Alabama: Comprehensive Tax Reform Legislation Enacted

Comprehensive tax legislation, House Bill 170, was signed into law by Governor Kay Ivey on February 12, 2021. The first part of the bill, entitled the “Alabama Taxpayer Stimulus Freedom Act of 2021” is intended to ensure that credits, advanced refund amounts, qualified disaster relief payments, subsidies, grants, and other amounts received as a result of federal COVID-19 relief bills will not be subject to Alabama individual and corporate income taxes and the Financial Institutions Excise Tax. This includes cancellation of indebtedness income associated with Paycheck Protection Program loans forgiven under section 1106 (i) of the CARES Act. Expenses paid with forgiven PPP loans will be deductible to the same extent the expenses are deductible in calculating federal income tax.

House Bill 170 also readopts the Multistate Tax Compact amended to provide for single-sales factor apportionment effective for tax years beginning on or after January 1, 2021. The throwback rule that applies to sales attributed to a state where a taxpayer is not taxable, and sales made to the U.S. Government that originate in Alabama, is also repealed beginning in 2021.

Importantly, House Bill 170 also addresses certain aspects of federal tax reform for corporate taxpayers. A new code section, Ala. Code § 40-18-35.2, excludes all amounts included in income under IRC section 951A. The amount subtracted is only to the extent such amount is not deductible in determining federal taxable income. An add back is required for all expenses deducted on the taxpayer's federal tax return for the taxable year that are attributable, directly or indirectly, to such subtracted amount. The IRC section 250 deduction applies only to the extent the same income was included in Alabama taxable income. Another new code section, Ala. Code § 40-18-35.3, allows a deduction for the amount of any contribution by Alabama or a political subdivision thereof that is included in the corporation’s federal taxable income under IRC section 118(b)(2).  The new exclusion for GILTI applies for tax years beginning after December 31, 2017 and the deduction for contributions to capital made by Alabama and its political subdivisions applies to contributions made on or after December 23, 2017. 

Effective for tax years beginning on or after January 1, 2021, new Ala. Code § 40-18-39.1 addresses various questions related to Alabama’s adoption of IRC section 163(j). Importantly, if a taxpayer or a taxpayer’s federal consolidated group does not have a federal IRC section 163(j) limitation reported on its return for the tax year, the taxpayer will not be subject to an Alabama 163(j) limitation. If the business interest expense deduction of the taxpayer or the taxpayer’s federal consolidated group is limited under IRC section 163(j), then the taxpayer shall compute the business expense deduction for Alabama purposes on a separate entity basis, or a consolidated group basis if the taxpayer is filing an Alabama consolidated return.  The gross receipts test under IRC section 163(j)(3) applies to each separate Alabama filer or the Alabama consolidated group (assuming an Alabama consolidated return is filed).  House Bill 170 also addresses the interaction between the IRC section 163(j) limitation and Alabama’s related party interest addback rules and provides that the 163(j) limitation applies before the application of the related party interest addback. For the purposes of the related party interest limitation, the Alabama 163(j) interest deduction limitation and any interest expense carryforwards will be allocated on a pro-rata basis to the interest income recipients.  In any year when a taxpayer deducts carried forward interest expense on its federal return that is also subject to Alabama’s related party interest addback provisions, the taxpayer will apply the add back to the amount of the interest expense carried forward in addition to the current year amounts.  A taxpayer with nonbusiness income and/or nonbusiness interest expense shall allocate nonbusiness interest expense to nonbusiness income and shall calculate a limit on the business interest expense deduction associated with nonbusiness income and nonbusiness interest expense on a pro rata basis. Nonbusiness interest expense shall be assigned to nonbusiness income and shall only be allowed to reduce nonbusiness income.  Finally, House Bill 170 adopts an elective pass-through entity tax regime effective for tax years beginning on or after January 1, 2021. The bill provides that “no refunds shall be granted or paid for tax years ending before January 1, 2020 related to the provisions of this act.” Please contact Irisa Wood at 404-222-3287 with questions.