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Tax Credits, Deductions & Exemptions Guidance

On March 23, 2018, the President signed into law the Consolidated Appropriations Act, 2018 (P.L. 115-141). Among other changes to the Internal Revenue Code (IRC), this bill included a fix to the so called “grain glitch,” which occurred when IRC section 199 was repealed under Tax Cuts and Jobs Act (TCJA) in 2018. This fix was accomplished by adding subsection 199A(g) to the IRC, often referred to as the “new DPAD.” This new subsection provides certain cooperatives with a new deduction for income attributable to domestic production activities. Iowa did not conform with this deduction for tax year 2018. However, Iowa does conform with this IRC section 199A(g) deduction for tax years beginning on or after January 1, 2019.

For tax years beginning in calendar year 2019 (tax year 2019), the starting point for computing a cooperative’s Iowa income tax is the cooperative’s federal taxable income before the net operating loss deduction, as properly computed under the IRC in effect on March 24, 2018. This starting point will include 100% of a qualifying cooperative’s IRC section 199A(g) “new DPAD” deduction as well as 100% of any reduction to the cooperative’s IRC section 1382 deduction resulting from the new DPAD allocated to patrons.

In other words, for Iowa tax purposes in tax year 2019 an Iowa cooperative is allowed a deduction for 100% of the IRC section 199A(g) deduction properly claimed on its 2019 federal 1120-C, line 22, and is also required to reduce its IRC section 1382 adjustment by 100% of the IRC section 199A(g) deduction allocated to patrons as reported on its 2019 federal 1120-C, Schedule H, line 4 (please note these federal line references reflect current versions of the forms, and are subject to change by the Internal Revenue Service).

There are a number of other Iowa-specific adjustments and nonconformity adjustments that must be made to federal taxable income to arrive at a cooperative's Iowa taxable income, but there is no provision in Iowa law requiring a cooperative to reduce or otherwise add-back any portion of its “new DPAD,” as there is for individual Iowa taxpayers.

For tax years 2020 and later, Iowa will automatically conform to any changes made to the section 199A(g) deduction at the federal level. The guidance above will apply for tax years 2020 and later, except that deduction will be computed based on the most current version of the IRC, as opposed to the March 24, 2018 version that applies for tax year 2019. As of 6/23/2020 no changes have been made to IRC section 199A(g) since March 24, 2018.