Qualifying COVID-19 Grants - Income and Franchise Tax Exclusion
Topics:
Coronavirus/COVID-19 Tax Guidance
Note: This guidance previously described the income and franchise tax exclusion for certain Iowa small business relief grant program amounts. This guidance was updated on July 20, 2021, to reflect legislative changes to the exclusion enacted in 2021 Iowa Acts, Senate File 619. It was updated again on August 30, 2021 to clarify that business expense deductions attributable to qualifying COVID-19 grants are allowed for Iowa purposes.
On June 16, 2021, Governor Kim Reynolds signed 2021 Iowa Acts, Senate File 619. Sections 5-8 of that legislation exclude from Iowa income and franchise tax the following:
“[T]he amount of any qualifying COVID-19 grant issued to an individual or business by the economic development authority, the Iowa finance authority, or the department of agriculture and land stewardship.”
The exclusion applies only to the extent the qualifying COVID-19 grant was included in a taxpayer's federal income in a tax year beginning before January 1, 2024, and only for eligible grants issued between March 17, 2020, and December 31, 2021.
Only qualifying COVID-19 grants identified by the Iowa Department of Revenue by administrative rule qualify for the exclusion. The administrative rules identifying qualifying grant programs are rule 701—302.86 for individual income tax, rule 701—502.30 for corporate income tax, and rule 701—602.32 for franchise tax.
The qualifying COVID-19 grant must be included in the federal income of the taxpayer as reported on the taxpayer’s Iowa tax return. Any grant exempt from federal income tax, and thus not included in the taxpayer’s base Iowa net income, will not qualify for an additional deduction on the taxpayer’s Iowa tax return. Federal tax law determines whether or not a qualifying COVID-19 grant is subject to, or exempt from, federal income tax.
A third-party payee of qualifying COVID-19 grant funds is not eligible for this exclusion. If the proceeds of a qualifying COVID-19 grant are paid to someone other than the grant recipient, only the grant recipient on whose behalf the grant proceeds were paid may qualify for this exclusion.
>To qualify for the exclusion from Iowa income or franchise tax, the qualifying COVID-19 grant must be issued by the administering agency between March 17, 2020 and December 31, 2021, and must be included in the taxpayer’s income during a tax year that ends on or after March 17, 2020, and begins before January 1, 2024. This law change may affect a taxpayer’s previously-filed 2019 Iowa tax return (certain fiscal-year taxpayers) or 2020 Iowa tax return. These taxpayers must file an amended Iowa tax return in order to claim this exclusion.
Yes. A taxpayer may take allowable federal business expense deductions attributable to funds from a qualifying COVID-19 grant if the grant is included in taxable income for federal purposes. These otherwise allowable business expense deductions do not have to be added back for Iowa purposes.
The Iowa deduction for the amount of the Iowa qualifying COVID-19 grant originally included in income on the Iowa tax return is claimed as follows:
Individuals: On the IA 1040, line 24, using code “ll”
Trusts and Estates: On the IA 1041, line 8
Corporations: On the IA 1120, Schedule A, line 16
S corporations: On the IA 1120S, line 7
Partnerships: On the IA 1065, line 6
Financial Institutions: On the IA 1120F, Schedule D, line 7
