Spanish island business located in Iowa (5)
I believe the answer is:
ibiza
'spanish island' is the definition.
(Ibiza is a Spanish island)
'business located in iowa' is the wordplay.
'business' becomes 'biz' (informal term for business).
'located in' means one lot of letters goes inside another.
'iowa' becomes 'IA' (standard US state two-letter abbreviation).
'biz' inserted into 'ia' is 'IBIZA'.
(Other definitions for ibiza that I've seen before include "Island in the Balearics" , "part of the Balearics" , "Clubbers' island" , "Westernmost of Balearic islands, and its capital" , "holiday destination" .)