Alabama Legislation Update
On Friday, February 12, Governor Kay Ivey signed three bills into law which include provisions that have a significant impact on businesses operating in Alabama, and also impact individual taxpayers in Alabama. A brief overview of the three bills is below. Please contact your BMSS professional if you have any questions regarding how these bills might affect you or your business.
House Bill 170 – A Trio of Acts
House Bill 170 includes three designated Acts pursuant to the language of the bill:
- Taxpayer Stimulus Freedom Act of 2021,
- The Alabama Business Tax Competitiveness Act, and
- Alabama Electing Pass-Through Entity Tax Act.
A brief summary of the highlights of each Act follows:
COVID-19 Related Provisions
The Taxpayer Stimulus Freedom Act of 2021 conforms Alabama to the CARES Act passed in March 2020, as well as the December relief law. Those measures were notable in clarifying that forgiven Paycheck Protection Program loans will not be treated as taxable income and loan recipients can deduct expenses paid with forgiven loans. This Alabama legislation generally makes the payments and benefits from the coronavirus relief measures exempt from state income taxes, and also allows the deduction of expenses paid with forgiven loan funds to same extent as under federal income tax laws. The Act excludes from Alabama income:
- Direct payments to individuals arising from the CARES Act of 2020, the Consolidated Appropriations Act (CAA) of 2021, or other similar COVID relief measures for individuals enacted by Congress for 2021. (Note that such amounts shall also be excluded in determining an individual taxpayer’s federal income tax deduction).
- Payments of principal or interest by an employer on an employee’s qualified education loan to the extent excludible from the employee’s gross income for federal income tax purposes.
- Amounts received from a Qualified Emergency Federal Aid Grant to the same extent as they are excluded for federal income tax purposes.
- Amounts received from the state’s Coronavirus Relief Fund.
- Any qualifying disaster relief payment received by an Alabama taxpayer that would be excluded from federal income taxation pursuant to Internal Revenue Code §139.
- Cancellation of indebtedness income from loans forgiven under the Paycheck Protection Program (PPP) and a wide variety of other SBA-backed loans or subsidies, while allowing expenses incurred by the borrower and funded by these loans to be deductible to the same extent as the expenses remain deductible for federal income tax purposes.
- SBA-subsidy payments for covered loans described in the CARES Act; Emergency EIDL Grants under the CARES Act or CAA; and grants to “shuttered venue operators” or as Targeted EIDL Advances under the CAA.
Business Tax Reform Provisions
The Alabama Business Tax Competitiveness Act makes several changes to the state’s business tax structure. Provisions in this Act:
- Convert Alabama’s apportionment formula to a single sales factor for most industries, compared with the previous double-weighted sales factor, effective retroactively from January 1, 2021.
- Repeal the “throwback rule,” which permitted Alabama to tax so-called “nowhere income” or income from a multistate business that is not taxed by another state.
- Conforms Alabama tax law to federal tax code Section 163(j), relating to business interest deductions, and allows members of a consolidated group to offset net business interest expense in one entity against net business income in another.
- Decouples Alabama tax law from the Section 951A global intangible low-taxed income, or GILTI, provisions of the 2017 tax law, which sought to discourage multinationals from shifting income from intangible assets such as patents and trademarks to low-tax countries.
Pass-Through Entity Workaround for SALT Cap
The Alabama Pass-Through Entity Tax Act allows pass-through entities, including partnerships and S corporations, to avoid the $10,000 SALT cap, enacted under the Tax Cuts and Jobs Act, through workaround structures allowed by the IRS last fall under its Notice 2020-75. For tax years beginning on or after January 1, 2021, any Alabama S corporation and any Subchapter K Entity (partnership), may elect to be taxed as an Electing Pass-Through Entity, upon the approval of owners holding greater than 50 percent of the voting control of the entity.
IRS Notice 2020-75 provided that state and local income taxes imposed on and paid by a partnership or S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment, and therefore, are not subject to the state and local tax deduction limitation for partners and shareholders who itemize deductions.
The Alabama Pass-Through Entity Tax Act specifically provides that Alabama tax paid by a pass-through entity under this election shall not be deducted in computing Alabama taxable income.
House Bill 192 – Incentives
House Bill 192 renews and expands three important economic development incentive programs used by the state to lure companies to Alabama:
- Credits available under the Alabama Jobs Act, which expired in 2020, would be extended to 2023, with the amount of credits increasing from $300 million to $325 million in 2021 and $350 million in 2022.
- Credits available under the Growing Alabama Act, which also expired in 2020, would be extended to 2023, with the amount of credits increasing from $10 million to $20 million annually.
- Credits available under the Alabama Port Credit program would be expanded to include more creditable opportunities for automotive companies.
Senate Bill 30 – Covid-19 Liability Protection
Governor Ivey also signed a separate bill (S.B. 30) that shields businesses, health care providers, churches and certain other entities from litigation that could hold them responsible for exposing employees and customers to COVID-19, to the extent such entities followed proper federal and state health measures.