Alabama Enacts Landmark TCJA Reform/CARES Act Exemptions

SALT Alert: Alabama Edition

Firm Alert

Author(s) ,

On February 12, Gov. Kay Ivey signed into law Act 2021-1, introduced only two weeks before as House Bill 170 (and its counterpart SB 98), and designated three separate acts: (1) the Alabama Taxpayer Stimulus Freedom Act of 2021, (2) the Alabama Business Tax Competitiveness Act, and (3) the Alabama Electing Pass-Through Entity Tax Act. Act 2021-1 received unanimous votes in both chambers (94-0 in the House; 27-0 in the Senate).

This critical legislation exempts from Alabama income tax a variety of federal CARES Act/Consolidated Appropriations Act, 2021 tax benefits, grants, loans and subsidies, while implementing other business tax reform measures, and allowing certain pass-through entities to elect to be taxed at the entity level as a means to address the federal $10,000 annual “SALT Cap.” The latter two components were considered briefly by the Legislature during the Spring 2020 regular session, and stem from proposals vetted by the Legislature’s bipartisan Tax Cuts and Jobs Act (TCJA) Task Force. A summary of each part of the final legislation follows, although we commend the act to your careful reading:

The Alabama Stimulus Freedom Act of 2021 exempts or excludes:

  1. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) and Consolidated Appropriations Act, 2021 (CAA) tax stimulus or advance refund payments “and other similar COVID-related relief measures for individuals enacted by the U.S. Congress...” during tax year 2021.
  2. What would otherwise be 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 (retroactively in some cases) to the same extent as for federal income tax (FIT) purposes.
  3. Amounts received from a Qualified Emergency Federal Aid Grant to the same extent as they are excluded for FIT purposes.
  4. 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 FIT purposes.
  5. Amounts received as grants from the state’s Coronavirus Relief Fund administered by the Finance Department, although expenses paid with grant funds will not be deductible per the Alabama DOR (vs. PPP loans).
  6. Qualifying disaster relief payments under IRC Section 139 to the extent they would be excluded for FIT purposes.
  7. 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. Like PPP loans, expenses funded by these grants or subsidies remain deductible for Alabama income tax purposes.

The Alabama Business Competitiveness Act deals with corporate tax reform:

  1. For most industries, converts the multistate apportionment formula to a single sales factor, from the current double-weighted sales factor, effective January 1, 2021.
  2. Repeals the so-called throwback rule (same effective date) not only for sales from in-state facilities to private sector customers located outside of Alabama, but also all sales to the U.S. government.
  3. De-couples (retroactively) from the TCJA’s Section 118 amendment that would have purportedly taxed certain tax and non-tax incentives provided to new or expanding industry.
  4. De-couples (retroactively) from the TCJA’s Section 951A “GILTI” rules with respect to income from non-U.S. intangibles such as royalties.
  5. Implements a modified approach with respect to the IRC Section 163(j) interest expense limitation for members of a federal consolidated group by allowing consolidated group members filing separate Alabama returns to avoid a state-level limitation if the federal consolidated group is not limited under IRC Section 163(j). If the group is limited at the federal level, the separate members are required to compute their 163(j) limitation on a stand-alone basis or, if applicable, on the basis of the elective Alabama combined group. The act does not de-couple from Section 163(j) as some other states have done, since the TCJA Task Force pointed out that Alabama conforms with (and the act did not de-couple from) the IRC Section 168(k) bonus depreciation provisions.

The Alabama Electing Pass-Through Entity Tax Act [Section 10] establishes a new alternate tax applicable only to electing partnerships/LLCs treated as pass-through entities and to S corporations. For tax years beginning on or after January 1, 2021, a PTE can elect annually to be taxed at the entity level at the highest marginal individual income tax rate calculated in accordance with the Subchapter K or Subchapter S rules, as appropriate, and apportioned in accordance with the state’s multistate apportionment rules. The PTE owners do not receive a credit for the income tax paid by their entity, nor are they liable for the income tax that would otherwise be imposed on them as PTE owners.

Status of Other Notable Tax Bills

  • House Bill 192 extends the Alabama Jobs Act, reinstates the Growing Alabama tax credits and includes additional enhancements to these programs. It was also passed quickly by both houses and signed into law by Gov. Ivey last Friday as well. Our Economic Development Practice Group plans to issue a separate client newsletter on HB 192.
  • House Bill 244, which would establish the Alabama Research and Development Act of 2021 and an annual income tax and FIET credit of up to $25 million in the aggregate for qualified research expenses, subject to a 20% limit per qualifying taxpayer, is pending before the House Ways and Means Education Committee.
  • House Bill 281, which would authorize $20 million of Alabama Historic Tax Credits annually for an additional seven years through 2029, is likewise pending before the House Ways and Means Education Committee.
  • House Bill 408 would amend both statute and administrative policies to require both the Alabama Departments of Revenue and Labor to conform with the IRS’ longstanding criteria for classifying workers as independent contractors or employees, with the exception of state workers’ compensation determinations.

For more information, please contact either author of this Alert [bely@bradley.com or jelong@bradley.com] or any other member of Bradley’s SALT Practice Team.