2021 Alabama Tax Reform Summary

Alabama’s tax environment is known to favor simplicity and taxpayer-friendly policies. Despite this positive reputation, conflicts between state and federal taxation can leave taxpayers hanging in the balance. Recent tax reform, which passed both chambers of the legislature unanimously, provides a solution for some of the uncertainty caused by the Tax Cuts and Jobs Act and COVID-19.

The Alabama Stimulus Freedom Act of 2021 (HB170), is one of three priority bills that were recently passed to address concerns related to the pandemic. Particularly, HB170 mandates that any COVID-19 funding – including economic stimulus payments, federal tax credits, Economic Injury Disaster Loan (EIDL) grants or advance refunds, loan forgiveness, or other qualified disaster relief payments, subsidies, or grants – is excluded from state income tax. The bill also created a workaround for the $10,000 state and local tax (SALT) cap enacted through the Tax Cuts and Jobs Act (TJCA) and changed the business interest expense limitation. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Alabama Taxpayer Stimulus Freedom Act of 2021

The portion of HB170 that addresses state income tax exclusions makes official previous promises that funding and loan forgiveness related to COVID-19 is exempt from state income tax.  This means Forgiven Paycheck Protection Program (PPP) and student loans are not taxable. In addition, the law also exempts from state income tax employer-paid principal or interest on an employee’s qualified education loan (to the extent deductible under federal law). Finally, those that received grants from the state’s Coronavirus Relief Fund cannot deduct expenses paid for with grant funds; however, qualified business expenses paid for with forgiven PPP funds are deductible, in line with federal tax. This is effective beginning after March 27, 2020 – or the date that the CARES Act was signed into law.

Alabama Business Competitiveness Act

To make Alabama’s corporate tax code more uniform with other states in the Multistate Tax Commission, the Alabama state tax code has been amended to reflect:

• A new single-sales factor apportionment formula (as opposed to the previous formula involving property, payroll, and sales) and
• Eliminating Alabama’s sales factor throwback rule for sales from in-state businesses to out-of-state customers, including the U.S. government.

Analysis

The switch to a single-sales factor apportionment will be beneficial for many in-state businesses that sell to out-of-state customers, but out-of-state businesses with in-state customers could be adversely affected. Those taxpayers will likely see an increase in state-owned income tax.

Both amendments are retroactive to January 1, 2021.

Additionally, the Alabama Business Competitiveness Act retroactively de-couples state tax law from certain TCJA amendments and rules. The change provides a state-level deduction of global intangible low-taxed income (GILTI) as well as the ability to deduct certain government-provided grants and location incentives as non-shareholder capital contributions. These amendments refer to Section 951A “GILTI” and Section 118 of TCJA, respectively.

Analysis

Excluding GILTI should help to encourage multinational business within Alabama, and clarification of Section 118 of TCJA, will likely help spur industry expansion for projects seeking incentives from local governments since those incentives will not be treated as taxable income.

Alabama Pass-Through Entity Tax Act

With the passage of the pass-through entity workaround, Alabama joins several other states that have enacted laws permitting certain business groups to subvert the $10,000 SALT cap. Under the new law, partnerships, LLCs, and S-corporations may elect to be taxed at the entity level versus each individual owner or shareholder reporting separately.  

If elected, the entity will be taxed at the highest marginal individual income tax rate; in Alabama, this is five percent. Additionally, individual owners or shareholders would not receive credit for entity-paid tax. On the flip side, they would also not be held liable for income tax that would have otherwise flowed through on their personal returns.

This is an annual election that must be made every year, on or before the 15^th day of the third month after the entity’s year-end. For calendar year entities, this would be March 15. More than 50 percent of a pass-through entity’s owners must approve of the annual election.

Contact Us

The changes outlined above provide taxpayers with important guidance on how COVID-19 relief measures and other changes will be taxed on the state level. Given the depth of the changes, it is important to consult with a qualified tax advisor to determine the impact on your business. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.