Iowa DOR Digs In
We have posted a couple of times on the Section 179 coupling issue regarding Iowa Farmers. The Iowa Department of Revenue just issue a notice on their web-site that they will require farmers to file and pay their taxes by March 1 or face penalties and interest (there is no interest if paid by normal due date). In my opinion, this appears to be a short sighted for the Iowa DOR. Yes, the current rule is farmers have to file and pay by March 1. If they file timely by March 1 and then Iowa couples with the federal Section 179 at the $500,000, they indicate a farmer can easily file an amended tax return and Iowa will issue a tax refund.
Now this sounds nice of the Iowa DOR, however, lets assume that Iowa does end up coupling with the federal rules. Based on the 2012-2014 data, there were a minimum of 12,000 sole proprietor farmers who filed Iowa income tax returns claiming at least $25,000 of Section 179 expense.
Let’s conservatively assume that only 50% of this number or 6,000 Iowa farmers would be required to file an amended tax return. In most cases, it takes a tax preparer at least 2 hours to fully prepare an amended tax return. Let’s assume the tax rate is $150 per hour. This results in additional costs to Iowa Farmers of almost $2 million to prepare the returns.
Then the Iowa DOR has to go ahead and process these returns manually. Let’s assume that this takes at least one hour and the average wage and benefit cost of this staff is $40 per hour. This results in costs to the Iowa DOR (or ultimately the people of Iowa) of $240,000, plus check processing and postage costs of another $10,000. Let’s round it to $250,000. Perhaps they don’t have to hire additional staff, but they could be doing more valuable work than processing 6,000 Iowa Farmer’s amended tax returns.
The state of Iowa likely earns about 1% on their funds (maybe). If the coupling results in $40 million of extra refunds to Iowa Farmers, then the interest earned by Iowa will be about $50,000 ($40 million times 1% times 1.5 months divided by 12 months).
The bottom line is that Iowa might give up interest earnings of perhaps $50,000 (if Iowa does not couple). Instead, they would rather cost Iowa Farmers $2 million and themselves $250,000. There is plenty of chatter that Iowa will couple (at least for 2015 tax returns). Perhaps the Iowa DOR will check my math and grant farmers an automatic extension to April 30 or at least grant them time to March 31.
We will keep you posted.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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