Alabama Department of Revenue Issues Helpful Analysis of Impact of OBBBA on Alabama Income Tax Code

As readers may recall, on July 4, 2025, President Trump signed into law the massive One Big Beautiful Bill Act (OBBBA) as Public Law 119-21, which made permanent many provisions of the Tax Cuts and Jobs Act of 2017. OBBBA also added several new provisions, such as deductions for qualified tip income, qualifying overtime pay, and personal interest on a loan used to purchase a new domestically assembled automotive vehicle, all with limits, of course. Every state that levies an income tax has been studying the impact of OBBBA on their respective income tax codes for months now. Several have already issued reports on that impact and several state legislatures — especially those with income tax codes that automatically incorporated many, if not most, OBBBA tax changes — have convened special sessions to determine how to respond.

Alabama’s income tax code is a hybrid with respect to federal conformity. It automatically incorporates changes to the Internal Revenue Code (IRC) for corporate income tax (CIT) and financial institution excise tax (FIET) purposes, and devolves to the Legislature to de-couple from specific IRC sections if it so chooses. However, for individual income tax (IIT) purposes, Alabama has so-called “piecemeal conformity,” meaning that unless a particular IRC section is specifically listed in our statutes, either by reference to a section number or more generally, our IIT base does not automatically conform with IRC changes. An example is the new deduction for tip income. Because that is embodied in a new IRC section, and our individual income tax code does not reference that section or tip income generally, there is no counterpart deduction for Alabama IIT purposes.

On November 4, 2025, the Alabama Department of Revenue (AL DOR) issued a very helpful 60-page report titled “The One, Big, Beautiful Bill Act-Analysis and Tax Provisions- Executive Summary.” It can be accessed here. It is evident that members of the AL DOR team spent literally hundreds of hours in developing this analysis, and they are to be commended for their efforts to provide guidance to Alabama taxpayers, especially Director of Tax Policy & Governmental Affairs, Cameran Clark.

Some of the key points of the Executive Summary include:

• Both C corporations and pass-through entities should breathe a sigh of relief. The so-called “Big 3” pro-business changes — to “bonus” depreciation, additional first year depreciation, and interest deduction caps — were brought into Alabama income tax law either because of automatic conformity in the CIT code or specific references to the underlying IRC sections in the IIT code. That includes their retroactive effective dates. The Executive Summary confirms that the 2021 amendment to the Alabama version of IRC Section 163(j) continues in force, so that if the taxpayer’s consolidated group does not have a 163(j) interest limitation for federal income tax purposes, then the taxpayer likewise does not have a separate company limitation for Alabama income tax purposes.
• The same holds true with the pro-taxpayer changes in the deduction of "domestic" research and experimentation expenditures, including the retroactive The AL DOR has already issued one notice on the interaction between federal and Alabama law and published revised guidance as an appendix to the Executive Summary.
• A more controversial provision in OBBBA imposes a new 1%-of-taxable-income floor or threshold for corporate charitable contribution deductions, which will likely have an adverse effect on their charitable giving. Thankfully that change does not take effect until 2026 so there is some year-end federal and state tax planning available for corporations.
• Because of de-coupling legislation enacted in 2021 as part of the Legislature’s joint TCJA Task Force recommendations, OBBBA’s complicated changes in international taxation and the taxation of foreign source income were not incorporated into Alabama income tax
• In the pass-through entity space, there is a kind of rough justice. Neither the IRC Section 199A deduction for qualified business income nor the IRC Section 461(1) limits on excess business losses for non­corporate taxpayers were adopted because, again, our IIT code does not contain those IRC section references or a more generic reference. On the other hand, because our IIT code adopts Subchapter K as a whole, the changes to IRC Section 707(a)(2), providing anti-abuse rules on the performance of services or transfers of property by a partner to the partnership, were automatically incorporated for Alabama income tax purposes.
• Increases to the so-called SALT cap, together with income limitations and phase-outs, were also automatically adopted.
• As mentioned above, the new deduction for up to $25,0000 of qualified tip income for MFJ filers was not incorporated into the Alabama IIT code, nor was the new deduction for qualified overtime pay.
• On the other hand, because the new deduction for interest on loans to purchase qualified domestic vehicles (for personal use) was added to an existing IRC section, cross-referenced in our IIT Alabama taxpayers can likewise claim that deduction, within limits.

We must caution that the above list is fluid. The Alabama Legislature, as is true with many other state legislatures, will soon convene to examine the short- and long-term fiscal impact of OBBBA on Alabama’s income tax revenues — and by our count, every state that has published a study so far predicts a substantial net negative revenue impact. Recall that state income tax revenues are earmarked by the Alabama Constitution for the Education Trust Fund, which funds both K-12 schools and many of our universities and colleges. Revenue estimates for Alabama haven’t been published yet.

We commend the Executive Summary to your reading, as well as the AL DOR’s new landing page on its website containing several helpful FAQs, and we expect several more to come. If you have any questions regarding the impact of OBBBA (or corresponding Alabama tax changes) on your company or client, don't hesitate to contact one of the Alabama-based members of our SALT Practice Team at the email address listed below.

Upcoming Seminars/Webinars

Jimmy Long, Bruce Ely and Will Thistle will be speaking on “Recent Developments in Alabama Taxes — Legislative, Judicial and Administrative — and Unofficial Predictions for the Upcoming Legislative Session” via webinar on behalf of the Alabama Society of CPAs on Wednesday, November 5 from 10-11:40 a.m. They will focus on the AL DOR’s Executive Summary and what we may expect to see in terms of de-coupling or revenue offset legislation when the Regular Session convenes January 13, 2026. Please contact Sarah Lowery for more information. Non-members are also welcome to attend.

Cameran Clark and Mary Martin Mitchell of the AL DOR and Bruce Ely will be speaking on a similar topic, with Cameran and Mary Martin providing the department’s perspective on the issues, at the annual Alabama Federal and State Tax Institute to be held at the Marriott Grandview Hotel in Birmingham on Thursday, November 13. Please contact Sarah Lowery for more information. You may attend in person or virtually.