Partnerships and S corporations will need to file their regular 2022 Iowa tax returns before electing into the optional Iowa pass-through entity tax for the year, under guidance issued yesterday by the Iowa Department of Revenue.
The guidance answers a number of open questions on the new tax, enacted by HF 352 during the 2023 Iowa Legislature. The Iowa PTET is designed as a workaround for the $10,000 limitation on the federal itemized deduction for state and local taxes enacted in the 2017 Tax Cuts and Jobs Act.
The guidance says that a separate election form for the tax is being developed (emphasis in original):
The Department is developing a 2022 PTET form that will be filed online through GovConnectIowa. Pass-through entities will use this 2022 PTET form to make the PTET election, compute and report the PTET due, and compute and report the PTET credit available to each owner. This will be the only method to make a PTET election for tax year 2022. The Department will not be modifying any existing 2022 income forms or schedules.
The Department expects the 2022 PTET form will be available on GovConnectIowa on or before October 1, 2023. Subscribe to updates from the Department to receive a notification when the form is available. It is strongly recommended that a pass-through entity logs into the GovConnectIowa account to complete their 2022 PTET form. However, there will be an option to Quick File the 2022 PTET form without logging in.
The 2022 PTET form on GovConnectIowa will be a supplement to the pass-through entity’s 2022 IA 1065 partnership return or 2022 IA 1120S S corporation return. The entity must file its 2022 IA 1065 or 2022 IA 1120S on or before the date it files its 2022 PTET form.
The guidance provides that the election must be made for 2022 by the later of the due date of the entity return or December 31, 2023. The election for 2023 and later will be due no later than the due date of the entity return.
Entities electing the Iowa PTET will generate tax credits that owners can claim on their Iowa returns. For 2022, the guidance provides that "The electing pass-through entity will report each owner’s PTET credit on a separate letter. After an electing pass-through entity files its 2022 PTET form in GovConnectIowa, the Department will make available in GovConnectIowa a letter template that will be used by the electing pass-through entity to report PTET credits to its owners."
Other highlights:
Claiming the credit: "Owners will utilize Iowa Schedule CC to report information about the PTET credit they received. Insert the phrase “(PTET)” after the paying pass-through entity name in Column A of the Schedule CC to signify that the credit claim relates to a PTET credit instead of a composite credit."
Schedule CC is the form for pass-through owners to claim a credit for composite taxes paid by an entity.
Composite return filers can apply overpayments on their already-filed 2022 composite returns to 2022 PTET filings, but they can't apply the amount paid on the balance due computed on the return. If they haven't filed their composite return yet, they can transfer the entire amount on account. This is to be done by phone.
Individual estimated taxes for a not-yet-filed 2022 return can be credited to the 2022 PTET account of an entity owned by the individual. This would normally make sense for a wholly-owned S corporation. This transfer is also to be done by phone.
Effect on individual credits for financial institution (franchise) taxes: "The franchise tax credit allowed to an electing pass-through entity that is a financial institution, as provided in section 1 of House File 352, will not prohibit qualifying owners of that financial institution from also claiming the Iowa Franchise Tax Credit on their own IA 1040, IA 1041, or IA 1120 using the IA 147 Franchise Tax Credit form."
Effect on individual credits for apportioned income (the Form 134 credit): "An S corporation’s PTET election will not disqualify its resident individual shareholders or resident fiduciary shareholders from claiming the S Corporation Apportionment Tax Credit on their own IA 1040 or IA 1041 using the IA 134 S Corporation Apportionment Tax Credit form."
The guidance also covers many other details, including calculation of the PTET, tax credits available (or not) at the PTET level, entity estimated tax payments, and return filing requirements for owners of entities subject to the PTET.
Related: Year-End Considerations for 2022 PTET Election.
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