Bradley attorney Bruce Ely was quoted in the Birmingham Business Journal on how the Tax Cuts and Jobs Act, which created a massive overhaul of the nation’s tax rules, is impacting Birmingham’s business world. The new tax law is forcing many businesses to reconsider their tax structures.
That’s because of the dramatic reduction in the corporate tax rate, Ely explained. Ely said the 20% pass-through deduction was Congress’ attempt to level the playing field for pass-through entities, which encompasses the majority of businesses in Alabama. But he said it didn’t achieve parity, and the deduction is too complicated for many to understand.
“So far, most of our clients and other Birmingham-area companies who are active members of our Tax Leadership Roundtable have decided to retain their current tax status and not convert to the other,” Ely said. “At a panel discussion on those issues a few weeks ago, we discussed the pros and cons, and only a couple of members indicated that they’d switched. Most companies are still taking a wait-and-see approach.”
Another challenge for businesses is a capped interest deduction, which can have a negative economic impact because a business would have less of a deduction and so would have to pay more income tax.
Ely said this is a big revenue raiser on the federal side, and he thinks it will be a big revenue raiser for Alabama as well. But it isn’t great for companies that are highly leveraged and have borrowed a lot of money.
Several years ago, Ely co-authored a bill that links the Alabama tax code to the federal tax code on the corporate side, so whenever there’s a change at the federal level on corporations’ taxes, the Alabama tax code automatically adopts that rule at the state level. But Alabama Legislation can choose to pass a bill to opt out or decouple from a rule.
And that’s what the Alabama Legislature is trying to do with code 163(j), which limits interest expense deductions. He said there is also some effort to decouple from some of the new tax code’s international changes because a lot of companies in Alabama have international parent companies or foreign affiliates, like Mercedes-Benz or Toyota-Mazda, and some of those changes shouldn’t impact those doing business here.
But Ely said he’s concerned there won’t be a lot of legislative activity to resolve some of the other ambiguities of the new tax law, which could come back to haunt Alabama businesses in the near future.
“These little gotchas in the Tax Cuts and Jobs Act are out there. A lot of folks are simply not focusing on them now because the rising tide lifts all boats. Everybody’s doing well. Profits are up, and unemployment is down,” Ely said. “Wait for the downturn for these folks to realize that some of these things are going to hurt financially at a time when profits are down a bit. I think probably, next year, you’ll see a lot of angst if we hit a downturn. A lot of angst where people are going, ‘well, geez, why didn’t we decouple from these provisions last year?’ Well, because times were good.”
The complete article, “How the landmark tax law is impacting Alabama during 2019 tax season,” first appeared in the BBJ on April 11, 2019. (login required)