The state of Iowa requires businesses to pay many types of taxes. These include sales and use tax, employer taxes, and various industry and local taxes. In addition, Iowa imposes an Iowa Pass-Through Entity Tax on most pass-through entities and their owners. The state also imposes a franchise tax on some types of businesses and collects excise taxes on tobacco, fuel, and rental cars. Iowa also has a tax credit for certain types of pass-through entity income.

The PTE election will be imposed on the entity at the highest graduated individual rate, which is 8.53% in 2022 and 6% in 2023. The owner will include the entity-level income on their return and claim a credit for the amount of the state income tax paid. The credit will be refundable if it exceeds the taxpayer’s Iowa individual income tax liability.

Pass-through entities such as partnerships and S corporations are responsible for paying a state income tax. However, this tax is not always withheld from employee paychecks. This is why it is important to register for withholding taxes using the online application on GovConnectIowa. The Department of Revenue will send you details on how to file and pay withholding taxes.

How to Make PTET Election in Iowa?

A new law signed by Governor Kim Reynolds allows certain pass-through entities, such as partnerships and S corporations, to elect into an Iowa pass-through entity tax (PTET) for 2024. This tax is designed as a workaround for the $10,000 limitation on federal itemized deductions for state and local taxes imposed by the 2017 Tax Cuts and Jobs Act.

To make the PTET election in Iowa, eligible partnerships and S corporations must log into GovConnectIowa to submit a PTET form. They must also submit Iowa tax payments online or by MeF through GovConnectIowa. The department recommends that a business owner makes these payments early to avoid late fees and interest.

Things to Consider About Iowa Pass-Through Entity Tax

PTET credit: While the entity-level tax rate is lower, owners receive a refundable PTET credit for a portion of the net PTET paid. This credit attempts to mitigate the double taxation effect, but it isn’t equal to the full amount of PTET paid.

Election deadlines: The deadline to make a PTET election for tax year 2022 has been extended to April 30, 2024.

Not for all businesses: PTET may not be beneficial for all businesses, as factors like ownership structure, income distribution, and future plans need to be considered.

Key Info:

• Iowa Department of Revenue – Pass-Through Entity Tax: https://tax.iowa.gov/pass-through-entity-tax
• IDR Releases New Tax Guidance: Pass-Through Entity Tax: https://tax.iowa.gov/pass-through-entity-tax
• IDR extends 2022 Pass-Through Entity Tax Election Deadline: https://tax.iowa.gov/pass-through-entity-tax