TCJA Reform/CARES Act Bill Introduced in both House and Senate
SALT Alert: Alabama Edition
On January 28, HB 170 and its Senate counterpart, SB 98, were prefiled with the Alabama Legislature and designated as three separate acts: (i) The Alabama Taxpayer Stimulus Freedom Act of 2021, (ii) The Alabama Business Tax Competitiveness Act, and (iii) The Alabama Electing Pass-Through Entity Tax Act.
The landmark legislation would exempt from Alabama income tax a variety of federal CARES Act/Consolidated Appropriations Act 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.” Here is a summary of each part of the proposed legislation:
The Alabama Stimulus Freedom Act of 2021 exempts or excludes:
- 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...”
- 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.
- Amounts received from a Qualified Emergency Federal Aid Grant to the same extent as they are excluded for FIT purposes.
- 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.
- 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 ADOR (vs. PPP loans).
- Qualifying disaster relief payments under IRC Section 139 to the extent they would be excluded for FIT 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. 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:
- For most industries, converts our apportionment formula to a single sales factor from the current double-weighted sales factor, effective January 1, 2021.
- Repeals the so-called throwback rule not only for sales from in-state facilities to private sector customers in other states, but also sales to the U.S. government.
- De-couples (retroactively) from the TCJA’s Section 118 amendment that would purportedly tax some tax and non-tax incentives provided to new or expanding industry.
- De-couples (retroactively) from the TCJA’s Section 951A “GILTI” rules with respect to income from non-U.S. intangibles such as royalties.
- Implements 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 the Section 163(j) limitation on a stand-alone basis or, if applicable, on the basis of the elective Alabama combined group. The bill does not de-couple in full from Section 163(j) as some other states have done, since Alabama conforms with [and the bill does not de-couple from] the Section 168(k) federal bonus depreciation provisions.
The Alabama Electing Pass-Through Entity 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 MTC 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.
Given the number of co-sponsors of the bill, we understand that both House and Senate leadership support it. The regular session begins Tuesday, February 2.