Iowa Administrative Code › Agency 701 - Revenue Department › Title IV - Individual Income Tax › Chapter 302 - Determination of Net Income › Rule 701-302.87 - Capital Gain Deduction for Certain Types of Net Capital Gains

Current through Register Vol. 47, No. 3, July 24, 2024
Information relating to the Iowa capital gain deduction
				  available for tax years prior to January 1, 2023, can be found in prior
				  versions of rule 701-302.38 (422). Prior versions
				  of the Iowa Administrative Code are located here:
www.legis.iowa.gov/law/administrativeRules/agencies
.
				  For tax years beginning on or after January 1, 2023, net capital gains from the
				  sale of real property used in a farming business and the sale of certain
				  livestock described in subrules 302.87(5) and 302.87(6) may be excluded in the
				  computation of net income for qualified individual taxpayers. To exclude
				  qualifying capital gains, a taxpayer has to meet certain holding period and
				  material participation requirements, unless otherwise indicated in this
				  rule.
(1)
Definitions.
Unless otherwise indicated in this rule or
				required by the context, all words and phrases used in this rule that are
				defined under Iowa Code section
				422.7(13) 
				shall have the same meaning as provided to them under that Iowa Code section.
"Disabled individual"
means an individual
				  who is receiving benefits as a result of retirement from employment or
				  self-employment due to disability. In addition, a person is considered to be a
				  disabled individual if the individual is determined to be disabled in
				  accordance with criteria established by the Social Security Administration or
				  other federal or state governmental agency.
(2)
Material participation.
If the taxpayer has regular, continuous, and substantial involvement in the
				operations of a farming business that meets the criteria for material
				participation in an activity under Section 469(h) of the Internal Revenue Code
				and the federal tax regulations for material participation in
				26 CFR Sections
				1.469-5 and
				1.469-5 T for the
				applicable number of years required under Iowa law for the deduction, the
				taxpayer has met the material participation requirement. Section 469(h)(3) of
				the Internal Revenue Code does not apply when determining material
				participation for the purposes of this rule.
a. Work done in connection with an activity
				is not participation in the activity if the work is not of a type that is
				customarily done by an owner and one of the principal purposes for the
				performance of the work is to avoid the disallowance of any loss or credit from
				the activity.
b. Work done in an
				activity by an individual in the individual's capacity as an investor is not
				material participation in the business or activity unless the investor is
				directly involved in the day-to-day management or operations of the activity or
				business. Investor-type activities include the study and review of financial
				statements or reports on operations of the activity, preparing or compiling
				summaries or analyses of finances or operations of the activity for the
				individual's own use, and monitoring the finances or operations of the activity
				in a nonmanagerial capacity.
c. A
				highly relevant factor in material participation in a business is how regularly
				the taxpayer is present at the place where the principal operations of a
				business are conducted. In addition, a taxpayer is likely to have material
				participation in a business if the taxpayer performs all functions of the
				business. The fact that the taxpayer utilizes employees or contracts for
				services to perform daily functions in a business will not prevent the taxpayer
				from qualifying as materially participating in the business, but the services
				will not be attributed to the taxpayer.
d. In determining whether a particular
				taxpayer has material participation in a business, participation of the
				taxpayer's spouse in a business must also be taken into account. Activity done
				by a taxpayer's spouse is considered activity done by the taxpayer. The
				spouse's participation in the business must be taken into account even if the
				spouse does not file a joint state return with the taxpayer or if the spouse
				has no ownership interest in the business. The activities of other family
				members, employees, independent contractors, vendors, laborers, or consultants
				are not attributed to the taxpayer to determine material
				participation.
e. Generally, an
				individual will be considered as materially participating in a tax year if the
				taxpayer satisfies or meets any of the following tests:
(1) The individual participates in the
				farming business for more than 500 hours in the taxable year.
(2) The individual's participation in the
				farming business constitutes substantially all of the participation of all
				individuals in the business (including individuals who are not owners of
				interests in the business) for the tax year.
EXAMPLE: Taxpayer A is a teacher in a small town in southeast
				  Iowa. Taxpayer A owns 20 acres of farmland. Taxpayer A grows various crops on
				  this land and is the only one who works on the farm. In the summer of 2023,
				  there was a drought killing most of Taxpayer A's crops so Taxpayer A spent only
				  80 hours in 2023 growing crops. Taxpayer A is deemed to have materially
				  participated in the farming business in 2023.
(3) The individual participates in the
				farming business for more than 100 hours in the tax year, and no other
				individual (including individuals who are not owners of interests in the
				business) participates more in the business than the taxpayer during the tax
				year.
(4) The individual
				participates in two or more businesses, excluding rental businesses, in the tax
				year and participates for more than 500 hours in all of the businesses and more
				than 100 hours in each of the businesses, and the participation is not material
				participation within the meaning of one of the tests in subparagraphs
				302.87(2)
"e"
(1) through (3), (5) and (6).
EXAMPLE: Taxpayer B is a full-time CPA. Taxpayer B owns a
				  restaurant and a farm. In 2023, Taxpayer B spent 400 hours working on the farm
				  and 150 hours at the restaurant, and other individuals spent more time in the
				  business activity than Taxpayer B did. Taxpayer B is treated as a material
				  participant in each of the businesses in 2023.
(5) The individual materially participated
				(determined without regard to this subparagraph) in a farming business for five
				of the ten years preceding the applicable tax year.
EXAMPLE: Taxpayer C is the co-owner of a farming business.
				  Taxpayer C stopped farming in 2018 after 15 years of farming. Since Taxpayer C
				  stopped farming, Taxpayer C has retained interest in the farming business.
				  Taxpayer C is considered to be materially participating in the business in
				  2019, 2020, 2021, 2022, and 2023 because Taxpayer C materially participated in
				  the farming business during five of the ten years immediately preceding 2019,
				  2020, 2021, 2022, and 2023.
(6) The individual participates in the
				business activity for more than 100 hours and, based on all the facts and
				circumstances, the individual participates on a regular, continuous, and
				substantial basis. Management activities of a taxpayer are not considered for
				purposes of determining if there was material participation if either of the
				following applies: any person other than the taxpayer is compensated for
				management services or any person provides more hours of management services
				than the taxpayer.
f. The
				following paragraphs provide additional information regarding material
				participation:
(1) Limited partners of a
				limited partnership. The limited partners will not be treated as materially
				participating in any activity of a limited partnership except in a situation
				where the limited partner would be treated as materially participating under
				the material participation tests in subparagraphs
				302.87(2)
"e"
(1) or 302.87(2)
"e"
(5) above if
				the taxpayer were not a limited partner for the tax year.
(2) Cash farm lease. A taxpayer who rents out
				farmland on a cash basis is not materially participating in a farming business.
				The burden is on the taxpayer to show that the taxpayer materially participated
				in the farming business operated on the cash-rented farmland.
(3) Farmer landlord involved in crop-share
				arrangement. A farmer landlord is subject to self-employment tax on net income
				from a crop-share arrangement with a tenant. The landlord is considered to be
				materially participating with the tenant in the crop-share activity if the
				landlord satisfies one of the four following tests:
TEST 1: The landlord does any three of the following:
(1) pays or is obligated to pay for at least
				half the direct costs of producing the crop;
(2) furnishes at least half the tools,
				equipment, and livestock used in producing the crop;
(3) consults with the tenant; and
(4) inspects the production activities
				periodically.
TEST 2: The landlord regularly and frequently makes, or takes
				  part in making, management decisions substantially contributing to or affecting
				  the success of the enterprise.
TEST 3: The landlord worked 100 hours or more spread over a
				  period of five weeks or more in activities connected with crop
				  production.
TEST 4: The landlord has done tasks or performed duties
				  which, considered in their total effect, show that the landlord was materially
				  and significantly involved in the production of the farm commodities.
(4) Conservation reserve program
				(CRP). Activities conducted under the CRP do not fall within the definition of
				"farming business" under Iowa Code section
				422.7. If a taxpayer's only
				activity is managing CRP land, the taxpayer does not meet the material
				participation requirement. A taxpayer may still meet the material participation
				requirement if the taxpayer materially participates in a farming business
				through a different activity.
(5)
				Recordkeeping requirements. Taxpayers are required to provide proof of services
				performed and the hours attributable to those services. Detailed records should
				be maintained by the taxpayer, on as close to a daily basis as possible at or
				near the time of the performance of the activity, to verify that the material
				participation test has been met. However, material participation can be
				established by any other reasonable means, such as approximating the number of
				hours based on appointment books, calendars, or narrative summaries. Records
				prepared long after the activity, in preparation of an audit or proceeding, are
				insufficient to establish participation in an activity.