the state Capitol in Des Moines and discussed the negative economic impact to farmers and small businesses if tax coupling is not allowed. It is estimated that if the state fails to couple with federal tax rules then farmers, businesses and others will have to pay nearly $100 million in additional income taxes.
Deadline to file tax is extended for farmers, but no coupling yet
Kristine Tidgren is staff attorney for the Center for Agricultural Law & Taxation at Iowa State University. She writes an article about legal issues each month in Wallaces Farmer magazine.
Two weeks ago it looked like the coupling legislation was going to die in the Iowa Legislature, says Tidgren. There was no hope that coupling was going to happen in the 2016 Iowa Legislature. The Iowa Department of Revenue had issued a notice saying there would be no extension of coupling and farmers would be required to file their taxes by March 1, or else face a penalty for underpayment of estimated taxes.
“All of that changed on February 27 when Gov. Branstad directed the Iowa Department of Revenue to extend the deadline for farmers to file their individual tax return for 2015,” says Tidgren. “Now the deadline has been extended to April 30. If you look at the calendar, that’s a Saturday. So technically farmers have until May 2 to file their individual tax return and not face a penalty for underpayment of tax. Thus, farmers don’t have to file or pay their 2015 income tax until May 2, 2016.”
It has been a confusing situation for farmers and tax preparers
“This has been a nightmare for tax preparers this year,” says Tidgren. “At the start of 2016, everyone just assumed Iowa would couple with the federal income tax, as it has in the past. That would have meant the 179 section of the tax code would apply to Iowa income tax returns, and no one was terribly concerned.”
Soon it became apparent that this “coupling” legislation was going to be a big battle at the statehouse. “Then everyone was in a holding pattern, trusting that we would have answers before the time got too close to the March 1 deadline,” she adds. “We did seem to get the answer, which was farmers are going to have to go ahead and file their income tax by March 1 because it looks like we’re not going to have coupling.”
That wasn’t the answer farmers wanted, but at least it was an answer. So a number of people went ahead and filed and paid their income tax. Then on Saturday, February 27, within a couple days before the original March 1 tax filing deadline, the governor sent word out that the filing deadline for state income tax would be extended to April 30.
What does this delayed tax filing deadline mean for farmers?
The bottom line on who this really impacts is a farmer who had income last year in 2015, says Tidgren. Either they earned the income in 2015 or it was income they had earned before then, but had deferred it to 2015 for tax purposes, knowing perhaps that they were going to make a large equipment purchase in 2015. Maybe a new combine or tractor, something that would qualify for the section 179 deduction.
People deferred income into 2015, even though the feds had not yet passed the extension of the enhanced 179 deduction which allowed for the $500,000 deduction in the year you put the item into service. Everyone assumed the government would do this and in December the federal government did indeed enact that law. “So on the federal tax side, farmers can deduct up to $500,000 off of their income they have to pay taxes on. This section 179 deduction is a huge tax savings for them,” says Tidgren.
In the past Iowa had same tax provision as federal government
Iowa in the past adopted this same 179 provision each year that the federal government has. When the federal government last fall told Iowans “we’re giving you this enhanced $500,000 deduction,” the Iowa Department of Revenue said it would provide a deduction as well. Iowa farmers and small businesses banked on the fact that if the federal government does it, “then we can rely on Iowa government doing it as well. But this year, 2016, we don’t have that law. So the Iowa section 179 deduction as of today is $25,000. That’s the maximum limit,” says Tidgren.
“That means a farmer can buy a piece of equipment, say for $500,000 and can only deduct $25,000 this year off of income,” says Tidgren. “That doesn’t reduce your income as much. It results in a lot bigger tax liability than if you were able to deduct the entire $500,000.”
Realize the 179 section has enhanced deduction limits
Another side of the 179 section in the federal law which is important for people to realize is this enhanced deduction has a threshold limit. Tidgren says when Congress upped the limit to $500,000 in the federal law last year they increased the threshold, the upper threshold amount, to $2 million. That’s the point at which this deduction begins to have a dollar-for-dollar effect. It disappears in dollars-for-dollars.
For example, if you purchase equipment worth over $2 million, for every dollar of that equipment over $2 million, your deduction is decreased by $1, she says. “However, in Iowa’s tax law, we are back at a $25,000 deduction, and we have a $200,000 threshold. That means if you buy equipment for $250,000 the state of Iowa doesn’t have a 179 deduction at all, because you were more than $25,000 over the $200,000 threshold.”
Main reason the tax coupling issue is important to farmers
There are many factors at stake for farmers in this tax coupling issue, she says. And there are other provisions that Iowa has not yet coupled. But bottom line, the reason “coupling” is important to farmers, those who are really impacted, “is because those farmers who earned farm income in 2015, and who purchased some large equipment, now want to deduct it using this enhanced amount.”
Can farmers still deduct it on their federal income tax return, but not on their state tax? “Yes, as it stands now,” says Tidgren. And although your state tax percentage you pay for income tax is lower than the federal tax percentage rate, it is still a substantial amount of money. For many farmers, it is thousands of dollars of additional tax they will have to pay if the 2016 Iowa Legislature does not make a change in the Iowa law.” For more information on this issue, visit calt.iastate.edu/.For farm management information and analysis visit ISU’s Ag Decision Maker site at extension.iastate.edu/agdm; ISU farm management specialist Steve Johnson's site is at extension.iastate.edu/polk/farm-management.