(1)
Definitions. For purposes of this rule:
"Foreign country" means any country, other
than the United States, and any political subdivision of that country.
"Income tax" means any direct tax imposed
upon a taxpayer and measured by the taxpayer's income for a specified period of
time. The out-of-state jurisdiction's characterization of the tax is not
controlling in the department's determination of whether a tax is an income
tax. Fees, penalty, and interest paid in connection with an income tax do not
qualify. For purposes of this rule, the term "income tax" does not include a
minimum tax imposed on preference items.
"Pass-through entity" means an entity taxed
as a partnership for federal tax purposes, an S corporation, an estate, or a
trust other than grantor trusts.
"Regulated investment company" means any
domestic corporation that meets the requirements of Section
851 of the Internal Revenue Code and that
has made a valid election under Section
853 of the Internal Revenue Code to have its
shareholders' pro rata share of entity-level income tax paid by the electing
corporation be deemed to have been paid by its shareholders. The term
"regulated investment company" includes, but is not limited to, a mutual
fund.
"State" means any state of the United
States, the District of Columbia, the Commonwealth of Puerto Rico, any
territory or possession of the United States, and any political subdivision
thereof.
"Tiered owner" means an owner or beneficiary
of a pass-through entity that is itself a pass-through entity.
(2)
General
application.
a.
Residents. Iowa residents, including part-year residents, are
allowed an out-of-state tax credit against the resident's Iowa income tax
liability for income taxes owed and paid by the resident to another state or
foreign country on income for which all of the following are true:
(1) The income was derived from sources
within the other state or foreign country. In determining whether income is
derived from sources within that other state or foreign country, Iowa statutes
and rules on the sourcing of a nonresident's income shall govern.
(2) The income is subject to Iowa income tax.
Income tax imposed by another state or foreign country on income that is not
subject to Iowa income tax does not qualify for the credit.
(3) The income was earned while the taxpayer
was an Iowa resident and is included on the resident's Iowa income tax return.
The credit is allowable only if the taxpayer files an Iowa income tax return as
a resident or part-year resident.
b.
Nonresidents.
Nonresidents of Iowa shall not claim the out-of-state tax credit.
(3)
Rule for pass-through
entities.
a.
Direct
owners.
(1) If the Iowa resident is a
direct partner, shareholder, or beneficiary of a pass-through entity that owed
and paid entity-level income tax, or income tax on a composite return basis, to
another state or foreign country on income derived from sources in that state
or foreign country, the resident is allowed to treat the resident's pro rata
share of that income tax as paid by the resident for purposes of the
out-of-state tax credit, provided the resident's pro rata share of that income
flows through to the resident and meets the requirements of paragraph
304.6(2)"a."
(2)
The entity-level income tax or composite income tax paid to the other state or
foreign country is the net state or foreign income tax actually owed and paid
for the tax year on income taxed by that state or foreign country, as properly
computed on the pass-through entity's income tax return or composite return
(not a withholding return) in the other state or foreign country after
reduction for all nonrefundable credits provided to the pass-through entity.
Paragraph 304.6(6)"b" provides an additional limitation if the
Iowa resident receives a refundable credit in the other state or foreign
country for the Iowa resident's share of the income tax owed and paid by the
pass-through entity. The resident's pro rata share of entity-level income tax
or composite income tax paid by the pass-through entity shall be in the same
proportion as the resident's pro rata share of income derived from sources in
that state or foreign country, as properly reported on the entity's return in
the other state or foreign country.
(3) To qualify, the pass-through entity must
provide to the resident a statement identifying the jurisdiction and the
resident's pro rata share of the income, income tax liability, and income tax
paid in that jurisdiction.
EXAMPLE 1: Partnership W earns $2,000 of income in state A,
which imposes an entity-level income tax directly on the partnership.
Partnership W pays $100 of income tax to state A. Partnership W is owned 50
percent by Partnership X and 50 percent by individual Y, a resident of Iowa.
Individual Y receives a statement from Partnership W showing that Partnership W
earned $2,000 of income and paid $100 of entity-level income tax to state A and
that individual Y's pro rata share of that income and entity-level income tax
is $1,000 and $50, respectively. If that $1,000 of income from Partnership W is
subject to Iowa income tax and included on individual Y's Iowa income tax
return as earned while an Iowa resident, individual Y will be entitled to treat
the $50 of income tax paid by Partnership W to state A as paid by individual Y
in the computation of Y's out-of-state tax credit.
b.
Indirect owners.
(1) If the Iowa resident is an indirect
partner, shareholder, or beneficiary of a pass-through entity that paid
entity-level income tax, or income tax on a composite return basis, to another
state or foreign country on income derived from sources in that state or
foreign country, the resident is allowed to treat the resident's pro rata share
of that income tax as paid by the resident for purposes of the out-of-state tax
credit if both of the following requirements are satisfied:
1. The tiered owner reduces the amount of the
paying pass-through entity's income tax that the tiered owner reports to its
partners, shareholders, or beneficiaries by the amount of any credit available
from that other state or foreign country to the tiered owner for the tax
liability of the paying pass-through entity.
2. The resident's pro rata share of that
income flows through one or more tiered owners to the resident and meets the
requirements of paragraph 304.6(2)"a."
(2) The entity-level income tax or composite
income tax paid to the other state or foreign country is the net state or
foreign income tax actually owed and paid for the tax year on income taxed by
that state or foreign country, as properly computed on the pass-through
entity's income tax return or composite tax return (not a withholding return)
in the other state or foreign country, after reduction for all nonrefundable
credits provided to the pass-through entity, and after further reduction by a
tiered owner for any credits provided by that other state or foreign country to
the tiered owner for the tax liability of the paying pass-through entity.
Paragraph 304.6(6)"b" provides an additional limitation if the
Iowa resident receives a refundable credit in the other state or foreign
country for the Iowa resident's share of the income tax owed and paid by a
pass-through entity. The resident's pro rata share of entity-level income tax
or composite income tax paid by the pass-through entity shall be in the same
proportion as the resident's pro rata share of income derived from sources in
that state or foreign country, as properly reported on the entity's return in
the other state or foreign country, after flowing through one or more tiered
pass-through entities to the resident.
(3) To qualify, the paying pass-through
entity must provide to the tiered owner a statement identifying the
jurisdiction and the tiered owner's pro rata share of the income, income tax
liability, and income tax paid in that jurisdiction. The tiered owner, in turn,
must provide the indirect partner, shareholder, or beneficiary with a statement
that includes all of the following information:
1. The jurisdiction to which income tax was
paid; the paying pass-through entity and any other tiered owner through which
the income flowed; and the indirect partner's, shareholder's, or beneficiary's
pro rata share of the paying pass-through entity's income.
2. The indirect partner's, shareholder's, or
beneficiary's pro rata share of the paying pass-through entity's income tax
liability and income tax paid to the other jurisdiction after reduction for any
credit available to the tiered owner for the tax liability of the paying
pass-through entity. If no such credit was provided to the tiered owner, the
statement must include a declaration from the tiered owner to that effect.
EXAMPLE 2: Assume the same facts as Example 1. Partnership X
(a tiered owner) receives a statement from Partnership W which shows that W
earned $2,000 of income in state A and paid $100 of entity-level income tax to
state A and that Partnership X's pro rata share of that income and entity-level
income tax is $1,000 and $50, respectively. Partnership X is not eligible for a
credit in state A for its share of the entity-level income tax paid by
Partnership W. Partnership X is owned 50 percent by individual Z, a resident of
Iowa. Individual Z then receives a statement from Partnership X indicating that
Partnership X was not eligible for a credit for the tax paid by Partnership W,
that Z's pro rata share of Partnership W's income taxed by state A is $500, and
that Z's pro rata share of Partnership W's income tax imposed by and paid to
state A is $25. If that $500 of income from Partnership W flows through
Partnership X to individual Z, is subject to Iowa income tax, and is included
on Z's Iowa income tax return as earned while an Iowa resident, Z will be
entitled to treat the $25 of income tax paid by Partnership W to state A as
paid by Z in the computation of Z's out-of-state tax credit.
EXAMPLE 3: Assume the same facts as Example 2, except that
Partnership X (a tiered owner) is eligible for a $50 credit in state A for its
share of the entity-level income tax paid by Partnership W to state A.
Partnership X must reduce its share of Partnership W's entity-level income tax
($50) that it can report to its partners by the amount of the credit provided
by state A for that tax ($50). Therefore, Partnership X cannot pass Partnership
W's entity-level income tax through to individual Z, and Z cannot treat a pro
rata share of Partnership W's entity-level income tax as paid by Z. However, if
Partnership X is itself subject to and pays an entity-level income tax in state
A, it may be allowed to pass through, and individual Z may be allowed to treat
as paid by Z a pro rata share of the entity-level income tax paid by
Partnership X in state A in the same manner as described in paragraph
304.6(3)"a."
(4)
Rule for regulated
investment companies. If the Iowa resident is a shareholder of a
regulated investment company making an election under Section
853 of the Internal Revenue Code, the
resident shareholder is allowed an out-of-state tax credit for the resident
shareholder's pro rata share of entity-level income tax paid to a foreign
country or possession of the United States by the regulated investment company
and treated as paid by the resident shareholder under Section
853 of the Internal Revenue Code if the
income taxed by the foreign country or possession of the United States is also
subject to tax in Iowa and is included on the resident shareholder's Iowa
income tax return as earned while an Iowa resident. To qualify, the regulated
investment company must provide to the resident shareholder a statement
identifying the jurisdiction and the resident shareholder's pro rata share of
the income, income tax liability, and income tax paid in that jurisdiction.
EXAMPLE 4: Individual D is a resident of Iowa and a
shareholder of a mutual fund that paid income tax to foreign jurisdictions and
that made an election under Section
853 of the Internal Revenue Code. On the
annual, year-end tax statement, the mutual fund reported $2,000 of income to
individual D and $10 of foreign tax paid with respect to D's income. If that
$2,000 of income from the mutual fund is subject to Iowa income tax and
included on individual D's Iowa income tax return as earned while an Iowa
resident, D will be entitled to treat the $10 of income tax paid by the mutual
fund to the foreign jurisdictions as paid by D in the computation of D's
out-of-state tax credit.
(5)
Computing the out-of-state tax
credit-preliminary calculation.
a.
Required form. The tax credit must be computed on the IA 130,
Iowa Out-of-State Tax Credit Schedule. Married taxpayers filing separate Iowa
returns, or filing separately on a combined Iowa return, must complete a
separate IA 130 for each spouse.
b.
Computed separately by jurisdiction. The tax credit must be
computed separately for each out-of-state jurisdiction. A separate IA 130 is
required for each out-of-state jurisdiction. However, separate computations and
separate IA 130s are not required for foreign income taxes paid by a regulated
investment company.
c.
Computed separately by income tax type. The tax credit must be
computed separately for regular income tax and special lump-sum distribution
tax. If the taxpayer was assessed a special tax on a lump-sum distribution by
another state or foreign country, compute the tax credit separately under these
rules using only the lump-sum distribution and lump-sum distribution tax
imposed in Iowa and imposed in the other state or foreign country. A lump-sum
distribution taxed by another state or foreign country shall not be included as
part of gross income. A minimum tax or income tax imposed on preference items
derived from sources in another state or foreign country are not eligible for
the out-of-state tax credit under this rule. For rules on the out-of-state tax
credit with respect to minimum tax paid, see rule
701-304.7 (422).
d.
Full-year Iowa residents.
For a taxpayer who is an Iowa resident for the entire tax year, the income tax
paid to the other state or foreign country is the sum of the following amounts:
(1) Income tax treated as paid by the
resident under subrules 304.6(3) and 304.6(4). The income tax shall be treated
as paid by the resident for the tax year that the out-of-state pass-through
income is considered taxable Iowa income to the resident.
(2) The net state or foreign income tax
actually owed and paid by the resident for the tax year on income qualifying
under paragraph 304.6(2)"a," as properly computed on the
resident's income tax return in the other state or foreign country, less all
nonrefundable credits provided to the resident, and less any refundable credits
provided to the resident for entity-level income taxes or composite income
taxes paid by a pass-through entity. See Example 5 below.
e.
Part-year Iowa residents.
A taxpayer who is a part-year resident of Iowa may only claim the out-of-state
tax credit against the taxpayer's Iowa income tax liability for income tax paid
to another state or foreign country on income qualifying under paragraph
304.6(2)
"a" that is earned during the period of the tax year
that the taxpayer was an Iowa resident. The income tax paid to the other state
or foreign country is the sum of the following amounts:
(1) Income tax treated as paid by the
resident under subrules 304.6(3) and 304.6(4) on income earned during the
period of the tax year that the taxpayer was an Iowa resident. The income tax
shall be treated as paid by the resident for the tax year that the out-of-state
pass-through income is considered taxable Iowa income.
(2) The net state or foreign income tax
actually owed and paid by the taxpayer for the tax year on income qualifying
under paragraph 304.6(2)"a" that was earned during the period
of the tax year that the taxpayer was an Iowa resident, as properly computed on
the resident's income tax return in the other state or foreign country, less
all nonrefundable credits provided to the resident, and less any refundable
credits provided to the resident for entity-level income taxes or composite
income taxes paid by a pass-through entity. See Example 6 below.
(6)
Computing
the out-of-state tax credit-additional limitations and considerations.
a.
Maximum credit. The
out-of-state tax credit cannot exceed the amount of Iowa income tax that would
have been imposed on the same income which was taxed by the other state or
foreign country. The maximum out-of-state tax credit must be computed according
to the formula in this paragraph. If gross income is subject to tax in a
jurisdiction at more than one level (i.e., at the pass-through entity level and
at the individual level), it shall only be counted once for purposes of
computing the maximum credit.
(1) Full-year
Iowa residents. Gross income qualifying under paragraph
304.6(2)
"a" and taxed by the other state or foreign country
shall be divided by the total gross income of the Iowa resident taxpayer. This
quotient, multiplied by the net Iowa tax as determined on the total gross
income of the taxpayer as if entirely earned in Iowa, shall be the maximum tax
credit. For tax years beginning before January 1, 2022, this quotient shall be
computed as a percentage rounded to the nearest tenth of a percent (e.g., 1.2
percent). For tax years beginning on or after January 1, 2022, this quotient
shall be computed as a percentage rounded to the nearest ten-thousandth of a
percent (e.g., 1.2345 percent). For purposes of this subparagraph, "net Iowa
tax" means the Iowa regular income tax after reduction for the nonrefundable
credits provided in Iowa Code section
422.12.
EXAMPLE 5: Taxpayer A was an Iowa resident for the entire tax
year but commuted across the border and worked in state Z. Taxpayer A had wages
of $30,000 in state Z. Taxpayer A filed an income tax return in state Z
reporting the $30,000 of wages and had state Z income tax liability of $500,
which is A's preliminary out-of-state credit under subrule 304.6(5). Taxpayer A
also had income of $10,000 from rental of an Iowa farm and another $10,000 in
interest income from a personal savings account. Taxpayer A's total gross
income for the tax year was $50,000. Thus, 60 percent ($30,000 ÷
$50,000) of Taxpayer A's income was earned in state Z. Taxpayer A's net Iowa
tax on total gross income was $817, which results in a maximum out-of-state
credit of $490 ($817 ×.60). Therefore, the out-of-state tax credit
allowed is $490, because the maximum credit of $490 was less than the
preliminary credit of $500.
(2) Part-year Iowa residents. Gross income
qualifying under paragraph 304.6(2)
"a" that was earned during
the period of the tax year that the taxpayer was an Iowa resident and taxed by
the other state or foreign country shall be divided by the total gross income
of the Iowa taxpayer earned while an Iowa resident or otherwise sourced to
Iowa. This quotient, multiplied by the net Iowa tax as determined on the total
gross income of the taxpayer as if entirely earned in Iowa, shall be the
maximum tax credit. For tax years beginning before January 1, 2022, this
quotient shall be computed as a percentage rounded to the nearest tenth of a
percent (e.g., 1.2 percent). For tax years beginning on or after January 1,
2022, this quotient shall be computed as a percentage rounded to the nearest
ten-thousandth of a percent (e.g., 1.2345 percent). For purposes of this
subparagraph, "net Iowa tax" means the Iowa regular income tax after reduction
for the nonrefundable credits provided in Iowa Code section
422.12 and after reduction for
the nonresident and part-year resident credit in rule
701-304.5 (422).
EXAMPLE 6: Taxpayer B was a part-year Iowa resident for the
tax year. Taxpayer B resided in state Z for the first six months of the year
and moved to Iowa on July 1 but continued to commute across the border and work
in state Z. Taxpayer B was employed in state Z for the entire year and had
wages of $30,000 in state Z. Taxpayer B filed an income tax return in state Z
reporting the $30,000 of wages and had state Z income tax liability of $1,000.
The amount of gross income taxed by state Z while taxpayer B was an Iowa
resident was $15,000 (50 percent of the $30,000 of state Z wages). Since 50
percent of the income earned in state Z was earned while taxpayer B was a
resident of Iowa, the preliminary out-of-state credit under subrule 304.6(5)
was $500 ($1,000 ×.50). Taxpayer B also had $10,000 in farm rental income
from farmland located in Iowa. Taxpayer B's gross income earned while an Iowa
resident and otherwise sourced to Iowa was $25,000 ($15,000 of wages + $10,000
farm rental income). Thus, 60 percent of the gross income was earned in state Z
while an Iowa resident ($15,000 ÷ $25,000). Taxpayer B's net Iowa tax on
total gross income was $1,094, which results in a maximum out-of-state credit
of $656 ($1,094 ×.60). Therefore, the out-of-state tax credit allowed is
$500, because the preliminary credit of $500 was less than the maximum credit
of $656.
b.
Refund attributable to credit for entity-level income tax or composite
income tax paid by a pass-through entity. If the resident claims a
refundable tax credit in another state or foreign country for entity-level
income tax or composite income tax paid by a pass-through entity, that
refundable credit reduces the resident's income tax liability in that state or
foreign country as described in subparagraphs 304.6(5)
"d"(2)
and 304.6(5)
"e"(2). However, any refund attributable to that
refundable credit also reduces the amount of income tax treated as paid by the
resident under subrules 304.6(3) and 304.6(4). In computing this credit
reduction, the refundable credit for entity-level income tax or composite
income tax paid by a pass-through entity shall be applied on the other state's
or foreign country's income tax return after all nonrefundable credits, but
before any other refundable credit. The credit reduction is required whether
the resident receives the refund or applies the amount to a different tax
liability or tax period.
EXAMPLE 7: Individual B, a resident of Iowa and a 50 percent
owner of Partnership P doing business in state Z, receives a statement from
Partnership P in accordance with subparagraph 304.6(3)"a"(3)
showing that P earned income in and paid entity-level income tax to state Z and
individual B's pro rata share of that income and that entity-level income tax
is $5,000 and $250, respectively. However, individual B also receives a $250
refundable credit from state Z for B's share of the entity-level income tax
paid by Partnership P. Individual B files an individual income tax return in
state Z to report B's pro rata share of income from Partnership P and
calculates a tentative income tax of $200, before application of the refundable
credit. Individual B applies the refundable tax credit against that tentative
income tax and calculates an income tax liability of $0 and a refund of $50
from state Z. Therefore, individual B must reduce the $250 of entity-level
income tax treated as paid by B under subrule 304.6(3) to $200 ($250 - $50).
Individual B files an Iowa income tax return which includes the $5,000 of
income from Partnership P earned in state Z and calculates a preliminary
out-of-state tax credit under subrule 304.6(5) of $200.
c.
Taxpayers claiming the S
corporation apportionment tax credit. A taxpayer who is a shareholder
of an S corporation and who has income that was apportioned outside of Iowa
through a claim to the S corporation apportionment tax credit is not permitted
to claim the out-of-state tax credit on the same S corporation income. Income
tax paid by the resident or a pass-through entity with respect to the S
corporation income shall not be included in the resident's preliminary credit
calculation in paragraph 304.6(5)"d" or "e."
Gross income from the S corporation shall not be included in the resident's
maximum credit calculation in paragraph 304.6(6)"a."
d.
Married taxpayers using a
different filing status in the other state or foreign country. If
married taxpayers use a separate filing status in the other state or foreign
country, but file jointly for Iowa tax purposes, the taxpayers must combine
both spouses' income and income tax paid in the other state or foreign country
for purposes of computing the out-of-state tax credit. If married taxpayers
file jointly in the other state or foreign country, but file separate Iowa
returns, or separately on a combined Iowa return, the taxpayers must prorate
the income tax paid in the other state or foreign country according to each
spouse's respective gross income earned in that state or foreign
country.
e.
Tax on income
that does not flow through to resident. Entity-level income tax or
composite income tax paid by a pass-through entity on income that does not flow
through to the Iowa resident and meet the requirements of paragraph
304.6(2)"a" does not qualify for the out-of-state tax credit.
For example, a LIFO recapture tax installment paid by an S corporation in
another state would not qualify because that tax is measured by the income of
the entity in the last tax year it was a C corporation, when such income did
not flow through to the shareholders. Also, income tax paid by a trust in
another state on income not distributed to the beneficiaries would not qualify
because that income did not flow through to the beneficiaries. These examples
are not intended to be exhaustive.
f.
Recalculating credit following
adjustments in the other jurisdiction. If the taxpayer or the
taxpayer's pass-through entity amends the amount of income or income tax
liability reported and paid to the other state or foreign country, either
through an amended return, audit, or otherwise, the taxpayer shall file an
amended Iowa return and recalculate the allowable out-of-state tax credit. Any
refund must be requested by the later of three years after the due date of the
return, or one year after payment of the tax, as prescribed in Iowa Code
section 422.73(2)
"a." Iowa law does not provide additional time to request a
refund following an audit by another state or foreign country.
g.
Nonrefundable and
nontransferable. The out-of-state tax credit cannot exceed the
resident's tax liability; thus, no amount is eligible to be carried forward to
any future tax year. The credit may not be transferred to any other
person.
(7)
Claiming the out-of-state tax credit-supporting documentation.
To claim the out-of-state tax credit, the taxpayer claiming the credit must
submit the following to the department with the return or upon request as
indicated below:
a.
Out-of-state tax
return. A copy of the income tax return filed with the other state or
foreign country must be submitted. The department may further request a copy of
the return which has been certified by the tax authority of that state or
foreign country and showing thereon that the income tax assessed has been paid
to them.
b.
Iowa income tax
return. To claim the out-of-state tax credit, a taxpayer must file an
Iowa income tax return for the tax year for which the credit is claimed. A
taxpayer must file an Iowa income tax return to claim the out-of-state tax
credit even if the taxpayer would not otherwise have an obligation to file an
Iowa income tax return for the year for which the credit is claimed.
c.
Iowa out-of-state tax credit
schedule. An IA 130, Iowa Out-of-State Tax Credit Schedule, must be
submitted for the tax year for which the credit is claimed.
d.
Pass-through entity
statements. A taxpayer who is claiming an out-of-state tax credit for
entity-level income tax or composite income tax paid by a pass-through entity
must submit a statement from the pass-through entity that meets the
requirements of subrule 304.6(3). The pass-through entity's actual income tax
returns must be submitted to the department upon request. A taxpayer who is
claiming an out-of-state tax credit for entity-level income tax paid by a
regulated investment company must submit a statement from the regulated
investment company that meets the requirements of subrule 304.6(4).
e.
Additional foreign income tax
documentation. A taxpayer who is claiming the out-of-state tax credit
for income taxes paid to a foreign country must provide the department with a
copy of federal Form 1116, Foreign Tax Credit, if that form was required to be
submitted with the taxpayer's federal income tax return. This submission
requirement does not mean that all amounts on federal Form 1116 qualify for the
Iowa out-of-state tax credit. Additionally, if the income tax was paid in
foreign currency, the taxpayer shall include a detailed explanation of how the
taxpayer figured the conversion rate. The conversion rate is the rate of
exchange in effect on the day the taxpayer paid the foreign income
tax.
f.
Proof of
payment. Upon request, the taxpayer must provide the department with a
photocopy, or other similar reproduction, of either:
(1) The receipt issued by the other state or
foreign country for payment of the tax, or
(2) The canceled check (both sides) with
which the tax was paid to the other state or foreign country together with a
statement of the amount and kind (e.g., wage or salary income, rental income,
business income) of total income on which such tax was paid.
This rule is intended to implement Iowa Code section
422.8.
