Notable Alabama Tax Legislation for the 2023 Regular Session

SALT Alert: Alabama Edition

Client Alert

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The Alabama Legislature adjourned sine die on June 6 and concluded a productive session for tax and incentive bills. A few of the notable measures include the renewal of and enhancements to the Alabama Jobs Act and Growing Alabama Credit, creation of the Innovate Alabama Tax Credit program, increases in the credit cap under the Alabama Accountability Act, and increased transparency under the Jobs Act. 

In addition, a few notable bills that crossed the finish line during the last week of the session are summarized below:

  • H.B. 217 will exempt overtime wages from Alabama income tax;
  • S.B. 292 will establish a simplified procedure for contractors to purchase materials on behalf of statutorily tax-exempt owners; and
  • H.B. 253 improves and provides additional allocation for Alabama’s Historic Rehabilitation Tax Credit Program.

One Year Exclusion of Overtime from Gross Income:

Act 2023-421 (H.B. 217) excludes any amounts received by a full-time, hourly wage resident employee as compensation for work performed in excess of 40 hours in a week from Alabama gross income, effective (unless extended) for calendar year 2024. Alabama is the first state to adopt an overtime exemption; similar proposals were introduced this year in North Carolina and South Carolina. The House and Senate both concurred in the Governor’s executive amendment that removed a $25 million cap on this exemption, but instead effectively limited the exclusion to the 2024 tax year because the bill now sunsets for tax years that end prior to June 30, 2025. In order to quantify the fiscal impact of the overtime exclusion, the Act requires all employers to report the amount of overtime paid to employees and the total number of employees that received overtime for each calendar year. The first report for the 2023 tax year is due January 31, 2024, and subsequent annual reports will be due no later than the due date for the corresponding monthly or quarterly withholding tax return. 

Streamlined Sales Tax Exemption Certificate Procedures for Tax-Exempt Projects:

Act 2023-526 (S.B. 292) extends the sales/use exemption certificate procedures for contractors currently available only to certain government projects to any project on behalf of an entity with a statutory exemption from sales and use taxes. Effective for contracts entered into on or after January 1, 2024, the Act allows contractors and subcontractors with projects on behalf of statutorily tax-exempt entities to apply to the AL DOR for a project-specific exemption certificate. Once approved, the project-specific exemption certificate will allow the statutorily tax-exempt entity and its contractors to make qualifying project purchases without paying sales or use tax. Prior to the effective date of this Act, non-government entities that are exempt from sales and use taxes must appoint their contractor as “purchasing agent” in order to utilize their statutory exemption. 

Modifications to the Alabama Historic Rehabilitation Tax Credit:

Act 2023-527 (H.B. 253) includes several technical corrections to the Alabama Historic Rehabilitation Tax Credit, including allowing a taxpayer to claim the credit in the year in which the “reservation is allocated to the project,” in the event the project was waitlisted and already placed in service prior to receiving a reservation. This will help projects that are on the waiting list for several years (but are able to complete the rehabilitation) to claim the credit and receive the refund in the year the allocation is finally available. The initial version of this bill would have enhanced this popular incentive by increasing the annual cap of available credits from $20 million to $40 million, but unfortunately this was removed. Instead, the Act only provides an additional $5 million of credits “to reduce the backlog of qualified applications.” An additional limit to narrow the class of qualifying buildings was also added by the Act. For any applications filed after June 1, 2023, the minimum age of eligible buildings was increased from 60 to 75 years, which further decouples the Alabama program from its federal counterpart (the federal credit applies to any historic building that is 50 years or older).

Please save the dates for the following state and local tax conferences in Birmingham this fall:

  • September 14, 2023: Council on State Taxation – Southeast Regional State Tax Seminar
    Presenting an update on significant state tax issues for the Southeast: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, South Carolina and Tennessee. More information and a link to register can be found here.
  • November 15-17, 2023: Alabama Federal and State Tax Institute (AFSTI)
    As a result of the merger of the American Institute on Federal Taxation and Federal Tax Clinic, AFSTI will hold its inaugural three-day federal and state tax conference at Regions Field, featuring presentations on recent legislative, administrative and judicial developments in Alabama SALT, as well as national SALT developments. More information and a link to register can be found here.