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STARTING AND OPERATING A BUSINESS IN IOWA Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Iowa has a fairly typical tax and legal structure under which businesses must operate. While both individual and corporate tax rates are fairly high, Iowa has no general state franchise tax or property taxes on business personal property, and has repealed its bulk sales law on business purchases. Real property is taxed and assessed at the local level. Like most states, Iowa imposes an income tax on individuals and corporations, a sales and use tax, and various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law and a limited liability partnership (LLP) law, so that businesses operating in Iowa in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. At present, the state's economy is relatively robust, in terms of the level of unemployment and other economic measures. For example, in February, 2009, the state's unemployment rate was only 4.9%, up from 3.9% a year earlier, but still comparing very favorably to a national unemployment rate of 8.5% in February, 2009. To view the latest federal Bureau of Labor Statistics unemployment rate data for Iowa or any other state, visit the BLS website. Iowa offers a very favorable environment for businesses, including the following advantages:
II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Iowa can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Iowa also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Iowa can be established with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, if you sell any kind of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the Iowa income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Iowa income tax and filing requirements for individuals. Doing business as a sole proprietor in Iowa is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. However, if your sole proprietorship business operates under a trade name or assumed name, it will be necessary to file an assumed name certificate with the county recorder in each county where you do business, as described in Section IV(g). (c) Partnerships. Iowa's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). As discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. Partnerships, as entities, are not subject to state income tax in Iowa. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). A partnership (or LLC taxable as a partnership) with nonresident partners may file a composite tax Iowa income tax return and pay the Iowa tax on behalf of its nonresident partners. Partnerships are required to file an annual tax information return with the state. For details on Iowa partnership tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Iowa can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses as well. General partnerships may file a Statement of Partnership Authority with the Iowa Secretary of State, but are not required to do so. Such a statement gives public notice as to which partners in the partnership are authorized (or NOT authorized) to act on behalf of the partnership with regard to specified matters such as real estate transactions. The statement expires after five years. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Iowa law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the Iowa Secretary of State, together with a filing fee of $100. Foreign limited partnerships must also register before being allowed to do business in Iowa, and must pay a registration fee of $100 with the registration application. Limited partnerships are required under Iowa Code Section 488.210 to file biennial reports and pay a filing fee that is set by the Iowa Secretary of State, currently $45. For information on limited partnership filing requirements, see the contact information for the offices of the Iowa Secretary of State, listed in Section VI(a). In addition, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses as well. LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new type of partnership entity permitted under the laws of Iowa. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Iowa state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Partners in a general partnership can obtain a significant degree of limited liability by simply registering the partnership with the state as an LLP. To form an LLP in Iowa, you must register and pay a filing fee of $50 to the secretary of state. Foreign LLP's, those created under the laws of another state, must register with the secretary of state and must pay a fee of $100. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses as well. Note that one potential drawback of LLP's, if you will do business in other states besides Iowa, is that some states, like California and New York, only recognize certain types of professional partnerships as LLP's. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in Iowa, you must file articles of incorporation with the Iowa Secretary of State and pay a fee of $50. A foreign corporation (one that is formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Iowa, by filing an application for a certificate of authority and paying a filing fee of $100. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Iowa, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file biennial reports every other year and a filing fee as determined by the secretary of state, currently $45. Failure to file this report on a timely basis can result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in Iowa must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. Banks and certain other financial institutions that do business in Iowa are subject to a corporate franchise tax. However, there is no general state franchise tax on other corporations. For tax forms and more information on corporate income taxes in Iowa, see the contact information for the offices of the Iowa Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Iowa recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. An S corporation with nonresident shareholders may file a composite tax return on behalf of the nonresidents and may pay their Iowa income tax liability on the S corporation's taxable income. (f) Limited Liability Companies. Iowa, like every other state, has now adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Iowa may also choose to operate in the form of an LLC. In most states, including Iowa, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLC's under Iowa tax laws. Iowa has enacted the new Revised Uniform Limited Liability Act, effective January 1, 2009, which replaces the old LLC law. To form an LLC under the laws of Iowa, one or more persons, not necessarily members, must file articles of organization with the secretary of state, which must be accompanied by a filing fee of $50. Iowa law now permits an LLC to have only one member. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in Iowa, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $100. Both domestic LLC's and foreign LLC's that do business in the state are required to file a biennial report every other year and pay a filing fee set by the secretary of state, currently $45. Iowa's LLC law provides that a limited liability company agreement may establish or provide for the establishment of one or more designated series of members, managers or limited liability company interests having separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations. Any such series may have a separate business purpose or investment objective. This provision, in effect, allows a single "series LLC" to be set up which has multiple divisions or "series," each of which can function like a separate legal entity, as long as separate accounting is done for each. Thus, each such "series" may contain a separate business venture, whose losses or bankruptcy will be walled off, in terms of liability, from the other such divisions of the "series LLC." In addition, some tax advisors believe such a single LLC can be set up in place of multiple LLC's and thereby save significant amounts of state taxes in many states where each LLC is subject to special taxes or fees. (However, California's Franchise Tax Board has already announced that in California each such "series LLC" doing business in that state will be taxable as a separate LLC entity.) For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Iowa is one of the states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Iowa. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Iowa, you should require the seller to obtain a tax release for state unemployment tax, from the Unemployment Insurance Division of the Iowa Department of Workforce Development, to avoid being held liable for the seller's unpaid state unemployment tax, if any. The release will inform you as to whether no tax is to be withheld, or the amount of tax that is to be withheld. There is no specific sales tax release form in Iowa, but state law requires the seller of a business to file a final sales and use tax return within one month after the sale, and to pay all tax due. You need to be sure, as buyer, you withhold enough tax to cover any sales tax liability, which may involve an escrow or holdback of the purchase price until the seller's final return has been filed and the tax paid. Otherwise, you will be liable for unpaid tax as a transferee. Contact the Iowa Department of Revenue for further information on how to determine if you are withholding a sufficient amount for unpaid sales and use taxes. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, where you acquire a segregable portion of the seller's business, you will need to apply within 90 days of sale to the Unemployment Insurance Division of the Department of Workforce Development, requesting that you be treated as a successor employer, pursuant to Iowa Code Section 96.7-2b. This can be done by filing Form 60-0126, Report to Determine Liability, the same form that you need to file as a new employer, to register for unemployment tax, or, as it is called in Iowa, "job insurance." PLANNING POINT: EXAMPLE: Upon any business acquisition, as the new owner, if you wish to retain any employees of the former owner, you should make a formal specific offer of work to each employee you wish to retain. The offer should outline the duties, rate of pay, days of work and shift for that employee. Refusals should be reported to the nearest Workforce Development Center. IV. IOWA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Iowa has the usual complement of business taxes, except
that there is no franchise tax on corporations, other than
financial institutions, and no personal property tax on
either tangible or intangible property owned by a business.
While the state sales tax is relatively low, at 5%, and
local sales taxes cannot exceed 1% (with no local use tax),
income tax rates are quite high, with a top rate of 12% on
corporate income over $250,000 and 8.98% on individual
income in the top individual tax bracket.
For state tax forms and tax information, see the contact
information for the Iowa Department of Revenue
in Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States,
will have to have at least one government license of some kind.
In most cases, this will be a local license, issued by your city
or county. Before you open your business, contact your local
city or county hall and find out if your particular business
needs one or more local licenses. Most kinds of local business
licenses are granted upon payment of a fee, with no further
requirements, except possibly for annual or other periodic
renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning and
planning restrictions. If you own or rent any type of
facility, you will generally need fire department permits,
showing that you meet fire safety codes and any construction
or improvements to an existing structure will usually
require a building permit. If you intend to simply operate
your business from your home, you may be in violation of
local zoning requirements, but this is less likely to be a
concern if you don't have clients, customers, suppliers,
or employees coming to your house on business, on a regular
basis.
State governments have traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Iowa has expanded the list of occupations
that must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing.
For help with state licensing and business registration
requirements in Iowa, see the contact information for the
Business License Information Center, listed under the Iowa
Economic Development Department listing in
Section VI(a); or, you can contact
the Labor Market Information Bureau at the address listed
for it in Section VI(a).
(c) Income and Franchise Taxes.
Iowa has both an individual income tax and a corporate
income tax. There is also a franchise tax, but it only
applies to certain financial institutions. Income taxes
for various types of legal entities are discussed below.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Iowa individual income tax is imposed at a maximum tax
rate of 8.98% in 2008 and 2009. Tax rate brackets are adjusted
each year to reflect inflation. For 2009, the top tax rate
bracket begins at $63,315 of taxable income. The state also
has an alternative minimum tax, similar to the federal AMT,
imposed at a tax rate of 6.7%. An individual pays the higher
of the regular individual income tax or the alternative
minimum tax. Iowa is one of a few states that allows
individuals a tax deduction for the federal income tax they
pay, including any Social Security (FICA) tax an individual
pays in excess of $6,324 (for 2008).
Individual taxpayers generally pay state income tax on
their business earnings from a sole proprietorship, or on
their share of the earnings of a pass-through entity, such
as a partnership, S corporation, or LLC. The Iowa personal
income tax return is Form IA-1040, which must
be filed with the Iowa Department of Revenue by April 30 each year.
State law also allows school districts to impose a
surtax of up to 20% of the state income tax liability of
an individual, on the income of a resident of the school
district. Many districts do so, although mostly at much
less than the maximum allowable 20% surtax rate. The
Department of Revenue publishes (on its web site) updated
lists of surtax rates imposed by every school district in
Iowa.
Partnerships, or entities taxable as partnerships, such
as LLC's, are not subject to state income taxation in Iowa,
but must file an information return with the Department of
Revenue each year, showing each partner's share of taxable
income, losses, and credits, on Form IA-1065.
A partnership with nonresident partners may file a composite
tax Iowa income tax return and pay the Iowa tax on behalf of
its nonresident partners.
Under new regulations adopted in 2007, it is no longer
necessary to apply for permission to file a composite return.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLC's, or
shareholders in S corporations), who have taxable income from
the business, will generally be required to make advance payments
of estimated Iowa individual income taxes, if their net tax
liability (not covered by withholding) exceeds $200. Estimated
tax payments are due in four installments, on the last day of
the 4th, 6th, and 9th months of the taxable year, and the last
day of the first month of the following year.
To avoid penalties for underpayment of estimated tax,
an individual must pay in the lesser of 90% of the current
year's Iowa income tax liability or 100% of the prior year's
tax (110% of the prior year's tax if federal adjusted gross
income exceeded $150,000 in the prior year).
The Iowa corporate income tax rate, on corporations other
than S corporations, is imposed at graduated rates, rising
from 6% on the first $25,000 of taxable income to as high
as 12% on income over $250,000. This is the highest corporate
tax rate in the nation. Unlike most other states, however,
Iowa allows corporations to deduct 50% of their federal income
tax from their Iowa taxable income. An alternative minimum tax
is imposed, at a tax rate of 7.2% on alternative minimum taxable
income, which is th regular taxable income increased for certain
tax preference items. A corporation pays the higher of the
regular corporate income tax or the alternative minimum tax.
The state corporation income tax return is Form IA-1120,
which must be filed with the Department of Revenue by the last day of the
fourth month following the end of the taxable year, or by April 30th in
the case of a corporation whose taxable year is the calendar year.
Corporations are required to make estimated tax payments of
their state corporate income tax in advance, if their tax liability
for the year equals or exceeds $1,000. Estimated tax payments are
due in advance, in four equal installments, on the last day of the
4th, 6th, 9th, and 12th months of the taxable year.
Penalties will be imposed for failure to make the required
estimated tax payments on a timely basis. Payments must be
based on an amount equal to at least 90% of the current year's
tax. However, if the preceding year was a full year of 12
months, the current year payments need only be equal to 100%
of the prior year's tax liability, if that is less than 90% of
the current year tax, in order to avoid an underpayment penalty.
Banks and certain other financial institutions that do
business in Iowa are subject to a corporate franchise tax.
However, there is no general state franchise tax on other
corporations.
S corporations are not taxable entities under the Iowa
income tax laws, but they must report their taxable income
that is allocable to each of their shareholders, who must
include the income (or loss) on their Iowa individual
income tax returns. An S corporation with nonresident
shareholders may file a composite tax return on behalf of
the nonresidents and may pay their Iowa income tax liability
on the S corporation's Iowa-source taxable income.
Under new regulations adopted in 2007, it is no longer
necessary to apply for permission to file a composite return.
TAXATION OF LIMITED LIABILITY COMPANIES
In Iowa, a limited liability company (LLC), is taxed in
the same manner as a partnership, thus avoiding the possible
double taxation of income that can occur with a corporation.
Single-member LLC's are now recognized as LLC's under Iowa law,
effective since July 1, 1997. A single-member LLC is generally
treated as a sole proprietorship (a "disregarded entity") for
tax purposes.
While an LLC is not a taxable entity, generally, an LLC that
is taxable as a partnership and that has nonresident members may
file a composite tax Iowa income tax return and pay the Iowa
tax on behalf of its nonresident members.
Under new regulations adopted in 2007, it is no longer
necessary to apply for permission to file a composite return.
Note that it is not always entirely clear whether an LLC is
a "single-member LLC" or not, where the "single owner" is a
married couple who hold the entire ownership of the LLC in some
form of co-tenancy, such as joint tenants with right of survivorship,
tenants by the entirety, or as tenants in common. The federal Internal
Revenue Service (IRS) has taken a very lenient position in Rev.
Proc. 2002-69, where a couple hold the LLC interest as
community property, ruling that the IRS will accept whatever choice
the couple make, either to disregard the LLC as an entity (treating
it as a "single-member LLC") or to treat it as a partnership between
the husband and wife.
However, Iowa is not a community property state, so where
the LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether Iowa would treat the LLC as a single-member
LLC or as a partnership.
(d) Sales and Use Tax.
Iowa imposes a general sales tax on retail sales of tangible
personal property and certain other gross receipts at the
statewide rate of 5%. County and city governments are also
allowed to adopt local sales taxes, at tax rates of up to 1%
(but no local use tax is permitted). School taxes of up to 1%
may also be imposed by counties. The combined tax rate at any
given location is either 5%, 6%, or 7%, depending upon whether
the locality has adopted no local option tax, or one or two
such taxes.
Iowa state law prohibits a seller from absorbing the sales tax
on taxable purchases or advertising to the public that the seller
will assume or absorb the sales tax on items or services that are
offered for sale.
Sellers are required to obtain a seller's permit for each
place of business and to collect and pay over the state and
local sales and use taxes to the Iowa Department of Revenue.
There is no fee for the permits.
Iowa localities are allowed under state law to impose a
hotel and motel tax of 1% up to 7% for transient accommodations,
in addition to the 5% state sales tax on such rentals of
sleeping quarters.
Iowa has adopted the Streamlined Sales Tax Agreement,
and since July 1, 2004, various services are subject to
sales tax, including admissions to athletic events and
fairs, room rentals, bundled service contracts, and
a large number of other enumerated services, ranging
from investment counseling to dating services.
Automobile rentals are subject to the sales tax, plus
an additional 5% state excise tax.
There are numerous exemptions from the sales tax, the
most important of which is the resale exemption. If you
are a wholesaler or retailer who purchases goods that you
will resell, your purchase of such goods may qualify as
an exempt sale for resale. Similarly, if you sell goods
to wholesalers or retailers for resale by them, your sale
may also qualify as an exempt sale for resale. In any such
transaction, the exemption is ordinarily available only if
the purchaser gives the seller a valid resale certificate,
certifying that the items are being purchased for resale,
and not for use or consumption by the buyer.
Iowa has repealed the sales tax on Internet access
services, effective since July 1, 1999.
Sales tax returns must be filed quarterly, if a taxpayer
remits between $120 and $6,000 a year of sales tax, or
monthly, if annual tax remitted is more than $6,000 but less
than $60,000 a year. Monthly filers must file returns and
pay over tax for the first two months of each calendar quarter,
but no tax deposit is required for the third month. Instead,
the tax for the third month is paid with the quarterly return.
If the annual tax remitted is $120 or less, only an annual
filing is required. Large taxpayers who remit more than
$60,000 of sales tax per year must file semi-monthly returns
and make semi-monthly deposits by electronic funds transfer
(EFT).
A shadow tax, the use tax, is also imposed at the same
rate (5%) as the sales tax, but there are no local use taxes.
It is primarily intended to tax property that is acquired
from sources outside of the state, in transactions not
subject to sales tax, when such property is used or consumed
within Iowa. Use tax may also apply to items purchased on
an exempt basis, such as for resale, if such items end up
being used or consumed, instead of being resold.
Before making any taxable sales, you will need to
register with the Iowa Department of Revenue on the Iowa
Business Tax Registration form, which also
registers your LLC, partnership, or corporation to receive
appropriate income tax forms, and, if you have employees,
registers you as an employer for state income tax
withholding purposes.
For more information on Iowa sales and use tax registration
and compliance, see contact information for the offices of
the Department of Revenue, listed in
Section VI(a).
(e) Real and Personal Property Taxes.
In Iowa, as in every other state, any business real estate
you own will be subject to real property taxes. In general,
there is little that you must do, unless you wish to challenge
your assessed valuation, since the assessor will bill you for
each year's property taxes as they come due.
Iowa, unlike most other states, does not impose any property
taxes on personal property of any kind, either tangible or
intangible. Thus, all types of business property other than
real estate, such as machinery, equipment, office furniture,
inventories, supplies, and intangible assets, are exempt from
either state or local property taxes in Iowa.
(f) Other Iowa Taxes.
Iowa imposes a number of excise and other taxes on businesses, including:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. In Iowa, if you conduct business under an assumed name, other than as a corporation, limited partnership, or LLC, you must generally file an assumed name certificate with the county recorder's office in each county where you do business. There are small county and state registration fees of $5 a page for registering an assumed name. A corporation, limited partnership, or LLC using an assumed or fictitious name must register with the Iowa Secretary of State by filing a Fictitious Name Resolution form. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Iowa imposes a state income tax on the income of individuals, you will need to also withhold Iowa income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Iowa Department of Revenue, on their Iowa Business Tax Registration form, on which you can also register for a sales and use tax permit or the automobile rental tax, if applicable. Note, however, that an employer must also separately register as such for state unemployment tax, with the Iowa Department of Workforce Development, and that Iowa unemployment tax is paid to that agency, not to the Department of Revenue. See Section V(b) for more information on state unemployment tax. UPDATE NOTE: For more information on Iowa income tax withholding and registration requirements for employers, see the contact information for the offices of the Iowa Department of Revenue, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in any calendar quarter, you, as an employer will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Iowa unemployment (job insurance) tax are required to register with the Iowa Department of Workforce Development, on Form 60-0126, Report to Determine Liability. New employers are required to pay tax at a rate of 1% (or 8% for construction employers) in 2009 on the first $23,700 of wages paid to each employee. This is the lowest unemployment tax rate imposed by any state. A temporary emergency surcharge may be added to the tax rate of certain employers in any calendar quarter that the Unemployment Insurance Division owes interest on money borrowed from the federal government to pay unemployment insurance benefits. However, no surcharge is imposed, generally, in years when (as as present), the level of unemployment in the state is very low. However, with unemployment in all parts of the nation rising very rapidly in early 2009, this could change in the very near future. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Iowa law, cannot be charged to your employees or withheld from their wages. For more information on your Iowa unemployment tax obligations as an employer, see the contact information for the offices of the Department of Workforce Development, Unemployment Insurance Division, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Iowa, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor, a member of an LLC, or a partner in a partnership is generally not considered an employee, but may elect to be covered. Also, up to four officers per corporation, the president, vice president, secretary, and treasurer, may voluntarily elect in writing not to have workers' compensation coverage. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the Iowa workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Workers' Compensation Division of the Iowa Department of Workforce Development, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Iowa wage-hour laws, which provide for a state minimum hourly wage that was $5.15 an hour, but increased to $6.20 on April 1, 2007. The Iowa minimum wage increased again on January 1, 2008, to $7.25 an hour, where it remains in 2009. The state minimum wage is never less than the federal, so that any increase in the federal minimum wage above $7.25 will automatically increase the Iowa minimum wage. Not all Iowa employers are subject to the Iowa minimum wage law. Those exempted are most small retail and service establishments grossing less than $300,000 annually. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the Iowa wage-hour rules, and other federal exemptions generally apply, with certain modifications. Unlike the federal wage-hour laws, Iowa law does not require employers to pay employees for overtime unless such additional pay is agreed to in a contract between the employer and employee. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Iowa Department of Workforce Development. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be aware of similar state child labor laws, in Iowa. In particular, be aware that work permits are required for any children under age 16 whom you may wish to employ. CAUTION: Iowa's child labor laws also contain the following restrictions on the types of labor children may be employed to perform:
For more information on Iowa minimum wage, wage payment, and child labor laws, contact the Division of Labor of the Iowa Department of Workforce Development, at the address listed for that department in Section VI(a). (e) State Occupational Safety and Health Laws. Nearly half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Iowa is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and Iowa job safety requirements, you may wish to contact the Division of Labor Services of the Iowa Department of Workforce Development and request a free on-site safety consultation. Consultations are provided by the Consultation Bureau, which is entirely separate from the Enforcement Bureau of the Division. Thus, you will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. The Division of Labor Services acts like a state version of federal OSHA, enforcing the Iowa Occupational Safety and Health Act of 1972, which closely follows federal OSHA, and will even provide you the required federal job safety posters. As under federal law, most firms with ten or fewer employees are exempt from most IOSHA record keeping requirements. Under Iowa state law, employers are required to report a work-related fatality or an incident of multiple injuries that required hospitalization of three or more employees. The employer must orally report such incidents in person or by phone within 8 hours of the incident. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Des Moines offices of the Division of Labor Services, Department of Workforce Development, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Iowa labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. Iowa law requires that, if an employee is terminated, he or she must receive final wages not later than the next regular payday. Unless otherwise agreed in writing, payday must be no later than 12 days (excluding Sundays and holidays) after the period for which the wages were earned. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Iowa has a right-to-work law which prohibits an employer from denying employment to any person on account of membership or non-membership in a labor union, or for failure to pay union dues. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Iowa, and display a poster informing employees of their rights. You can obtain this poster from the Des Moines office of the Iowa Civil Rights Commission, at the address listed in Section VI(a). Under Iowa law, it is unlawful for an employer to discriminate in employment against any applicant for employment or any employee because of the age, race, creed, color, sex, sexual orientation, national origin, religion, or disability of such applicant or employee, unless based upon the nature of the occupation. It is also unlawful to terminate the employment of a person disabled by pregnancy because of the employee's pregnancy. (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the Centralized Employee Registry of the Iowa Department of Human Services, for Iowa employers) within 15 days after the date of hire. See Section VI(a) for contact information for the Centralized Employee Registry or see Section VI(c) for the Internet web link for reporting new hires online. Employers who file electronically or magnetically must file reports twice a month, on dates not less than 12 days or more than 16 days apart. Wilful failure of a business to report new hires is punishable as contempt, under the Iowa Code. REPORTING INDEPENDENT CONTRACTOR SERVICES Some individuals who owe child support have, in the past, attempted to avoid having their employee wages garnished by working as self-employed independent contractors, rather than as employees. Thus, in addition to new hire reporting, Iowa now also requires businesses to report payments to independent contractors if the payor is required to file a federal Form 1099-MISC with the Internal Revenue Service with respect to that contractor. A report is due within 15 days after making such payments to the contractor or entering into an agreement to do so. However, reporting is only required if payments are to be made in other than the form of a single lump sum payment, within a calendar year. Only one report is required to be filed with regard to any individual contractor. Wilful failure of a business to report new contractors is punishable as contempt, under the Iowa Code. (5) Lie Detector Tests Prohibited. Under Iowa law, an employer may not require or demand, as a condition of employment, prospective employment, or continued employment, that an individual submit to or take a lie detector or similar test. Unlike the federal law, which exempts certain kinds of private businesses such as security firms from the prohibition against polygraph testing, the Iowa law makes no such exceptions. VI. STATE SOURCES OF HELP AND INFORMATION. (a) Key State Agencies Contact Information. Unlike most other states, Iowa does not have a single agency to whom you can go to handle all your licensing and permitting requirements for your business under the laws of Iowa. Accordingly, you will need to contact the various Iowa state government agencies that are mentioned in this book and listed below on an individual basis, to obtain needed forms, official posters, information and other assistance from each such agency. However, a good starting place for licensing information is the Business License Information Center, which can be reached through the Iowa Division of Business Development office listed below: Division of Business Development Also, you can register your business with the state for Iowa income tax, sales and use tax, employer withholding, and miscellaneous other state taxes on a single state application form, the Iowa Business Tax Registration form. Addresses and other contact information for other key state and federal government agencies in Iowa, mentioned in preceding sections of this book, are listed below for your convenience. SECRETARY OF STATE. Contact this office for information on:
Business Services Division TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Iowa Department of Revenue, which is the main tax collection agency in Iowa. Also register with this agency as an employer, for state income tax withholding purposes. Taxpayer Services STATE LABOR LAWS. Contact the appropriate division of the Iowa Department of Workforce Development about your employer obligations under various state labor laws, including:
Iowa Workforce Development STATE LICENSES. Contact the Business License Information Center (BLIC), at the number listed above for the Department of Economic Development, of which the BLIC is a part. STATE SALES TAX. Obtain your sales and use tax permit and information on the Iowa sales and use tax law from the Iowa Department of Revenue, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the Iowa Department of Revenue to obtain a form for registering as an employer, for purposes of Iowa income tax withholding. See the address listed above for that agency. STATE UNEMPLOYMENT TAX. Contact the Iowa Department of Workforce Development to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject, at the address listed above for that agency. NEW HIRE AND INDEPENDENT CONTRACTOR REPORTING. The Iowa Department of Human Services, Centralized Employee Registry, is responsible for receiving reports of new hires, within 15 days after you hire any employee (or 15 days after retaining an independent contractor). You can register on-line as an employer and submit new hire reports via the Internet, at the ICER web site listed in Section VI(c). Reports of new hires (or hiring of new independent contractors) can also be mailed or faxed to: Centralized Employee Registry WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the Workers' Compensation Division of the Iowa Department of Workforce Development, for further information, at the address listed above for that agency. STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in Iowa, contact the Division of Labor Services of the Iowa Department of Workforce Development, at the address listed above for that agency. STATE ANTI-DISCRIMINATION AGENCY. For information on Iowa civil rights laws and required ant-discrimination posters, contact the following agency: Iowa Civil Rights Commission (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Iowa to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the SBDC below for information, or for the location of other SBDCs nearer to you. Iowa SBDC: Iowa State University (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Iowa state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Iowa. Since new sites are appearing frequently, you might also want to search for other Iowa government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Iowa government information, you may want to begin with the following Internet sites: State of Iowa Home Page: Iowa Department of Economic Development, Business Licensing Center: Iowa Department of Revenue: Iowa Workforce Development: Iowa Child Support (Department of Human Services online Centralized New Hire registry for reporting new hires): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Iowa, or contact the following state agency, which can provide you information on all state loan programs. Iowa Department of Economic Development Also, you may want to contact the following Certified Development Company, which operates under the SBA Section 504 program: Iowa Business Growth Company The address of the main SBA Office in Iowa is: U.S. Small Business Administration |
Copyright © 2009 Michael D. Jenkins
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