Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 40 - Determination of Net Income › Rule 701-40.65 - Section 179 Expensing

Current through Register Vol. 47, No. 3, July 24, 2024
(1)
In general.
Iowa taxpayers who elect to expense certain
				depreciable business assets in the year the assets were placed in service under
				Section 179 of the Internal Revenue Code must also expense those 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, as described in
				this rule.
(2)
Claiming the
				deduction.
a.
Timing and
				requirement to follow federal election. A
taxpayer who takes a federal
				section 179 deduction must also take the deduction for the same asset in the
				same year for Iowa purposes, except as expressly provided by Iowa law or this
				rule. A taxpayer who takes a federal section 179 deduction is not permitted to
				opt out of taking the same deduction for Iowa purposes. A taxpayer who does not
				take a federal section 179 deduction on a specific qualifying asset is not
				permitted to take a section 179 deduction for Iowa purposes on that
				asset.
b.
Qualifying for
				the deduction.
Whether a specific business asset qualifies for a
				section 179 deduction is determined by the Internal Revenue Code (Title 26,
				U.S. Code) and applicable federal regulations for both federal and Iowa
				purposes.
c.
Amount of the
				Iowa deduction.
Generally, the Iowa deduction must equal the amount of
				the federal deduction taken for the same asset in the same year, subject to
				special Iowa limitations. The following chart provides a comparison of the Iowa
				and federal section 179 dollar limitations and reduction limitations. See rule
				701-5323. (422) for the section
				179 rules applicable to corporations (both C and S corporations) and other
				entities subject to the corporate income tax, and see rule
				701-5924. (422) for the section
				179 rules applicable to financial institutions subject to the franchise tax.
Section 179 Deduction Allowances Under Federal and
							 Iowa Law
Federal
Iowa
Tax Year
Dollar Limitation
Reduction Limitation
Dollar Limitation
Reduction Limitation
2003
$ 100,000
$ 400,000
$ 100,000
$ 400,000
2004
102,000
410,000
102,000
410,000
2005
105,000
420,000
105,000
420,000
2006
108,000
430,000
108,000
430,000
2007
125,000
500,000
125,000
500,000
2008
250,000
800,000
250,000
800,000
2009
250,000
800,000
133,000
530,000
2010
500,000
2,000,000
500,000
2,000,000
2011
500,000
2,000,000
500,000
2,000,000
2012
500,000
2,000,000
500,000
2,000,000
2013
500,000
2,000,000
500,000
2,000,000
2014
500,000
2,000,000
500,000
2,000,000
2015
500,000
2,000,000
500,000
2,000,000
2016
500,000
2,010,000
25,000
200,000
2017
510,000
2,030,000
25,000
200,000
2018
1,000,000
2,500,000
70,000
280,000
2019
1,020,000
2,550,000
100,000
400,000
2020 and later
Iowa limitations are the same as federal
d.
Reduction.
Both the federal and the Iowa deductions 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 (reduction limitation) for that year. Like the
				deduction limitation, the Iowa and federal reduction limitations are different
				for certain years. See paragraph 40.65(2)
"c "
for applicable
				limitations.
Example: Taxpayer purchases $400,000 worth of qualifying
				  section 179 assets and places all of them in service in 2018. Taxpayer claims a
				  section 179 deduction of $400,000 for the full cost of the assets on the 2018
				  federal return. The Iowa section 179 deduction for 2018 is phased out dollar
				  for dollar by the amount of section 179 assets placed in service in excess of
				  $280,000. This means that, for 2018, the Iowa deduction is fully phased out if
				  the taxpayer placed in service section 179 assets that cost, in total, more
				  than $350,000. Since the cost of the qualifying assets in this example exceeds
				  the Iowa section 179 phase-out limit, the taxpayer cannot claim any section 179
				  deduction on the Iowa return. However, the taxpayer may depreciate the entire
				  cost of the assets for Iowa purposes.
e.
Amounts in excess of the Iowa
				limits.
(1) Recovering the excess.
				Due to the differences between the Iowa and federal limitations for certain
				years, taxpayers may have a federal section 179 deduction that exceeds the
				amount allowed for Iowa purposes. This excess amount is handled in different
				ways depending on the source of the deduction.
1. Assets placed in service by the taxpayer
				or entity reporting the deduction. The cost of any section 179 assets placed in
				service by the taxpayer in excess of the Iowa limitation for a given year may
				be recovered through regular depreciation under Section 168 of the Internal
				Revenue Code, without regard to bonus depreciation under Section 168(k). The
				Iowa section 179 and depreciation deductions and any basis adjustments
				resulting from the difference in timing of the recovery between Iowa and
				federal law are calculated and tracked on forms made available on the
				department's website.
Example: Taxpayer purchases a $100,000 piece of equipment and
				  places it in service in 2018. Taxpayer claims a section 179 deduction of
				  $100,000 for the full cost of the equipment on the 2018 federal return.
				  Taxpayer is also required to claim a section 179 deduction of $70,000 on the
				  2018 Iowa return (the full amount of the federal deduction up to the Iowa
				  limit). The taxpayer can depreciate the remaining $30,000 cost of the equipment
				  for Iowa purposes.
2.
				Special election for assets placed in service by a pass-through entity when the
				section 179 deduction is claimed by the owner of that pass-through. See subrule
				40.65(3) for information on a special election available to certain owners of
				pass-through entities related to any section 179 deductions passed through from
				a partnership or other entity that, in the aggregate, exceed the Iowa
				limitations.
(2)
				Application of limitation to pass-throughs. In the case of pass-through
				entities, section 179 limitations apply at both the entity level and the owner
				level. Pass-through entities that are required to file an Iowa return and that
				actually place section 179 assets in service should follow
				40.65(2)
"e
"(1)"1" to account for any assets for which the
				total federal section 179 deductions for a given year exceeded the Iowa
				limitation. Owners of pass-throughs receiving section 179 deductions from one
				or more pass-throughs that, in the aggregate, exceed the Iowa limitations
				should follow 40.65(2)
"e
"(1)"2."
Example: Partner A (an individual and an Iowa resident) owns
				  50 percent interests in each of three partnerships: C, D, and E. Partnership C
				  does business exclusively in Iowa, places $200,000 worth of section 179 assets
				  in service during tax year 2019 and claims a federal section 179 deduction for
				  the full cost of the assets. Because C is required to file an Iowa partnership
				  return, C is subject to the Iowa section 179 limitations for 2019 and must
				  adjust its Iowa section 179 deduction as provided in 40.65(2)"e"(l)"l." C
				  passes 50 percent of its section 179 deduction ($100,000 for federal purposes,
				  $50,000 for Iowa purposes) through to A. A also receives $50,000 each in
				  section 179 deductions from D and E, for a total of $150,000 in section 179
				  deductions (for Iowa purposes) in 2019. A is subject to the $100,000 Iowa
				  section 179 deduction limitation for 2019, but because A received total section
				  179 deductions from one or more pass-throughs in excess of the 2019 Iowa
				  limitation, A is eligible for the special election referenced in 40.65(2)
				  "e"(l)"2."
f
Income limitation.
The Iowa section 179
				deduction for any given year is limited to the taxpayer's income from active
				conduct in a trade or business in the same manner that the section 179
				deduction is limited for federal purposes. If an allowable Iowa section 179
				deduction exceeds the taxpayer's business income for a given year, any excess
				may be carried forward as described in paragraph 40.65(2)
"g."
g.
Carryforward.
This paragraph applies only to amounts that do not exceed the Iowa section 179
				deduction limitations for a given year but do exceed the taxpayer's business
				income for that year. As with the federal deduction, allowable Iowa section 179
				deductions claimed in a given year that exceed a taxpayer's business income may
				be carried forward and claimed in future years. This carryforward, if any, is
				calculated using only amounts up to the Iowa limit. Any federal section 179
				deduction the taxpayer claimed in excess of the Iowa limit is not an Iowa
				section 179 deduction and therefore is not eligible for the carryforward
				described in this paragraph. Such amounts must instead be recovered as
				described in paragraph 40.65(2)
"e, "
or in subrule 40.65(3)
				for taxpayers receiving the deduction from one or more pass-through entities
				and making the special election as described in that subrule.
Example: Taxpayer purchases a $100,000 piece of equipment and
				  places it in service in 2019. Taxpayer claims a section 179 deduction of
				  $100,000 for the full cost of the equipment on the 2019 federal return.
				  Taxpayer is also required to claim a section 179 deduction of $100,000 on the
				  2019 Iowa return (because the federal deduction is equal to the Iowa limit for
				  the year, the Iowa and federal deductions are the same). However, the taxpayer
				  has only $50,000 in business income for 2019, so the allowable deduction for
				  that year is limited to $50,000. The remaining $50,000 may be carried forward
				  and applied as a section 179 deduction (subject to all limitations) in 2020,
				  and in any future years until the amount is fully deducted.
h.
Differences in basis.
Iowa adjustments for differences between the Iowa and federal section 179
				deduction limitations may cause the taxpayer to have a different basis in the
				same asset for Iowa and federal purposes. Taxpayers are required to use forms
				made available on the department's website to calculate and track these
				differences.