Bill Summary – FastDemocracy

Fiscal Note
                                       Fiscal Services Division
HF 2503 – Retired Farmer Lease Income Exclusion, Pass-Through Entities (LSB5832YH)
Staff Contact: Eric Richardson (515.281.6767) eric.richardson@legis.iowa.gov
Fiscal Note Version – New
Description
House File 2503 allows the net income from a farm tenancy agreement for an entity taxed as a
disregarded entity, a partnership for federal tax purposes, an S corporation, a trust, or an estate
to be deducted from the net individual income tax for a retired farmer who materially participated
in a farming business for 10 or more years.
The Bill takes effect upon enactment and is retroactively effective to tax years beginning
January 1, 2023.
Background
Iowa Code section 422.7 details how net income is computed for federal income tax purposes
with State adjustments. Farm tenancy income covering real property held by an individual for
10 or more years is eligible to be subtracted from net income for State tax purposes. Currently,
Iowa Code section 422.7(14)(e) does not allow an entity taxed as a partnership for federal tax
purposes, an S corporation, a trust, or an estate to deduct net income from a farm tenancy
agreement for the net individual income tax. The Bill would remove this ineligibility.
Assumptions
• According to the Iowa Department of Revenue (IDR), the Bill will entail administrative costs,
   updated forms, administrative rules, development, enforcement costs, and other related
   costs that cannot be estimated due to lack of information. However, any fiscal impacts
   related to these challenges are not included in this Fiscal Note.
• It is assumed that retired farmers who receive farm income from partnerships in 5 of the
   prior 12 tax years will have received at least 10 years of farm income during their entire
   working lives and are eligible for the deduction. According to the IDR, the total farm rental
   income from partnerships that is passed through to qualified retired farmers is estimated to
   be $31,000 in tax year (TY) 2022.
• It is assumed that retired farmers who receive farm income from S corporations in 5 of the
   prior 10 tax years will have received at least 10 years of farm income during their entire
   working lives and are eligible for the deduction. According to the IDR, the total farm rental
   income from S corporations that is passed through to qualified retired farmers is estimated
   to be $27.4 million in TY 2022.
• It is assumed that retired farmers who receive farm income from estates and trusts in 5 of
   the prior 7 tax years will have received at least 10 years of farm income during their entire
   working lives and are eligible for the deduction. According to the IDR, the total farm rental
   income from estates and trusts that is passed through to qualified retired farmers is
   estimated to be $10.1 million in TY 2022.
• Qualified total farm rental income for the entities in this Fiscal Note equals $37.6 million in
   TY 2023, growing annually to $41.5 million by TY 2030.
• The marginal individual income tax rate per TY is estimated below:
   • TY 2023 — 5.43%
   • TY 2024 — 5.02%
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    • TY 2025 — 4.67%
    • TY 2026 and after — 3.90%
•   The fiscal impact of a TY would be realized in the following fiscal year, except that TY 2023
    and TY 2024 fiscal impacts would both be realized in FY 2025.
•   The income surtax for schools is a local option tax that is based on a taxpayer’s Iowa
    income tax liability. Law changes that lower Iowa income tax liability also lower the amount
    of income surtax owed by any taxpayer subject to the surtax. For this projection, the surtax
    is assumed to equal 2.5% of State individual income tax liability.
Fiscal Impact
The proposed deductions from the individual income tax in House File 2503 are projected to
decrease net individual income tax liability and State General Fund revenue by the following
amounts:
• FY 2025 = $3.9 million
• FY 2026 = $1.8 million
• FY 2027 = $1.5 million
• FY 2028 = $1.5 million
• FY 2029 = $1.6 million
• FY 2030 = $1.6 million
The decrease in tax liability is also projected to decrease the statewide local option income
surtax for schools by the following amounts:
• FY 2025 = $99,000
• FY 2026 = $44,000
• FY 2027 = $38,000
• FY 2028 = $38,000
• FY 2029 = $39,000
• FY 2030 = $40,000
Sources
Iowa Department of Revenue
Legislative Services Agency analysis
                                                                               /s/ Jennifer Acton
                                                                                 March 8, 2024
Doc ID 1447785
The fiscal note for this Bill was prepared pursuant to Joint Rule 17 and the Iowa Code. Data used in developing this
fiscal note is available from the Fiscal Services Division of the Legislative Services Agency upon request.
                                                 www.legis.iowa.gov
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Statutes affected: 
Introduced: 422.7