Posts Tagged ‘Iowa capital gain exclusion’

Tax Roundup, 3/19/14: Are taxes turning Iowa red? And: Statehouse Update!

Wednesday, March 19th, 2014 by Joe Kristan

Is Iowa really a red state?  According to personal finance site WalletHub, Iowa is a red state.  But didn’t Iowa vote for Obama the last two elections?  Not that kind of red state.  WalletHub’s map has states with the most burdensome taxes as red states, and those with less burdensome taxes as green:

 

WalletHub

From WalletHub:

 WalletHub analyzed how state and local tax rates compare to the national median in the 50 states as well as the District of Columbia.  We compared eight different types of taxation in order to determine:  1) Which states have the highest and lowest tax rates; 2) how those rates compare to the national median; 3) which states offer the most value in terms of low taxation and high cost-of-living adjusted income levels.

WalletHub says Iowans have a tax burden 26% above the national average.  They note, though, that when the rank is adjusted based on our cost of living, Iowa improves 10 places on their rankings.

This is a different measurement than the Tax Foundations well-known Business Tax Climate Indexwhich places Iowa at 11th-worst.  Either way, it’s not a healthy system.  And nothing major is likely to happen to change it anytime soon.  Still, the The Tax Update’s Quick and Dirty Iowa Tax Reform Plan shows the way!

 

20130117-1Supplies sales tax exemption advances.  The Iowa General Assembly isn’t entirely idle on the tax front.  Sometimes that’s a good thing, as in the House passage yesterday of HF 2443, exempting supplies used in manufacturing from sales tax.  Business inputs in general should not be subject to sales tax, as they are likely to be taxed again when the finished product is sold.

Other than that, there isn’t a lot else to report on the Iowa tax legislative scene.  The speedway tax break remains alive.  The bill to broaden the Iowa capital gain “ten and ten” exclusion hasn’t cleared the committee level.  Silly legislation continues to be introduced, like a 50% state tax credit for payments of principal and interest on student loans (HSB 673).  Let’s encourage crushing student debt burdens!

But sometimes its best when the legislature does nothing.  It’s hard to complain that HF 2770, the bill to pay doctors at their average charge rates with tax credits for “volunteering,” has languished.

 

Former IRS Commissioner Shulman, showing how big is legacy is.

Former IRS Commissioner Shulman, showing how big is legacy is.

The TaxProf notes the Death of Former IRS Commissioner Randoph Thrower; Was Fired for Refusing President’s Request to Audit His Enemies, quoting a New York Times story:

The end came in January 1971, after Mr. Thrower requested a meeting with the president, hoping to warn him personally about the pressure White House staff members had been placing on the IRS to audit the tax returns of certain individuals. Beginning with antiwar leaders and civil rights figures, the list had grown to include journalists and members of Congress, among them every Democratic senator up for re-election in 1970, Mr. Thrower told investigators years later. He was certain the president was unaware of this and would agree that “any suggestion of the introduction of political influence into the IRS” could damage his presidency, he said.

Mr. Thrower received two responses. The first was a memo from the president’s appointments secretary saying a meeting would not be possible; the second was a phone call from John D. Ehrlichman, the president’s domestic affairs adviser, telling him he was fired.

I’ll just note here that Doug Shulman, worst commissioner ever, left on his own terms.

 

David Brunori, Hawaii Tax Credit Craziness (Tax Analysts Blog):

According to some excellent reporting in the Honolulu Civil Beat, the Legislature is considering a slew of tax incentives to promote manufacturing in the state. Yes, there are those (particularly established manufacturers) who would like to promote something other than tourism, hosting of naval bases, and pineapple production. The main proposal (SB 3082) would provide tax credits for employee training and some equipment purchases. The goal is to turn Hawaii into 1960s Pittsburgh or Flint Mich., in their heyday. I have my doubts. 

I don’t think that really plays to Hawaii’s strengths.

 

20120817-1Howard Gleckman, A Terrible Response to the Internet Tax Mess (TaxVox)

Under the plan, the federal government would let retailers collect tax based on the levy where the seller is located, no matter where the purchaser resides. This would apply to all retailers, as long as they had no physical presence in the consumer’s state.

A firm could base its “home jurisdiction” on the state where it has the most employees, the most physical assets, or the state it designates as its principal place of business for federal tax purposes.

Given the nature of online sellers, changing locations to a no-sales-tax state would be fairly easy.

Interesting.  I wonder if a “universal mail order sales tax rate” might ultimately be the answer.  You could set this universal rate at, say, the average national sales tax rate, collect it from all buyers, and remit it to the delivery state through a clearinghouse run by the state revenue agencies.

 

Paul Neiffer, Cash Rents Equals Extra 3.8% on Sale. “However, once you are done farming and are simply renting the ground to other farmers (including relatives), then the rental income will be subject to the tax and even worse, selling the farmland for a large gain will result in extra tax.”

Jana Luttenegger, Filing From Home, and Health Insurance Reporting on W-2s (Davis Brown Tax Law Blog)

TaxGrrrl, Taxes From A To Z (2014): J Is For Jury Duty Pay   

 

Everything is spinning out of control! Suburban Cleveland Councilman Denies Getting in Brawl With Liberty Tax Sign Spinner (Going Concern)

 

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Tax Roundup, 1/16/14: Bill would widen Iowa 10-year gain break. And: Obamacare tax credits survive challenge.

Thursday, January 16th, 2014 by Joe Kristan


20130117-1
Iowa Capital Gains Exclusion for stock sales?  
The first income tax bill in the hopper in this session of the Iowa General Assembly is HSB 502, which would expand the current tax break for extra-long term capital gains to stock and partnership interest sales.

Iowa currently allows taxpayers to exclude some capital gains from income when the taxpayer meets each of two 10-year requirements:

- They have to have held the property for at least ten years, and

- They have to have materially participated in the business for at least ten years. Material participation is determined under the federal passive activity rules.

If those requirements are met, a taxpayer can exclude gain on the sale of “substantially all of the assets” of a business, or on the sale of real estate used in the business.  But unless the gain is recognized in a corporate liquidation following an asset sale, stock gains aren’t eligible for the break.  Gains on the sale of partnership interests are never excluded

HSB 502 would extend the break to a sales of “substantially all of the taxpayer’s stock or equity interest in the business, whether the business is held as a sole proprietorship, corporation, partnership, joint venture, trust, limited liability company, or another business entity.”

The provision makes sense to the extent that such a break shouldn’t be dependent on the way you organize your business.  What doesn’t make sense is the way the exclusion is limited by the ten-year material participation requirement.  There is a strong economic case to not tax capital gains at all, but I can’t think of any reason that case is affected by material participation.

The biggest argument against the exclusion is that it is a carve-out of the income tax base for a very limited class of taxpayers that adds to the complexity of the Iowa income tax.  I would favor a broader, or even complete, capital gain exclusion.  I would also be OK with taxing all capital gains in exchange for repeal of the corporation income tax and reduction of the individual rate to under 4% as part of the Quick and Dirty Iowa Tax Reform Plan.

The bill has been referred to a subcommittee of the Iowa House Ways and Means Committee.  While I expect no major tax legislation to move this year, limited provisions like this could advance.

Related: Iowa Capital Gain Deduction: an illustration

 

20121120-2TaxGrrrl, Another Legal Threat To Obamacare Shot Down In Federal Court:

When the Regulations were published, those refundable tax credits which were intended for participants in state exchanges were extended to those individuals under the federal exchanges. The plaintiffs filed suit, arguing that making the credits available to those on the federal exchanges was beyond the scope of the law. The plaintiffs sought, through the lawsuit, to prohibit the IRS from enforcing the Regulations as written.

The D.C. U.S. District Court upheld the regulations yesterday on summary judgement.  An appeal to the D.C. Circuit is likely.

 

 David Henderson quotes economist John Cochrane:

Our current tax code is a chaotic mess and an invitation to cronyism, lobbying, and special breaks. The right thing is to scrap it. Taxes should raise money for the government in the least distortionary way possible. Don’t try to mix the tax code with income transfers or support for alternative energy, farmers, mortgages, and the housing industry, and so on. Like roughly every other economist, I support a two-page tax code, something like a consumption tax. Do government transfers, subsidies, and redistribution in a politically accountable and economically efficient way, through on-budget spending.

But that isn’t going to happen anytime soon.

So wise, and, sadly, so true.  Mr. Cochran has a lot of wise things to say; read the whole thing.  Lynne Kiesling passes on more Cochrane wisdom in Cochrane on ACA’s unravelling: parallels to electricity.

 

Robert D. Flach, TWO RECENT TAX POSTS WORTH DISCUSSING.  ”The idiots in Congress must understand that the purpose of the Tax Code is to raise the money needed to run the government – PERIOD.”

Trish McIntire talks about Choosing A Tax Pro.  ”Just because your previous preparer did something a certain way doesn’t mean that another preparer will run their office the same.”

William Perez, Free Tax Preparation Services

 

HarvestHarvest
harvest
Paul Neiffer, Grain Gifts – How Are They Taxed?:

Since there is no cost allocated to the grain that is gifted, there is no charitable deduction to report.  Rather, since you are reducing your schedule F income by the amount of grain given, this essentially results in your charitable deduction.  You are not allowed to deduct both on schedule F and on schedule A.

Only one deduction counts.

 

Jason Dinesen, Got 1099s to Issue?:

A 1099 may need to be issued if:

  1. You paid $600 or more in total to any 1 person during the year for services provided to your business. This also applies to payments made to businesses organized as partnerships. However, a 1099 does NOT need issued for payments made to a corporation. Payments made to an LLC may or may not require a 1099, depending on how the LLC is taxed.

  2. You paid $600 or more in total to a law firm during the year, regardless of how the law firm is organized. In other words, even if the law firm is a corporation, you would need to issue it a 1099 if you paid the firm $600 or more.

  3. You paid $600 or more in rental or lease payments to an unincorporated person or partnership during the year (similar rules as listed under item #1).

And the deadline is looming.

 

Jack Townsend, Switzerland’s Quixotic Efforts to Close the Stable Door After the Horse Has Left the Barn.  Consider Swiss bank secrecy most sincerely dead.

 

20130419-1Kay Bell, IRS’ fiscal year 2014 budget takes a big hit

TaxProf, The IRS Scandal, Day 252

TaxTrials, Wesley Snipes, A Lesson in Listening to Bad Advice

Keith Fogg, Forum Shopping in the Tax Court – Small Tax Case Procedure and the Rand Decision. (Procedurally Taxing).  Issues when a tax deficiency results solely from refundable tax credits.

Tax Justice Blog, What to Watch for in 2014 State Tax Policy

Scott Drenkard, Open Sky Policy Institute: “Illinois is not an Example for Other States”.  Not exactly going out on a limb, but worth noting.

Roberton Williams, Tax Complications for Same-Sex Couples in Utah (and Elsewhere) (TaxVox)

Cara Griffith, Is Connecticut Ignoring Supreme Court Precedent? (Tax Analysts Blog).  Who do they think they are anyway — Iowa?

 

News from the Profession: How To Not Tick Off Your Public Accounting Colleagues Without Being a Clown About It (Going Concern)

 

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Tax Roundup, 12/3/2012: Medicare 3.8% tax guidance issued. Meanwhile, to the cliff!

Monday, December 3rd, 2012 by Joe Kristan

The IRS issued proposed regulations for the 3.8% Obamacare tax on investment income Friday.  I will do detailed posts on the in the coming days as I study them.

I’ll note two important items from my first overview of the proposed rules:

  • The rules allow taxpayers a free opportunity to redo their activity “grouping” elections for the passive loss rules for 2013. ”Passive” business activities are subject to the the 3.8% tax.  Because “passive” status often depends on how much time a taxpayer spends working in a business, how different operations or locations are grouped can determine whether they are passive.
  • The rules appear to allow you to pro-rate state income taxes in determining “net” investment income.  That’s taxpayer-friendly, but it adds another level of complexity.

For an initial take on the rules, see Anthony Nitti at Forbes.

Related:   Obamacare: it’s a tax!

 

David Brunori of Tax Analysts on the fiscal cliff discussion:

     Everyone knows that taxing the very rich will have no perceptible effect on the deficit. It’s all for show. The president and Democrats in Congress can say they stuck it to the millionaires and billionaires. Fairness will abound. The Republicans can tell the world that they are reasonable people willing to compromise on issues as important as taxes. But Americans will still get more government than they are willing to pay for.

     Some liberals have called for us to go over the cliff and to raise taxes across the board. Like Norquist, they are miscalculating. If everybody had to start paying more, there would be a lot more questioning of massive defense spending, egregious subsidies for industries, and entitlements run amok. But for now, we must be content with the rich paying more so we can get more than we deserve from our government.

You can’t pay for mass welfare benefits with a class tax.  The mania for taxing “the rich” is a distraction from the enormous tax increases on everybody that will be required.  The Rich Guy’s not buying.

 

Why the fiscal cliff is such a big fall.  The Bush Tax Cut Issue in One Chart (Ed Krayewski, Hit and Run):

He adds:

And for those who would say “well of course the government has to spend more when the economy is hurting” only one question applies: has it helped? If you think so, I’ve got a tiger-repellant rock to sell you.

Related:  ‘Fiscal Cliff’ follies: Why it may pay to take deductions early.  My latest post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

Nobody’s serious I:  No ‘fiscal cliff’ deal without higher rates, Geithner says (CNN via Going Concern)

Nobody’s serious, II: Grassley and King push for extension of Wind Energy Tax Credit

 

Iowa admits its capital gain forms were a mess.  A protest rejection released by the Iowa Department of Revenue highlights how badly the Iowa 1040 has been designed with respect to the Iowa deduction for capital gains on the sale of businesses an business real estate.

The taxpayer had excluded regular capital gains from a brokerage account on her tax return.  Iowa properly rejected the deduction, but admitted her mistake was understandable:

Your position relies on the Department’s instructions for completing the tax return.  We found that you are not the only one that made this mistake, so our instructions now clarify that these types of capital gains do not qualify for the deduction as shown above.  In any event, the instructions are not controlling.

Iowa now has better wording on the deduction line and a flow chart to walk taxpayers through whether they should claim the deduction.  It’s a big improvement, but it should be better.  There should be a separate form to compute the deduction, with a checklist to complete to demonstrate eligibility.

The state examines every capital gain exclusion claim.  Taxpayers should be able to submit the information the state asks for with their returns to preclude the examination; even if it would have to be paper-filed, it would save the state the time and money spent on unneeded exams.

Related:  Iowa Capital Gain Break: how it works when you rent property to your business

 

NY Times: States and Cities Shovel $80 Billion/Year in Tax Incentives to Companies, With Little Proof of Their Effectiveness  (TaxProf):

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.

It’s a chump’s game, and we taxpayers are the unwilling chumps.  These things are to economic growth what steroids are to long-term fitness.

 

When you don’t remit withheld taxes, it might not just be a matter of getting your payments caught up.  A New Jersey couple that ran an engineering firm failed to remit over $500,000 in withheld taxes to the IRS.  They were sentenced last week to 44 months in prison after being convicted of charges arising out of the nonpayment.  From the Department of Justice Press Release:

Evidence was also introduced that the DeMuros converted withheld funds for their business and personal use, including more than $280,000 in purchases from QVC, Home Shopping Network and Jewelry Television.

No doubt it was of the best-quality.  Oh, and the couple still has to pay over $1.3 million in restitution to the IRS.

Doug Shulman is no longer IRS Commissioner, but his legacy remains:

 ABC News: Alarming Rise in IRS Refund ID Thefts, Few Prosecuted: GAO Report

Dayton Daily News,  IRS says tax fraud attempts up 39 percent

Greg Mankiw,   Some Advice on Tax Planning

Richard Morrison,   The Tax Rate Paid by the Top 1% Is Double the National Average (Tax Policy Blog)

The Critical Question:  Will the Payroll Tax Cut Fall Silently Off the Cliff? (Elaine Maag, TaxVox)

Kay Bell:  Time to spend down your medical flexible savings account (FSA)

Paul Neiffer,  Senator Baucus Urges Extension of Current Estate Tax Laws

Jim Maule,  Passing the Tax Responsibility Buck

Peter Reilly,  Who Should Be Accelerating Income Into 2012?

Patrick Temple-West,  Most Americans face lower tax burden than in 1980, and more (Tax Break)

Robert D. Flach,  DAMNED IF THEY DO AND DAMNED IF THEY DON’T.

Tragedy:  Lindsay Lohan Has Yet To Settle Tax Bills With IRS, Faces Account Seizures (TaxGrrrl)

The Tax Update is also on Twitter (@joebwan) and Facebook!

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Iowa Capital Gain Break: how it works when you rent property to your business

Friday, October 5th, 2012 by Joe Kristan

 

Flickr image by John Snape used under Creative Commons license

The Iowa Department of Revenue has released a Policy Letter illustrating how Iowa’s “10 and 10″ capital gain exclusion works when you own business real estate in one entity and the operating business in another.  The rule allows taxpayers to exclude capital gain from Iowa income on the sale of business real estate* held for ten years and used in a business in which the also has taxpayer “materially participated” in for ten years.The facts from the policy letter (my emphasis):

Both scenarios involve a taxpayer who is a nonresident of Iowa.  This taxpayer owns an interest in his business, an S corporation, for more than ten years.  The taxpayer has been a material participant in the S corporation for more than ten years.  The S corporation does business solely within Iowa.

Under the first scenario, the S corporation sells real estate in a sale/leaseback transaction.  The real estate has been owned by the S corporation for more than ten years.

In the second scenario, the taxpayer owns a controlling interest in a limited partnership.  The partnership has rented Iowa real estate to the S corporation for more than ten years.

You are asking if the capital gain from the sale of the real estate in both scenarios would qualify for the Iowa capital gains exclusion.

Iowa follows the federal “passive loss” Section 469 rules in defining “material participation.”  The letter says that the gain in both cases qualify for the exclusion — even though the taxpayer is an Iowa non-resident, and even though in the second scenario the real estate isn’t owned in the same entity in which the material participation occurs:

Similarly, in regard to the second scenario, as long as the taxpayer materially participated in the operations of the partnership by meeting one of the section 469(h) tests for the ten years prior to the date of the sale, the taxpayer is eligible to claim the Iowa capital gain deduction for this0`1w   sale.  The fact that the federal passive loss rules deem net income from self-rental as non-passive income does add additional support for this conclusion. 

The letter comes to the correct conclusion.  Non-residents can qualify for the Iowa capital gain exclusion, and real estate used in the business can qualify even when the real estate is owned in a separate entity by the participant.

*It also allows taxpayers to exclude gains on the sale of an entire business when the 10-and-10 standards are met.  More here.

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Department of Revenue asks legislature to trim back real estate gain exclusion

Thursday, March 29th, 2012 by Joe Kristan

While the annual Iowa Department of Revenue policy bill is usually a snoozer, dealing with minor technical problems in the tax law, this year it’s more ambitious.  When a Senate Ways and Means subcommittee meets to discuss SSB 3117 this morning, one of the items on the Department’s agenda is to trim back the deduction for sales of business real estate.  Iowa currently allows many taxpayers who have held rental real estate for at least ten years to exclude gains from the sale of the real estate from income if they also meet a ten-year ”active participation” requirement. 

The Department’s new bill makes the requirements much stiffer. From the bill’s explanation:

   The division amends Code section 422.7, relating to the Iowa capital gain exclusion, to provide that capital gains from the sale of real property used in a business or from the sale of a business which is defined as a passive activity business under section 469(c) of the Internal Revenue Code does not qualify for the exclusion. This provision of the bill applies retroactively to January 1, 2012, for tax years beginning on or after that date.

I asked the Department for a clarification and received this explanation from the Department’s policy chief, Jim McNulty (my emphasis):

The intent of the proposal is to not allow rental activities to qualify for the capital gain exclusion unless they are a real estate professional, which is the 750 hour/50% test that you cited.

 The Department has taken a position, which has been upheld by an Administrative Law Judge decision, that cash rent of farmland does not qualify for the Iowa capital gain exclusion.  We have received concerns that while rental of farmland does not qualify in many cases, rental of commercial property often does qualify.  The intent of this change is to better equalize the treatment regarding rental activities, whether they relate to farmland or commercial property.  This would still allow real estate professionals to claim the exclusion.

The bill would allow the exclusion for rental real estate only for taxpayer that meet the “rental real estate professional” hurdle of Section 469(c)(7).  To qualify, a taxpayer has to work more than 750 hours in real estate trades or businesses and spend more time in that than in any other activity.  Then the taxpayer also has to prove “material participation” in the rental real estate activity.    The current rules for the exclusion are much more lenient:

7. Rental activities or businesses.

 For purposes of subrules 40.38(1) and 40.38(7), the general rule is that a taxpayer who actively participates in a rental activity or business which would be considered to have been material participation in another business or activity would be deemed to have had material participation in the rental activity unless covered by a specific exception in this subrule (for example, the exceptions for farm rental activities in numbered paragraphs “4,” “5,” and “6” immediately above). Rental activity or rental business is as the term is used in Section 469(c) of the Internal Revenue Code.

This means, for example, that a taxpayer who is not a “real estate professional” who spends 100 or more hours on a real estate rental activity, and more time than anyone else, could qualify now but would not qualify under the law proposed by the Department.  The new rules would take effect retroactively to the beginning of this year. 

I’m not a big fan of the Iowa long-term gain exclusion; I think much lower rates without complex exclusions would be a better way to go.  Still, trimming back this exclusion shouldn’t be the job of the Department’s policy bill, especially on a retroactive basis.  It should be part of a larger discussion of how Iowa’s tax law works.

Related:

Iowa Capital Gain Deduction: an illustration

It’s hard to be a real estate professional 

 

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Doing battle around the web

Wednesday, January 18th, 2012 by Joe Kristan

I’m quoted today in the Des Moines Register lead page 1 story explaining why the proposed special Iowa capital gain break on Iowa returns for sales to ESOPs is a bad idea. The story nowhere discusses the existing federal break for sales to ESOPs under Section 1042, which also applies to Iowa, nor does it mention the existing “10 and 10″ Iowa gain exclusion on asset sales. There is a better way to improve Iowa’s business climate.
I pick a fight with advocates for increased IRS funding at Going Concern.
I pick a fight with no one (I think) at IowaBiz.com when I say that you shouldn’t try to file your return before you have all of your W-2s, 1099s and K-1s.

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Iowa Capital Gain exclusion: first, you need a capital gain

Wednesday, October 26th, 2011 by Joe Kristan

Iowa allows taxpayers to exclude from Iowa taxable income capital gain on the sale of a business if the taxpayer meets both a ten-year holding period requirement and a ten-year “material participation” requirement. A protest decision released this week by the Iowa Department of Revenue shows that you have to clear the “capital gain” hurdle first:

The disallowed portion was the amount shown on line 13 of form 4797 and line 7 of the IA 1040 return. Your position is the capital gain deduction should be allowed because the taxpayer held the property for more than 10 years, sold 100% of the business, and met the material participation requirement. You also state

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Yes, Iowa does have a capital gain exclusion for long-held farm land

Thursday, September 8th, 2011 by Joe Kristan

A reader asks farm-tax blogger Paul Neiffer, “Does Iowa have a reduced capital gains tax rate on sale of farm land held for 15 years?
Actually, Iowa allows an exclusion for capital gains on certain business assets, including farms, held for 10 years (not 15). You also have to have “materially participated” in the business for 10 years. The break applies to sales of business real estate, or to all capital gains on a sale of substantially all of the assets of a business. Sales of stock or partnership interests don’t qualify, except for capital gains on a corporate liquidation following an asset sale.
One tricky feature: you can lose your eligibility for the break if you stop “materially participating” in the business. A special rule lets “retiring” farmers qualify for the break as long as they live.

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Iowa: vacant land adjoining business fails to qualify for business capital gain exclusion

Thursday, March 24th, 2011 by Joe Kristan

Iowa’s tax law rewards persistence, but you have to have a lot of it. Iowa allows you to exclude from taxable income capital gain from real property used in a trade or business if you have both held the land for ten years and have “materially participated” in the business for ten years. The exclusion can also apply when you sell your business.
A policy letter released this week shows that even if you have ten years’ worth of persistence, you might not win. Iowa lays out the facts:

Your scenario involves a taxpayer who is a 50% owner of a limited liability company that purchased commercial real estate in Cedar Rapids in 1999. The property consisted of five acres, of which three acres included a large commercial building and two acres consisted of vacant land. The building was leased to several tenants and the vacant land was never rented out. The taxpayer’s participation in the rental business constituted substantially all of the participation in the rental business. In 2010, the two acres of vacant land was split off and sold, and the limited liability company still owns the building and the three acres. You are asking if the sale of the two acres of vacant land qualifies for the Iowa capital gain exclusion.

Iowa said that the vacant land wasn’t “used in the business,” so the exclusion was unavailable.
This continues a long-time trend at the Department of interpreting gain eligibility narrowly.

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What happens when you’re big enough to fight the bully

Monday, August 31st, 2009 by Joe Kristan

The Iowa Department of Revenue will say the darndest things. And if you don’t like them, you can appeal to a Department of Revenue kangaroo court. If you don’t like what Joey has to say, then you get to go to court again and again and again. Most taxpayers give up somewhere along the line because they can’t afford the lawyers. That’s why it’s amusing when they run into someone big enough to keep fighting. David Brunori picks up the story ($link):

To see a strange litigation strategy on the part of government lawyers, you should read the Iowa Supreme Court’s decision in AOL v. Iowa Department of Revenue. Iowa has a law that says interstate Internet service is exempt from sales tax. AOL customers in Iowa used to dial a local number that connected them to the AOL megatron computer in Virginia. Actually, the AOL computer was not called megatron, but I think it was really big. So the connection went from Des Moines or Dubuque to Virginia.
The Department of Revenue decided that wasn’t an interstate connection and it could assess sales tax.

Never mind that all of AOLs servers are in Virginia. Iowa is everywhere.
So AOL took the case to the state district court. The district court found for AOL, holding that the department’s position was an “irrational, illogical, and wholly unjustifiable application of law to fact.” Ouch. Undaunted, the department appealed. The appellate court, however, affirmed the district court. The appellate court said it was obvious the interstate Internet service was not a taxable transaction. You might think that the department would have thrown in the towel at that point. No use going back in the ring when you are getting mauled. But like Rocky Balboa, the plucky Department of Revenue reached back and took one more swing. It took its ridiculous argument to the Iowa Supreme Court.
You know it will go bad when the state supreme court starts with “the director’s interpretation fails to meet even the most deferential standard of review.” The court went on to say that the department was engaging in legal jujitsu to escape the facts. The court called the department’s position illogical, irrational, and wholly unjustified.

Bully for AOL. But its sad that the Department is so bullheaded. There are at least two other positions where the Department is equally wrong and equally stubborn:
- Their taxation of non-resident S corporation shareholders and partners on investment income from Iowa-sited investment partnerships, and
- Their position for pre-2006 capital gains that “held” has a special meaning in Iowa that applies nowhere else in federal or state tax law.
The only question is: are these positions merely shameless revenue grabs? Or is the Department just that bullheaded?
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Dad’s participation isn’t your participation

Tuesday, August 18th, 2009 by Joe Kristan

Iowa has a special tax break for capital gains on the liquidation of a business or farm that has been held for 10 or more years; taxpayers also have to “materially participate” in the business for 10 years to qualify.
A new ruling by the Iowa Department of Revenue illustrates that while your spouse’s participation counts toward the 10-year material participation requirement, you don’t get credit for your parents’ work:

In this case, the capital gain will be reported by the surviving children. From the facts presented, the children have not been materially participating in the operation of the farm over the immediately preceding ten years. A nephew of the deceased farmer has been cash renting the property over the preceding ten years. The fact that the deceased farmer materially participated until the date of his death does not impact the material participation test for the surviving children. The children have not met the ten year material participation test, so any capital gain from the sale of the farmland would not qualify for the Iowa capital gains exclusion.

The tests for material participation are generally the same as for the federal passive loss rules; they are summarized below. Farmers qualify for special material participation rules for the Iowa capital gains deduction.

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Installment sales and the Iowa capital gain deduction

Thursday, May 28th, 2009 by Joe Kristan

Iowa’s “ten and ten” capital gain break eliminates the tax on certain capital gains on property held for ten years by a taxpayer who has also “materially participated” in the business for ten year. The state has issued a ruling explaining how it works for installment sales when the seller dies during the installment period, and the installment receivable goes to a trust with the taxpayer’s spouse as the beneficiary:

Therefore, since the taxpayer is still receiving this capital gain income from the trust and the taxpayer met the ten year ownership and ten year material participation test at the time of the installment sale, the taxpayer is still entitled to claim the Iowa capital gains exclusion.

But while that works if the spouse is the trust beneficiary, it doesn’t work if the beneficiaries are the materially-participating taxpayer’s children:

Finally, you are correct that upon the death of the taxpayer and the subsequent distribution of the taxpayer and trust shares of the capital gains to the children of the deceased, these capital gains reported by the children would not qualify for the Iowa capital gains exclusion since the material participation and holding period requirements were not met by the children at the time of the original sale.

Cite: Policy letter 09201020
Related: IOWA CAPITAL GAINS DEDUCTION: WHAT IS MATERIAL PARTICIPATION?

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