For tax years beginning on or after January 1, 2019, Iowa conforms to the federal Internal Revenue Code in effect on March 24, 2018 and therefore adopts many of the Tax Cuts and Jobs Act (TCJA) changes. Iowa did not conform to the TCJA changes for tax year 2018. Recently, the Department of Revenue updated its website to include guidance on many of the federal changes that affect corporations. With respect to GILTI, the guidance confirms (a) that the net federal amount of GILTI is included in Iowa net income, (b) GILTI is not a dividend or Subpart F income and is not eligible for a dividends-received deduction, and (c) Iowa does allow corporations the section 250 deduction for GILTI, but only to the extent the taxpayer was allowed the deduction for federal purposes. Iowa also adopts the section 250 deduction for FDII. When a taxpayer files a separate Iowa return, or an Iowa consolidated returns that includes different group members than the federal consolidated return, the separate entity or Iowa consolidated group will need to calculate its own net GILTI and its own FDII deduction to determine the correct amount of Iowa income. To do this, the entity or Iowa consolidated group must calculate net GILTI and the FDII deduction in the same manner they would have for federal purposes, but using only the income of the separate entity or Iowa consolidated group.
The Department also addresses the apportionment of GILTI, which has been a crucial issue for taxpayers. The guidance indicates that the Department intends to promulgate a rule categorizing GILTI as a new category of investment income for apportionment purposes. To the extent the promulgated rule differs from the current guidance, the Department notes that taxpayers must follow the rule. In the interim, the guidance provides that net GILTI will be included in the apportionment factor if the income arises out of the taxpayer’s ownership interest in Controlled Foreign Corporations (CFCs) that are an integral part of some business activity regularly occurring in or outside of Iowa. All other net GILTI that is investment business income may be included in the apportionment factor at the taxpayer's election, with certain limitations. The election to include or exclude investment income applies to all investment business income. To the extent the income arises from the taxpayer's ownership of a CFC that is integral to some business activity of the taxpayer occurring regularly in or outside of Iowa, the net GILTI must be included in the numerator of the Iowa apportionment factor. If no portion of the net GILTI arises from the taxpayer's ownership of a CFC that is integral to some business activity occurring regularly in Iowa, but the taxpayer has elected to include investment business income in the apportionment factor, the net GILTI is included in the numerator if the taxpayer's commercial domicile is in Iowa. Any GILTI included in Iowa net income is included in the denominator of the apportionment factor. Please stay tuned to TWIST for future tax reform related updates.