The 2025 Iowa legislature enacted Senate File 657 to revamp some of the state's biggest tax incentives to attract and retain businesses. The bill was signed by Governor Kim Reynolds on June 6, and the restructured credits and incentives will go into effect on January 1, 2026.
Research and Development (R&D)
The Iowa Research Activities Credit (RAC) is replaced with a new "R&D Tax Credit Program." The long-running RAC was a refundable tax credit for taxpayers conducting qualifying research in the manufacturing, life sciences, agriscience, software engineering, and aviation and aerospace industries. Based on the federal credit, the RAC allowed businesses to claim up to 6.5% of their qualifying research expenses (QREs). There was no cap for businesses or for the credit overall – businesses claimed $77.6 million(!) in RAC in fiscal year 2024. The legislature has often tinkered with the RAC in recent years – changing calculation methods, excluding specific industries, and phasing out supplies as a QRE. Businesses who have claimed the RAC are also likely familiar with the Department of Revenue (DOR)'s always-popular RAC audit program.
All of this changes with the new program. To be eligible, a business must be primarily engaged not only in a targeted industry – advanced manufacturing, bioscience, insurance and finance, and technology and innovation – but also must fit into a specific sector:
- Second-generation food innovation
- Food ingredients and supplements
- Crop Production
- Hybrid Seed Technologies
- Diagnostic analytics and immunotherapies
- Chip technology and microelectronics
- Medical equipment and supplies
- Software and technology
- Aerospace
- Pharmaceuticals
- Consumer products
- Additional sectors specified by the Iowa Economic Development Authority (IEDA)
Businesses must first pre-apply with IEDA to determine whether it fits one of those sectors and is engaged in qualifying research. Approved businesses must reapply every 5 years. Eligible businesses must also apply to IEDA by January 31 annually and must hire a CPA to review its claimed expenses. The business may use its most recently filed and accepted federal tax return, meaning, for example, it does not need to have filed its 2026 return to claim the Iowa credit in 2026. However, the credit must be claimed in the tax year following the year in which the expenses were incurred.
IEDA has discretion to approve a credit of up to 3.5% of a business's QREs. The credit program is capped at $40 million – a significant decrease from what was claimed in FY 2024. This means the credit amounts will be distributed on a pro rata basis, so businesses applying for the credit each year will not know their credit amount until they receive their annual tax credit certificate from IEDA. Approved businesses will submit their tax credit certificate with their tax return to the DOR.
Like the RAC, the credit is refundable and can be carried forward but is not transferable. Businesses claiming the credit must file an annual report with IEDA to disclose the amount of R&D investment made, where the R&D occurred in Iowa, the number of jobs created, and the wages paid for those jobs, and where those employees reside.
Many questions remain unanswered as to how IEDA will approve applicants and allocate the $40 million. IEDA's rulemaking process to implement this new program will be fascinating to watch.
Business Incentives for Growth (BIG)
Another well-used tax incentive program, the High Quality Jobs Program (HQJP), is being replaced with the Business Incentives for Growth (BIG) Program. While SF 657 brings this program's name in line with last year's MEGA Program, BIG has the same key features as HQJP: an income tax credit based on investment, sales and use tax refunds, and local property tax exemptions.
Like the new R&D program, BIG is targeted at certain industries: advanced manufacturing, bioscience, insurance and finance, and technology and innovation. The program is capped at $50 million annually, down from a $68 million cap for HQJP. The business and IEDA may negotiate the terms of the incentive package. IEDA will consider a variety of factors during the negotiation: whether existing Iowa workers will be displaced by the project, whether the business has in-state competitors, and the potential to create jobs and increase the state's GDP. The total tax incentive awarded to each business is capped at 5% of the business's qualifying investment in the project (or 7.5% if the project is in a rural area), also down from a maximum of 10% under HQJP.
Similar to HQJP, BIG applicants must meet certain thresholds for job creation, job retention, and wages and benefits. IEDA maintains the right to recover incentives paid if a business fails to meet the terms to which it agreed. Approved businesses will receive a tax credit certificate from IEDA to be submitted with their tax return to the DOR once the project is placed in service. Businesses will still need to file paperwork with the DOR to obtain sales tax refunds.
New to the BIG program is the ability for IEDA to deny other tax incentives to BIG recipients. The overall BIG package does not include the Supplemental RAC or Third Party Developer credits that were available under HQJP. Local property tax exemptions may not exceed 10 years, down from 20 under HQJP. Interestingly, BIG provides IEDA new authority to provide financial assistance to BIG applicants in certain circumstances potentially including grants, loans, and royalties using other funds under IEDA's control.
Seed Investor Tax Credit
The new Seed Investor Tax Credit replaces the Angel Investor Tax Credit. Since 2015, the Angel Investor credit allowed investors to apply for a credit of 25% of their equity investment in a qualifying business or community-based seed capital fund, capped at $100,000 per investor and $500,000 of investments in a particular business. The credit was refundable for individuals and could be carried forward for 3 years. IEDA awarded the credits on a first-come, first-served basis and routinely hit the program cap of $2 million per year.
The new Seed Investor Tax Credit, together with the existing Innovation Fund Tax Credit, have a cap of $10 million per year. The Seed Investor credit maintains the $100,000 cap per investor and the $500,000 cap in investments to any given business. The business receiving the investment must be principally based in Iowa, less than 5 years old, in the same targeted industries as BIG and R&D, not worth more than $10 million, and have at least two investors and $500,000 in investments at the time it applies for the credit. The Seed Investor credit is capped at 20% of the investment if the business is in an urban area and 35% if the business is in a rural area.
Film Production Incentive Program
Iowa is reentering the realm of film production tax credits with a 2-year pilot program. The new program requires the film studio to be located in Iowa with all production and filming happening in Iowa. The studio must have been principally located in Iowa for 3 years before being eligible. The total film budget must exceed $1 million. Studios are eligible for rebates of up to 30% of qualifying expenditures, to be determined by IEDA by rule. The pilot program is capped annually at $4 million.
Endow Iowa
The Endow Iowa Tax Credit allows a taxpayers to apply to IEDA for a credit of 25% of a gift to a qualifying community foundation. Going forward, the credit's overall cap is lowered from $6 million to $3.5 million annually. Individual credit caps are also lowered from $100,000 to $50,000. Recipient foundations must also meet certain new criteria. It's worth noting that the initial version of what became SF 657 eliminated this credit entirely.
But Wait, There's More
Believe it or not, there's more in SF 657. The bill adjusts overall caps on certain IEDA-awarded incentives. It repeals the Employer Child Care and Assistive Device Tax Credits. It creates a Sustainable Aviation Fuel (SAF) Production Tax Credit, capped at $10 million in conjunction with the Chemical Production Tax Credit. It adjusts the sales tax refund payment schedule for MEGA recipients. It extends the E-15 Gasoline Promotion credit two years, through 2027. It allows IEDA to reduce or eliminate any tax incentive awarded to a business that experiences a closure or mass layoff.
Summary
Starting in 2026, Iowa's tax incentives to attract and retain businesses will be more focused on 4 targeted industries – advanced manufacturing, bioscience, insurance and finance, and technology and innovation. IEDA also has a lot more discretion to award credits, particularly when it comes to R&D. The shifting caps and new program criteria also illustrate a focus on new businesses bringing jobs and opportunities to the state. It will be interesting to see how businesses who have historically taken advantage of these incentives react to these changes.
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