Iowa Tax Climate And Incentives

This month we travel to the Midwestern state of Iowa, the Hawkeye State. Sitting between the Missouri and Mississippi Rivers, the state is known for its rolling plains and cornfields.

Iowa has a humid continental climate throughout the state with extremes of both heat and cold. The average annual temperature at Des Moines is 50 degrees Fahrenheit. Winters are often harsh and snowfall is common. Iowa summers are known for heat and humidity, with daytime temperatures reaching 90 degrees.

Spring ushers in the beginning of severe weather season. Iowa averages about 50 days of thunderstorm activity per year. Iowa averages about 47 tornadoes per year. However, 2008 had the most tornadoes ever in a year: 105!

Iowa is generally not flat; most of the state consists of rolling hills. Iowa can be divided into eight landforms based on glaciation, soils, topography, and river drainage. The Loess hills lie along the western border of the state, some of which are several hundred feet thick. These hills are a clastic, predominantly silt-sized sediment that is formed by the accumulation of wind-blown dust. Northeast Iowa, along the Mississippi River is part of the Driftless Zone, consisting of steep hills and valleys which appear almost mountainous. The state’s northwest area has remnants of the once common wetlands, such as Barringer Slough.

Business Climate

While Iowa is often viewed as a farming state, in reality agriculture is a small portion of a diversified economy, with manufacturing, biotechnology, finance and insurance services, and government services contributing substantially to Iowa’s economy. This economic diversity has helped Iowa weather the late 2000s recession better than most states, with unemployment substantially lower than the rest of the nation.

In the latter half of the 20th century, Iowa’s agricultural economy made the transition to a diversified economy of advanced manufacturing, processing, financial services, information technology, biotechnology and green energy production.

Manufacturing is the largest sector of Iowa’s economy. Major manufacturing sectors include food processing, heavy machinery, and agricultural chemicals. Sixteen percent of Iowa’s workforce is dedicated to manufacturing.

Food processing is the largest component of manufacturing. Besides processed food, industrial outputs include machinery, electric equipment, chemical products, publishing, and primary metals. Companies with direct or indirect processing facilities in Iowa include ConAngra Foods, Wells Blue Bunny, Barilla, Heinz, Tone’s Spices, General Mills, and Quaker Oats. Meatpacker Tyson Foods has 11 locations, second only to its headquarter state Arkansas.

Agriculture has been a major component of Iowa’s economy. The state’s main agricultural outputs are hogs, corn, soybeans, oats, cattle, eggs and dairy products. Iowa is the nation’s largest producer of ethanol and corn and is one of the largest growers of soybeans.

Tax Climate  

Iowa imposes taxes on net state income of individuals, estates, and trusts. There are nine individual income tax brackets ranging from 0.36% to 8.98%, as well as four corporate income tax brackets ranging from 6-12%, giving Iowa the country’s highest marginal corporate tax rate. The state sales tax rate is 6%. Property tax is levied on the taxable value of real property. The tax rate differs in each locality and is a composite of county, city or rural township, school district and special levies. Iowa allows its residents to deduct their federal income taxes from their state income taxes.

Other taxes that are of interest to consumers are the gasoline tax and cigarette tax. The state levies a gasoline tax of 30.7 cents per gallon, which ranks 21st in the nation, and a state cigarette rate of $1.36 per 20-pack, which ranks 27th in the country.

Iowa is fairly conservative in its approach to taxation of technology products for sales tax purposes. All digital products are exempt from taxation. Prewritten computer software that is electronically downloaded is taxable while custom computer software is exempt from taxation. Lastly, all cloud services are exempt from taxation. How products are produced, sold and delivered is critical to determining its tax status.

Tax Incentives And Credits

The state of Iowa offers a number of programs providing tax credits or other incentives which can reduce taxable obligations and help increase your company’s bottom line. Some of these include:

High Quality Jobs Program- This program can provide tax credits and direct financial assistance to help off-set costs incurred to locate, expand or modernize a facility located in Iowa. To be eligible, businesses must meet certain wage threshold requirements.

Research Activities Tax Credit- This is a refundable credit for increasing a company’s research activities. Under certain conditions, this credit may be doubled. A company must meet the qualifications of the Federal Research Activities Credit in order to be eligible for the credit in Iowa.

Have a question? Contact Monika Miles.

Your comments are always welcome!

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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