Does the filing and payment extension apply to required estimated income tax payments?

No.

Are income tax estimated payments still required to be made by their regular due date?

Yes. For example, a calendar-year filer’s 1st quarter and 2nd quarter 2020 estimated payments are due on April 30, 2020, and June 30, 2020, respectively.

Does the penalty waiver provided in Order 2020-01 or the estimated tax underpayment penalty relief provided in Order 2020-03 apply to penalties for underpayment of tax year 2018 or 2019 estimated taxes (IA 2210 penalties) required to be paid with the return?

No. Estimated taxes were specifically excluded from the relief in Order 2020-01. The estimated tax underpayment penalty relief provided in Order 2020-03 only applies to certain estimated tax installments due for tax years that begin in 2020. For example, 2019 estimated tax payments for calendar year filers were due in four installments (e.g. April 30, June 30, September 30, January 31, 2020) and these penalties are imposed for failure to make adequate estimated payments on time. Those estimated payments are not covered by these Orders. Penalties calculated on the 2019 IA 2210, 2210F, or 2210S (individuals) or 2019 IA 2220 (corporations and financial institutions subject to franchise tax) still must be paid with the Iowa return. The same outcome would apply to fiscal-year filers for tax years that began in 2018 or 2019 with due dates that fall within the period covered by Order 2020-01. Because estimated payments were specifically excluded from Order 2020-01, underpayment penalties due on required payments during the period covered by that order and those returns will still apply. See the appropriate forms for more details.

If an overpayment calculated on a 2019 individual income tax return filed after April 30, 2020, is requested to be applied to the taxpayer’s 2020 income tax year as a credit carryforward of estimated tax, will this application of the overpaid income tax be considered a timely 1st or 2nd quarter estimated income tax payment for 2020?

It depends. The actual payment date of the tax payment(s) that gave rise to the overpayment are used to determine whether an underpayment of estimated tax occurred and to calculate penalties and interest on that underpayment. The overpayment of tax must exist on or before the due date of the quarterly estimate in order to be considered a timely estimated payment with respect to that quarter.

Example 1: Taxpayer X, a calendar-year filer, makes a $5,000 payment on a 2019 form IA 1040-V on April 30, 2020. Taxpayer X then timely files a 2019 Iowa income tax return on July 31, 2020, and reports a $1,000 overpayment to be applied to 2020 Iowa estimated tax. The $1,000 overpayment was made on April 30, 2020, so it is treated as an estimated tax payment made on April 30, 2020. The $1,000 overpayment will be treated as a timely-filed 1st quarter estimate for purposes of determining whether an estimated tax underpayment penalty applies.

Example 2: Taxpayer Y, a calendar-year filer, does not make any estimated tax payments on or before April 30, 2020, or June 30, 2020. Taxpayer Y does make a $5,000 payment on a 2019 form IA 1040-V on July 31, 2020. Taxpayer Y has paid at least 90% of Taxpayer Y’s 2019 income tax liability by July 31, 2020, and therefore qualifies for an automatic 6-month filing extension until January 31, 2021. Taxpayer Y then timely files a 2019 Iowa income tax return on December 1, 2020, and reports a $1,000 overpayment to be applied to 2020 Iowa estimated tax. The $1,000 overpayment was made on July 31, 2020, so it is treated as an estimated tax payment made on July 31, 2020. The $1,000 overpayment will be treated as a late-filed 1st quarter estimate for purposes of determining whether an estimated tax underpayment penalty applies.

Specific to Individuals

What safe harbors from underpayment penalties are available to individuals under existing Iowa statute and rule for estimated payments for tax year 2020?

There are a number of statutory and rule-based safe harbor protections from underpayment penalties available for individuals required to make estimated payments of tax under Iowa law for tax year 2020.

Iowa determines underpayment of estimated tax for individuals in generally the same manner as provided under the Internal Revenue Code. Generally, taxpayers who will owe less than $200 in tax after withholding for the taxable year will not face a penalty for underpayment of estimated tax. Individuals may also avoid an underpayment penalty if current year payments (estimated payments + withholding) made by the installment due dates equal or exceed one of the following:

100% of the individual’s 2019 Iowa tax liability, or 110% for high income taxpayers. A high income taxpayer includes any taxpayer whose 2019 federal adjusted gross income (as adjusted for any Iowa decoupling including bonus depreciation/section 179 adjustment) is greater than $150,000 ($75,000 for married filing separate federal returns). 90% of the tax liability on the taxpayer’s 2020 income or annualized income as determined on form IA 2210 and IA 2210 Schedule AI.

For more information on estimated income tax payments and underpayment penalties for individuals, see Estimated income Tax Payments and Iowa Administrative Code chapter 701—49. Also see below for additional relief from certain 2020 estimated income tax underpayment penalties granted in Order 2020-03.

Has the Department granted any additional underpayment penalty relief for tax year 2020, because I intend to rely on my 2019 tax liability for computing my safe harbor estimates for tax year 2020, but my 2019 tax return will not be complete until the extended Iowa filing deadline of July 31, 2020?

Yes. As explained below, Order 2020-03 allows taxpayers to use their 2018 income tax liability (or 110% of their 2018 liability for high income taxpayers) to compute safe harbor estimates for 2020 estimated tax installment payments with a due date on or after April 30, 2020, and before July 31, 2020. For most individuals, this additional relief will apply to their 1st and 2nd quarter estimates for tax year 2020 due on or before April 30, 2020, and June 30, 2020.

A taxpayer will not be subject to penalties for underpayment of estimated tax with respect to both installments due on April 30, 2020, and June 30, 2020, if the individual pays the following amounts for each installment payment:

27.5% of their 2018 Iowa tax liability for a taxpayer whose 2018 federal adjusted gross income (as adjusted for any Iowa decoupling including bonus depreciation/section 179 adjustment) is greater than $150,000, or greater than $75,000 for a married filing separate taxpayer; or

25% of their 2018 Iowa tax liability for any other taxpayer.

As a result, for taxpayers who computed their tax year 2019 safe harbor estimates using their 2018 tax liability, and had no change in their withholding since 2019, their 1st and 2nd quarter safe harbor estimated payments for tax year 2020 will match their tax year 2019 required quarterly estimated payment.

However, any taxpayer who takes advantage of the underpayment penalty relief provided in Order 2020-03 must add the remaining amount due for these installments to their next installment due on or after July 31, 2020. For most individuals, this will increase the required 3rd quarter estimate due September 30, 2020. Failure to pay the increased required installment by the taxpayer’s first due date on or after July 31, 2020, will be considered an underpayment of estimated taxes for the installment.

Example 1: Taxpayer A is an individual with a 2018 federal adjusted gross income as modified for Iowa purposes of $100,000. Taxpayer A has no Iowa withholding from wages. Taxpayer A filed a 2018 IA 1040 Iowa Individual Income Tax Return that covered a period of 12 months, and showed a total tax due of $5,000.

Taxpayer A’s 1st and 2nd installments of 2020 quarterly estimated tax are due on April 30, 2020, and June 30, 2020, respectively. Taxpayer A pays $1,250 (i.e., $5,000 × 0.25) in estimated tax on or before the April 30, 2020 due date, and pays $1,250 in estimated tax on or before June 30, 2020. As a result, Taxpayer A will not be subject to a penalty for underpayment of estimated tax for the 1st and 2nd quarter of 2020.

Taxpayer A timely files a 2019 IA 1040 Iowa Individual Income Tax Return on July 31, 2020, showing a tax due of $7,500, and computes 2020 safe harbor quarterly estimates of 1,875 (i.e., $7,500 x 0.25) using Taxpayer A’s 2019 Iowa return. The difference between these 2020 safe harbor estimates for the first two quarters ($1,875 x 2 = $3,750) and the safe harbor payments Taxpayer A was required to pay pursuant to Order 2020-03 ($2,500) must be added to Taxpayer A’s 3rd quarter safe harbor estimated payment for 2020. In other words, Taxpayer A adds $1,250 (i.e., $3,750 - $2,500) to the $1,875 3rd quarter installment, and therefore must pay at least $3,125 (i.e., $1,250 + $1,875) as a 3rd quarter estimate by September 30, 2020 in order to avoid an underpayment penalty for the 3rd quarter.

Example 2: Taxpayer B is an individual with a 2018 federal adjusted gross income as modified for Iowa purposes of $300,000. Taxpayer B filed a 2018 IA 1040 Iowa Individual Income Tax Return that covered a period of 12 months, and showed a total tax due of $20,000. Taxpayer B also had a 2019 tax liability of $25,000 on Taxpayer B’s 2019 Iowa individual income tax return.

Taxpayer B’s 1st installment of 2020 quarterly estimated tax is due on April 30, 2020. Taxpayer B pays $5,500 (i.e., $20,000 × 0.275) in estimated tax on or before the April 30, 2020, due date.

Taxpayer B’s 2nd installment of 2020 quarterly estimated tax is due on June 30, 2020. Taxpayer B pays $5,500 (i.e., $20,000 × 0.275) in estimated tax on or before the June 30, 2020, due date. As a result, Taxpayer B will not be subject to a penalty for underpayment of estimated tax for the 1st and 2nd quarter of 2020.

Taxpayer B’s 3rd installment of 2020 quarterly estimated tax is due on September 30, 2020. Taxpayer B pays $6,875 (i.e., $25,000 x 0.275) in estimated tax on September 30, 2020.

Taxpayer B is subject to an underpayment penalty for the 3rd installment payment because Taxpayer B did not pay the additional estimated tax required under Order 2020-03. To avoid underpayment penalty, Taxpayer B should have added to the 3rd installment payment the difference between the 1st and 2nd required installment payments required without regard to the relief provided in Order 2020-03 ($6,875 × 2 = $13,750) less the 1st and 2nd required installment payments required to be made under Order 2020-03 ($5,500 × 2 = $11,000). Thus, Taxpayer B should have paid at least $9,625 by September 30, 2020 (i.e., ($13,750 - $11,000) + $6,875).

Is the relief granted in Order 2020-03 available even if I file my 2019 Iowa income tax return prior to July 31, 2020?

Yes, the relief granted in Order 2020-03 is available to any taxpayer required to make a tax year 2020 estimated income tax payment on or after April 30, 2020, but before July 31, 2020.

What if I rely on the underpayment relief provided in Order 2020-03 in computing and paying my applicable safe harbor estimated payments for 2020, but my minimum estimated installment payments using the regular underpayment penalty exceptions are later determined to be lower when I complete my 2020 Iowa income tax return?

You will be considered to have overpaid your installment and the overpayment will be carried to the next installment due. The underpayment penalty relief provided in Order 2020-03 is in addition to any existing underpayment penalty exceptions already provided by Iowa law.

Does Order 2020-03 indicate that a taxpayer will not be assessed any estimated tax underpayment penalty if they pay 50% of the 2018 income tax liability with the 2nd installment?

This is only true if the taxpayer also timely paid at least 25% (or 27.5% for a high income taxpayer) of the 2018 income tax liability with the 1st quarter income tax estimate. By the due date of the 2nd quarter installment the taxpayer must pay at least 50% (or 55% for a high income taxpayer) of the 2018 income tax liability, if the relief granted in Order 2020-03 is utilized. The underpayment of estimated tax penalty is calculated separately for each quarter.

What relief is available if I believe my income for tax year 2020 will vary substantially between different quarters because of economic disruptions caused by COVID-19?

Iowa law permits a taxpayer to compute estimated tax underpayment penalty using the annualized income installment method if your income varied during the year. You may be able to reduce or eliminate the amount of one or more of your required installments by using the annualized income installment method calculated on the IA 2210 Schedule AI.

What if I cannot pay my quarterly estimates because of economic hardship caused by COVID-19?

Individuals who cannot pay quarterly estimates may apply to the Department for a waiver of underpayment penalty. The penalty for underpayment of estimated tax may be waived in the following situations:

The underpayment was due to casualty, disaster, or other unusual circumstances, or The underpayment was made by an individual who retired after having attained age 62, or who became disabled in the tax year for which the estimated payment was due or in the preceding tax year, and the underpayment was due to reasonable cause and not due to willful neglect. To apply for a waiver from the estimated income tax underpayment penalty, use the Penalty Waiver Request, 78-629.

For more information on estimated income tax payments and underpayment penalties for individuals, see Estimated Income Tax Payments and Iowa Administrative Code Chapter 701—49.

Specific to Corporations and Financial Institutions

What safe harbors are available to corporations and financial institutions under Iowa statute and rule for estimated payments for tax year 2020?

There are a number of statutory and rule-based safe harbor protections available for corporations and financial institutions making estimated payments of tax under Iowa law for tax year 2020. Corporations and financial institutions may avoid a penalty for underpayment of estimated tax if certain requirements are met, but unlike individuals, Iowa law does not allow corporations and financial institutions to apply for the two underpayment penalty waiver provisions described under the question “What if I cannot pay my quarterly estimates because of economic hardship caused by COVID-19?”. For details on the corporations and financial institutions underpayment penalty exceptions, see Iowa Code section 422.89 and Iowa Administrative Code rules 701—56.5(2) (corporations) and 701—61.5(2) (financial institutions).

Is any additional relief available to corporations and financial institutions required to make tax year 2020 estimated payments due prior to July 31?

Order 2020-03 allows taxpayers to use their 2018 income or franchise tax liability to compute safe harbor estimates for tax year 2020 installment payments with a due date on or after April 30, 2020, and before July 31, 2020. This relief is available to taxpayers that file on a calendar-year or fiscal-year basis, but it only applies to estimated payments due for a tax year beginning during calendar year 2020 (i.e. tax year 2020). However, any taxpayer who takes advantage of the underpayment penalty relief provided in Order 2020-03 must add the remaining amount due for these installments to their next installment due on or after July 31, 2020. Failure to pay the increased required installment by the taxpayer’s first due date on or after July 31, 2020, will be considered an underpayment of estimated taxes for the installment.

Pursuant to Order 2020-03, corporations or financial institutions who filed a 2018 Iowa income tax return that covered a period of 12 months and showed an Iowa tax liability will not be subject to penalties for underpayment of estimated tax for tax year 2020 quarterly estimated payments with a due date on or after April 30, 2020, and before July 31, 2020, if the taxpayer pays at least 25% of the 2018 Iowa tax liability for each 2020 installment due during that period.

Example 1: Corporation ABC, a calendar-year filer, filed a 2018 IA 1120 Iowa Corporate Income Tax Return with the Department showing a tax due of $50,000.

Corporation ABC’s 1st installment of 2020 quarterly estimated tax is due on April 30, 2020. Corporation ABC pays $12,500 (i.e., $50,000 × 0.25) in estimated tax prior to the April 30, 2020 due date.

Corporation ABC’s 2nd installment of 2020 quarterly estimated tax is due on June 30, 2020. Corporation ABC makes another installment payment of $12,500 in estimated tax prior to June 30, 2020. Corporation ABC will not be subject to a penalty for underpayment of estimated tax for the 1st and 2nd quarter of 2020.

Corporation ABC timely files its 2019 IA 1120 Iowa Corporate Income Tax Return on July 31, 2020, showing a tax due of $60,000, and computes 2020 safe harbor quarterly estimates of $15,000 (i.e., $60,000 x 0.25) using its 2019 Iowa return. The difference between these 2020 safe harbor estimates for the 1st two quarters ($15,000 x 2 = $30,000) and the safe harbor payments it was required to pay pursuant to Order 2020-03 ($25,000) must be added to its 3rd quarter safe harbor estimate payment for 2020. In other words, Corporation ABC adds $5,000 (i.e., $30,000 - $25,000) to its $15,000 3rd quarter installment, and therefore must pay at least $20,000 (i.e., $5,000 + $15,000) as a 3rd quarter estimate by September 30, 2020 in order to avoid an underpayment penalty for the 3rd quarter.

Example 2: Corporation XYZ, a calendar-year filer, filed a 2018 IA 1120 Iowa Corporate Income Tax Return with the Department showing a tax due of $75,000. Corporation XYZ also had a 2019 tax liability of $160,000 on the 2019 IA 1120 Iowa Corporate Income Tax Return.

Corporation XYZ’s 1st installment of 2020 quarterly estimated tax is due on April 30, 2020. Corporation XYZ pays $18,750 (i.e., $75,000 × 0.25) in estimated tax on or before the April 30, 2020 due date.

Corporation XYZ’s 2nd installment of 2020 quarterly estimated tax is due on June 30, 2020. Corporation XYZ pays $18,750 (i.e., $75,000 × 0.25) in estimated tax on or before the June 30, 2020 due date. As a result, Corporation XYZ will not be subject to a penalty for underpayment of estimated tax for the1st and 2nd quarter of 2020.

Corporation XYZ’s 3rd installment of 2020 quarterly estimated tax is due on September 30, 2020. Corporation XYZ pays $40,000 (i.e., $160,000 x 0.25) in estimated tax on September 30, 2020.

Corporation XYZ is subject to an underpayment penalty for the 3rd installment payment because Corporation XYZ did not pay the additional estimated tax required under Order 2020-03. To avoid underpayment penalty, Corporation XYZ should have added to the 3rd installment payment at least the difference between the 1st and 2nd required installment payments required without regard to the 2018 safe harbor provisions relief provided in Order 2020-03 ($40,000 x 2 = $80,000) less the 1st and 2nd required installment tax payments required to be made under Order 2020-03 ($18,750 x 2 = $37,500). Thus, Corporation XYZ should have paid at least $ 82,500 by September 30, 2020 (i.e., ($80,000 − $37,500) + $40,000).

Is the relief granted in Order 2020-03 available even if the taxpayer files its 2019 Iowa income or franchise tax return prior to July 31, 2020?

Yes, the relief granted in Order 2020-03 is available to any taxpayer required to make a tax year 2020 estimated income or franchise tax payment on or after April 30, 2020, but before July 31, 2020.

What if the taxpayer relies upon the underpayment relief provided in Order 2020-03 in computing and paying the applicable safe harbor estimated payments for 2020, but the minimum estimated installment payments using the regular underpayment penalty exceptions are later determined to be lower when the 2020 Iowa income or franchise tax return is completed?

The taxpayer will be considered to have overpaid its installment and the overpayment will be carried to the next installment due. The underpayment penalty relief provided in Order 2020-03 is in addition to any existing underpayment penalty exceptions already provided by Iowa law.

For a calendar-year filer that has two tax year 2020 installments covered by Order 2020-03, does the Order indicate that the taxpayer will not be assessed any estimated tax underpayment penalty if the taxpayer pays 50% of the 2018 income tax liability with the 2nd installment?

This is only true if the taxpayer also timely paid at least 25% of the 2018 income or franchise tax liability with the 1st quarter income tax estimate. By the due date of the 2nd quarter installment, the taxpayer must pay at least 50% of the 2018 income or franchise tax liability, if the relief granted in Order 2020-03 is utilized. The underpayment of estimated tax penalty is calculated separately for each quarter.

What relief is available if the taxpayer believes its income for tax year 2020 will vary substantially between different quarters because of economic disruptions caused by COVID-19?

Iowa law permits a taxpayer to compute estimated tax underpayment penalty using the annualized income installment method if its income varied during the year. A taxpayer may be able to reduce or eliminate the amount of one or more of its required installments by using the annualized income installment method calculated on the IA 2220.

What if a taxpayer cannot pay its quarterly estimates because of economic hardship caused by COVID-19?

While the Department sympathizes with taxpayers’ economic hardship caused by COVID-19, Iowa law does not allow corporations and financial institutions to apply for the two underpayment penalty waiver provisions described for individuals under “What if I cannot pay my quarterly estimates because of economic hardship caused by COVID-19?”