Alabama Legislature Wraps Up Productive Session on Business Tax Bills

The Alabama Legislature adjourned sine die near midnight on May 14, 2025, with the final legislative meeting day bogged down with filibusters by certain senators. Fortunately, a spate of tax bills had already passed both the House and Senate during the three or four meeting days preceding the last day, and all the bills have now been signed into law by Gov. Kay Ivey. We have summarized below what we consider the “top 10” tax bills that likely will impact the Alabama business community the most.

1. Mobile Workforce Protections

Act 2025-334 is patterned after a uniform law issued by the Council On State Taxation (COST), the AICPA, and the American Payroll Association dealing with nonresident employees performing services for their out-of-state employer in Alabama. Since nearly half the states (including Alabama until January 1, 2026) require a nonresident employer to withhold Alabama income tax from the wages of an employee who is performing services in the state, if they are in the state for more than one day a calendar year, a 30-day safe harbor is one that all the states should adopt. There is pending in Congress legislation [S. 1443] that would adopt such a uniform safe harbor. At the request of the Alabama Society of CPAs, the legislation also allows nonresident employees who enter the state to perform disaster relief or emergency work (think Hurricane Helene) to be exempt from the 30-day limit if needed. On the other hand, professional athletes, entertainers and “public figures” are liable for Alabama income tax on their Alabama-source earnings regardless of the number of days spent in-state.

2. Research and Development Expenses Deductible (Again)

Act 2025-400 “de-couples” from current federal tax law and allows qualified “research and experimentation expenditures” under IRC Section 174 to be deducted in the year incurred rather than amortized over [generally] five years. We believe this will spur increased R&D activities across the state, but especially in the Birmingham and Huntsville areas.

3. Right to Appeal City and County Business License Tax Assessments

Act 2025-408 gives businesses the option to appeal an assessment of either city or county business privilege license taxes (or a denied refund claim) to the independent Alabama Tax Tribunal (ATT), rather than to a local circuit court, without first having to pay the assessment or file an expensive appeal bond. And unlike local sales and use tax assessments, no city or county can opt out of ATT jurisdiction. The act also requires private auditing firms to provide proof of their authority to audit a business on behalf of specified cities and counties and permits a “private right of action” against the auditing firm for non-compliance, including taking an unreasonable position on an audit.

4. Appeal Period Extended for Tax Tribunal

Act 2025-343 lengthens the deadline for appealing a final tax assessment to the ATT from 30 days to 60 days after mailing or personal delivery, as advocated by COST and the AICPA. The time period required to appeal a preliminary assessment remains at 30 days. We are optimistic that this act and the preceding act will improve Alabama’s “C-” grade on the annual “COST Scorecard: The Best and Worst of State Tax Administration.”

5. “Portable Benefit Accounts” Allowed for Independent Contractors

Act 2025-119, another bipartisan bill, allows independent contractors such as gig workers, landscapers, building contractors, etc. to establish their own retirement and health insurance plan by establishing a “portable benefit account.” Congress is considering something similar. Instead of paying the contractor the full contract price, the contractor could direct the hiring party to contribute (and deduct) a portion of their compensation to a private PBA, which could fund health and/or life insurance premiums, retirement benefits, etc. for the contractor. The Legislature wisely added a caveat that prevents a state agency such as the Alabama Department of Workforce or the Alabama Department of Revenue or a state court from reclassifying the contractor as an employee of the hiring party based in part on the fact that a PBA resembles an employer-funded retirement or health insurance plan. What the act cannot do, however, is tie the hands of a federal court or agency such as the IRS or U.S. Department of Labor from doing so. That could be problematic.

6. Tax Credits for Donations to Rural Hospitals

Act 2025-404 allows a dollar-for-dollar tax credit for donations to eligible rural hospitals (many of which are at risk of closing these days). The aggregate amount of tax credits under this program is capped at $20 million in 2026, $25 million in 2027, and $30 million in 2028. On the donor side, the credit is limited to $30,000 for joint filers, $450,000 for electing pass-through entities, and $500,000 for corporate, bank and insurance company donors. There are also per hospital caps, and a qualifying rural hospital must also receive at least a 10% “match” from local governing bodies.

7. Business Personal Property Tax Threshold Increased

Act 2025-344 increases the exemption and filing threshold for the state business personal property tax from $40,000 to $100,000, effective October 1, 2025. Some legislators preferred to get rid of the BPP Tax entirely.

8. Economic Development Fund Created

Act 2025-84 requires a small portion of sales/use and property tax abatements granted to new or expanding industries after June 1, 2026, to instead be deposited in the state’s new Alabama Development Fund to further economic development/business recruiting efforts. Cash is always the best economic incentive.

9. Cities/Counties Can Now “Decouple” from State Sales/Use Tax Exemptions

In a marked departure from the landmark Local Tax Procedures Act and Local Tax Simplification Act of 1998, Act 2025-280 allows any city or county to refuse to honor a new sales or use tax exemption enacted by the Legislature unless the enabling legislation expressly gives them the right to opt in to the exemption by ordinance or resolution – but their inaction will be deemed to be an opt out. The Alabama DOR is required to maintain a list of the opt ins and opt outs and post that on its website.

10. Sales Tax on Food Reduced Again

Act 2025-305 reduces the state sales tax on “food” (a defined term) from 3% to 2% effective September 1, 2025, but deletes a trigger mechanism that would have allowed the rate to drop another percentage point if revenue growth in the Education Trust Fund exceeded a certain percentage. Similarly, cities and counties are given more flexibility in reducing their own sales tax on food and are no longer tied to a minimum local revenue growth or some sort of parallel to the state sales tax rate.

**The above discussion is only our summary of each act and is by no means comprehensive. If readers have a question about a particular act, they or their tax advisers should print off a copy from the Alabama Legislature’s official website, ALISON, or from the Alabama Secretary of State’s website. All opinions expressed in this column reflect only the authors’ personal views. This article is based of an article originally published by the Birmingham Business Journal on May 23, 2025.