Iowa Enacts Passthrough Entity Tax Election to Create Tax Savings for Business Owners

On May 11, 2023, Governor Kim Reynolds signed House File 352 creating an optional passthrough entity tax credit. The new tax law applies to partnerships and S corporations in Iowa for tax years beginning on or after January 1, 2022.

At a high level, the law is designed to create federal tax savings for owners of Iowa passthrough entities who are subject to the $10,000 state and local tax limitation as part of their itemized deductions on their individual tax returns. Those passthrough owners paying state income and property taxes in excess of $10,000, may want to consider electing this new provision. Below are the key details relevant to eligible taxpayers.

Taxpayers have the option to be subject to the provisions of this law but are not required to make the election. If a passthrough entity elects this new provision, the entity will be subject to the maximum individual tax rate of the Iowa Code. For 2022, the top individual tax rate is 8.53%. The tax paid by the entity creates a refundable credit that passes through to the partners and shareholders creating a reduction of their Iowa individual income tax liability.

Iowa tax paid by the partnership or S corporation creates a tax deduction for individual partners and shareholders not subject to any limitations. As a result, owners previously limited by the state and local tax itemized deduction of $10,000 receive tax savings.

Next steps: the Iowa Department of Revenue will issue guidance and rules on implementing the tax and the election process for the credit. We will review the guidance when available and provide further analysis. Passthrough taxpayers who have not yet filed for 2022 may consider waiting until rules are implemented before proceeding with filing. Passthrough entities that previously filed in Iowa for 2022 should consider if an amended return is beneficial.

Your MHCS team is available to help analyze the new law and determine the potential benefits for your situation.