Based on legislation passed in the spring 2012 legislative session, retroactively effective to January 1, 2012, Alabama residents who are owners of pass-through entities doing business in two or more states may claim an Alabama income tax credit for certain taxes paid by their company to other states on behalf of the individual owners when the other state imposes an income tax withholding obligation or an entity-level tax on the company. This statutory change did not, however, address how the tax credit should be calculated.
Nevertheless, prior to the passage of H.B. 286/Act 2012-427, amending Alabama Code § 40-18-21, the Alabama Department of Revenue (ADOR) revised its 2011 Schedule CR to change the credit calculation. The change resulted in a substantial new limitation on the amount of credit available for taxes paid to other states. Because the tax credit had been calculated in the same manner since World War II, and because there was no statutory or regulatory change that provided for the form change, this revision to Schedule CR created concern among Alabama taxpayers and their advisers. Many tax practitioners considered the low-key form change to constitute an unauthorized rule change, in violation of the Alabama Administrative Procedure Act (AAPA).
On September 4—after months of discussions between tax practitioners, the ADOR, legislative leadership, the Business Council of Alabama, and the Governor’s Office—the ADOR announced that it would withdraw the change to its 2011 Schedule CR. In addition, the department stated that it would address procedures for calculating the credit for taxes paid to other states through the AAPA rule-making process. Accordingly, for the 2011 and 2012 tax years, taxpayers may calculate the flow-through credit using the pre-2011 methodology. The revised form is available on its website, at http://revenue.alabama.gov. The ADOR just issued a second announcement, clarifying its position on the Schedule CR and taxpayers’ filing options, in a very helpful September 12 Information Release.
Several members of our firm were involved in drafting the legislation expanding the credit for taxes paid to other states as well as in the negotiations regarding the credit calculation. If you have any questions regarding any of these matters, feel free to contact Chris Grissom, Will Thistle, or Bruce Ely in our SALT Practice Group or Dave Stewart in our Governmental Affairs Practice Group.