Alabama Enacts Significant Tax Legislation

On Feb. 12, 2021, Alabama enacted legislation (Act 2021-1) which includes most notably the “Alabama Taxpayer Stimulus Freedom Act of 2021” and the “Alabama Business Tax Competitiveness Act” as well as numerous other provisions.[1] A summary of some of the more significant provisions of Act 2021-1 is noted below.

Conformity to Federal Provisions Related to COVID-19 Relief

Act 2021-1 addresses Alabama’s treatment of provisions of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) and related federal legislation from 2020 providing relief to taxpayers.

Specifically, the bill provides the following:

  • The state will follow the federal treatment of cancellation of indebtedness income from loans forgiven as part of the Paycheck Protection Program (PPP) and similar programs. The cancellation of indebtedness income will be excluded from Alabama taxable income and otherwise deductible expenses funded with PPP loans remain deductible for Alabama purposes. Both of these provisions conform to the federal income tax treatment. These provisions apply to both Alabama income tax and the financial institution excise tax.
  • The bill also provides the Alabama tax treatment of the following additional federal provisions:
    • Certain tax credits and advance refund amounts applicable to the 2021 tax year shall be excluded from Alabama individual income taxation.[2]
    • Principal or interest payments incurred by an employer on qualified education loans are excluded from the gross income of the employee to the extent excluded for federal purposes.[3]
    • Amounts received from certain qualified Federal Aid Grants are excluded from gross income of the recipient to the extent excluded for Federal purposes.[4]
    • Qualifying disaster relief payments are excluded from gross income to the extent they are excluded for Federal purposes.[5]
    • Subsidy payments for covered loans are exempt from Alabama income tax and financial institution excise tax; related expenses remain deductible.[6]
    • Emergency EIDL grants are exempt from Alabama income tax and financial institution excise tax; related expenses remain deductible.[7]
    • Amounts received as grants to shuddered venues or as targeted EIDL advances are exempt from Alabama income tax and financial institution excise tax; related expenses remain deductible.[8]
State Income Tax Provisions

Act 2021-1 made some significant changes to some of the state’s long-standing approaches to the determination of Alabama taxable income.

Specifically, the bill provides the following.

  • Effective for tax years beginning on or after Jan. 1, 2021 utilization of single sales factor apportionment rather than a 3-factor apportionment formula of property, payroll, and double weighted sales.
  • Effective for tax years beginning on or after Jan. 1, 2021 repeal of the throwback provision in the calculation of the sales factor.
Tax Cuts and Jobs Act (TCJA) Conformity Changes
  • Global Intangible Low-Taxed Income (GILTI) (IRC 951A) subject to tax at the federal level shall be deducted from federal taxable income in calculating Alabama taxable income. The deduction should be net of any expenses incurred which are attributable to GILTI. This change is retroactive to tax years beginning after Dec. 31, 2017.
  • With regards to the interest expense limitation imposed by IRC 163(j), Alabama now provides that for purposes of calculating the limitation on a separate entity basis, or Alabama consolidated basis, taxpayers should first look to whether a limitation is imposed at the federal consolidated level. If there is no limitation at the federal consolidated level, there is no requirement to calculate a limitation at the separate company level or Alabama consolidated level. This change is effective for tax years beginning on or after Jan. 1, 2021.
Pass-Through Entity Election
  • For tax years beginning on or after Jan. 1, 2021, pass through entities can elect to be taxed in Alabama at the entity level rather than flowing the income out to partners, member, or shareholders. This is consistent with the trend seen in numerous states which is in response to the $10,000 SALT limitation on itemized deductions imposed by the TCJA.
Commentary

The state tax impact / treatment of many of the federal provisions enacted in 2020 is critical to many taxpayers. The fact that these are addressed early in the 2020 tax filing season allows taxpayers to move forward with tax calculations, returns, etc.

Further, the apportionment changes as well as some of the changes related to the TCJA create both a greater incentive for many taxpayers to situate in Alabama and a potentially significant change to many taxpayer’s Alabama tax liability. Taxpayers may also want to consider the impact of the retroactive changes related to GILTI/FDII and the potential for amending Alabama returns.

There are numerous issues for a taxpayer to consider prior to making any sort of pass-through entity election in the states that offer such an election. Careful consideration should be given to the impact prior to making this election.

Prior to making any tax decisions based on the information provided in this alert we recommend consulting your DHG Tax Advisor or performing a detailed review of the bill. As this alert provides a summary of the enacted legislation, it does not cover every detail or nuance.

 

References:

[1] Full copy of the bill can be found at https://legiscan.com/AL/text/HB170/2021 (HB 170)

[2] Includes amounts provided under IRC §6428, IRC §6428A, Section 272 of the COVID-related Tax Relief Act of 2020, or Pub. L. 116-260

[3] Includes amounts under IRC §127(c)(1)(B), CARES Section 2206(a) amended by Section 120 of the Taxpayer Certainty and Disaster Relief Tax Act of 2020 (Pub. L. 116-260)

[4] Includes amounts from Section 272 of the COVID-related Tax Relief Act of 2020

[5] Must be qualifying IRC §139 payments excluded as a result of the Presidential Proclamation on Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak.

[6] Includes payments from CARES Act Section 1112(c)

[7] Includes amounts from CARES Act Section 1110 amended by Section 332 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act

[8] Includes amounts from Sections 324 or 331 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act

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Matt Gentile
Director, Tax

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