Excluding the net capital gain from the sale of certain livestock from the computation of net income for purposes of the individual income tax, and including retroactive applicability provisions

Sponsored by the House Ways and Means Committee

Topics:Agriculture Taxes Income taxes Livestock & confinements

Same legislation: HSB 680, SF 2400

Write your legislators about itWhat changed before it passed

Official bill page Lobbyist declarations One-pager to print

Where it is now

Done: IntroducedFebruary 8, 2024
Done: SubcommitteeFebruary 8, 2024
Done: House committeeMarch 6, 2024
Done: Passes the HouseMarch 19, 202494–0
Done: Senate committeeApril 18, 2024
Done: Passes the SenateApril 19, 202446–0
Done: To the GovernorApril 29, 2024
Done: Signed into lawMay 15, 2024

Signed into law What’s a funnel?

What’s in it

AI summary People who make most of their money from farming or ranching could avoid paying income tax on profits from selling certain animals. This rule applies to cattle and horses used for breeding, work, or sports, as well as other types of breeding livestock. Retired farmers cannot use this tax break if they are already getting a similar benefit through other laws.¹

Read the official explanation

This bill excludes the net capital gain from the sale of certain livestock from the computation of net income for purposes of the individual income tax. The bill allows a taxpayer to exclude the net capital gain from the sale of cattle or horses if held by the taxpayer for breeding, draft, dairy, or sporting purposes for more than months, but only if the taxpayer received more than percent of the taxpayer’s gross income from farming or ranching operations during the tax year. The bill allows a taxpayer to exclude the net capital gain from the sale of breeding livestock, other than cattle or horses, held by the taxpayer for a period of months or more from the date of acquisition, but only if the taxpayer received more than one-half of the taxpayer’s gross income from farming or ranching operations during the tax year. 7(13). The bill applies retroactively to January 1, 2024, for tax years beginning on or after that date.

Changed since by amendment H-8174; see Amendments.

Full bill text · What changed before it passed²

Senate subcommittee

Named March 25, 2024. It hasn’t reported yet.

Three legislators hear a bill first and recommend what the committee should do; it’s the best time to weigh in. How to take part

1 written public comment to its subcommittee: April 15, 2024 (1) · on the Legislature’s site

Fiscal note

Less revenue: up to $5.3M Compare with other bills

AI summary This bill allows certain farmers and ranchers to exclude net capital gains from the sale of cattle, horses, or breeding livestock from their taxable income. The bill is projected to decrease State General Fund revenue by $5.3 million in fiscal year 2025, $2.6 million in fiscal year 2026, $2.2 million in fiscal year 2027, $2.2 million in fiscal year 2028, $2.3 million in fiscal year 2029, and $2.3 million in fiscal year 2030. Additionally, the bill is expected to decrease the statewide local option income surtax for schools by $133,000 in fiscal year 2025, $64,000 in fiscal year 2026, $55,000 in fiscal year 2027, $56,000 in fiscal year 2028, $57,000 in fiscal year 2029, and $59,000 in fiscal year 2030. Administrative and enforcement costs related to this bill cannot be estimated.³

Read the fiscal note

Description

House File 2649 excludes the net capital gain from the sale of livestock from the computation of net income for individual income taxpayers. The Bill:

Allows a taxpayer to exclude the net capital gain from the sale of cattle or horses if held by the taxpayer for more than 24 months if the taxpayer receives more than 50.0% of gross income from farming or ranching operations during the tax year.
Allows a taxpayer to exclude the net capital gain from the sale of breeding livestock if held by the taxpayer for more than 12 months if the taxpayer receives more than 50.0% of gross income from farming or ranching operations during the tax year.
The Bill disallows a retired farmer from taking the exclusion if the retired farmer takes a similar exclusion allowed in Iowa Code section 422.7(13).

The Bill is retroactively effective to January 1, 2023, for tax years beginning on or after that date.

Background

Section 1223 of the Internal Revenue Code defines the length of time in the Bill a farmer is required to hold cattle, horses, or breeding livestock for purposes of a net capital gain exclusion. 2022 Iowa Acts, House File 2317 (Income Tax Rate Reduction and Exemptions Act), created new net income exclusions for retired farmers. Iowa Code section 422.7(13) allows retired farmers to take net capital gain exclusions from their net income from the sale of cattle, horses, or breeding livestock, but only if the taxpayer materially participated in the farming business for five of the eight years preceding the farmer’s retirement or disability and the taxpayer has sold all or substantially all of the taxpayer’s interest in the farming business by the time the election is made.

Assumptions

Taxpayers who record at least one-half of their gross income from farming or ranching operations according to the IA 100A form are eligible for the capital gains deduction. On average, between tax year (TY) 2016 and TY 2021, taxpayers claimed $70.5 million in capital gains through livestock sales.
Approximately 76.0% of capital gains through livestock sales will be made exempt due to the Bill. It is estimated that the amount of capital gains that will be made exempt will be $52.1 million in TY 2023.
Annual increases in capital gains exemptions will be 2.8% in TY 2024, 2.3% in TY 2025, 2.3% in TY 2026, and 2.2% in TY 2027 and beyond, equaling the estimated consumer price index (CPI) consensus estimations from Moody’s Analytics.
The marginal State tax rate is estimated to be 5.0% in TY 2023 and TY 2024, 4.7% in TY 2025, and 3.9% in TY 2026 and beyond.
It is assumed the impacts of a tax year under the Bill will be realized when taxpayers file returns in the corresponding fiscal year. The first year of fiscal impacts due to the Bill is FY 2025 for TY 2023 and TY 2024. TY 2025 impacts will occur in FY 2026.
Changes proposed in the Bill will include administrative costs, administrative rule development, and enforcement and related costs. These cannot be estimated in this Fiscal Note due to a lack of information.
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 exclusions from the individual income tax in House File 2649 are projected to decrease net individual income tax liability and State General Fund revenue by the following amounts: