Fiscal Note
Fiscal Services Division
HF 2685 – Governmental Subdivision Audits, Income Tax Exemption (LSB5362HV)
Staff Contact: Eric Richardson (515.281.6767) eric.richardson@legis.iowa.gov
Fiscal Note Version – New
Description
House File 2685 exempts from the State individual income tax and corporate income tax income
received by a certified public accountant (CPA) performing an audit or examination of a
governmental subdivision under Iowa Code section 11.6.
The Bill applies retroactively for tax years beginning on or after January 1, 2024, and is repealed
for tax years beginning on or after January 1, 2029.
Background
Iowa Code section 11.6 details audits of governmental subdivisions and related organizations,
which are required to undergo annual audits unless they have a population of less than 2,000
people and more than $1.0 million in budgeted gross expenditures in consecutive years, in
which case they must undergo an audit in the second fiscal year. Cities with less than 2,000
people and less than $1.0 million in budgeted gross expenditures are required to undergo a
periodic examination at least once during an eight-year period.
Assumptions
• The Auditor of State reports that between 2018 and 2023, an average of 1,322 audit reports
of governments and governmental subdivisions are released per year. Of those reports,
approximately 1,027 (78.0%) were conducted by outside CPA firms. It is assumed the
number of audits performed by CPA firms remains stable beginning in tax year (TY) 2024.
• An outside CPA audit on governmental subdivisions results in an average of 236 billable
hours per audit or examination.
• Outside CPA audits are assumed to bill at $139 per billable hour and collect $33.7 million
from local governments in TY 2024. This amount is assumed to increase by 2.0% annual
inflation beginning in TY 2025.
• It is assumed that a CPA firm contracted to perform governmental subdivision audits and
examinations will be structured as either an S corporation or a partnership, with individual
partners including this income on their individual income tax returns. It is assumed that
these S corporations and partnerships do not elect to utilize the pass-through entity tax
(PTET).
• The marginal individual income tax rate is estimated to be 5.0% in TY 2024, 4.7% in
TY 2025, and 3.9% in TY 2026 and beyond.
• 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 Fiscal Note, the
surtax is assumed to equal 2.5% of State individual income tax liability.
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Fiscal Impact
The proposed income exemptions in HF 2685 are projected to decrease net General Fund
revenue by the following:
• FY 2025 = $1.7 million
• FY 2026 = $1.6 million
• FY 2027 = $1.4 million
• FY 2028 = $1.4 million
• FY 2029 = $1.4 million
The Bill is projected to decrease school district surtax revenue by the following:
• FY 2025 = $42,000
• FY 2026 = $40,000
• FY 2027 = $34,000
• FY 2028 = $35,000
• FY 2029 = $36,000
Sources
Iowa Department of Revenue
Iowa Auditor of State
Legislative Services Agency analysis
/s/ Jennifer Acton
April 8, 2024
Doc ID 1448657
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: 11.6, 422.7, 422.35