Alabama Enacts Landmark TCJA Reform/CARES Act Exemptions and Business Tax Reform Legislation

In this installment of the Bradley SALT Corner, we focus on Alabama Act 2021-1 (the “Act”) – a landmark piece of tax legislation that Governor Kay Ivey signed into law on February 12. The Act received unanimous votes in both chambers (94-0 in the House; 27-0 in the Senate), and was quickly signed into law only slightly more than two weeks after being introduced.

The Act makes sweeping changes to Alabama’s income tax laws and is designated as 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. This critical legislation exempts from Alabama income tax a variety of federal CARES Act/Consolidated Appropriations Act of 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,for Alabama income tax purposes, 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 from Alabama income tax:

1. Tax stimulus or advance refund payments received as a result of The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) and Consolidated Appropriations Act of 2021 (“CAA”) “and other similar COVID-related relief measures for individuals enacted by the U.S. Congress “as applicable to the 2021 tax year.”

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 State Finance Department, although expenses paid with grant funds will not be deductible per the Alabama Department of Revenue (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 income tax reform:

1. For most industries, converts the multistate apportionment formula from the current double-weighted sales factor to a single sales factor, effective January 1, 2021. Financial institutions are not affected.

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(b) amendment that would have purportedly taxed certain tax and non-tax incentives/ site grants 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 (even those 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 consolidated 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 establishes a new alternate tax regime applicable to electing partnerships/LLCs treated as pass-through entities and to S corp’s.

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 (i.e., 5% today) calculated in accordance with the Subchapter K or Subchapter S rules, as appropriate, and apportioned in accordance with the state’s multistate business apportionment rules. The PTE owners do not receive a credit for the state income tax paid on their behalf by the electing entity, but their distributive share of the entity’s income is excluded from their taxable income. Alabama joins 8-9 other states with these so-called “SALT cap workarounds” of various stripes.

In addition to the Act, the Legislature and the Governor also fast-tracked Act 2021-2 (House Bill 192), which retroactively extends the Alabama Jobs Act and reinstates the Growing Alabama tax credits, and includes additional enhancements to both programs. It was also passed quickly by both houses and signed into law by Governor Ivey on February 12. We will devote a separate column to that act and several other tax incentives bills once the dust settles. If you have any questions about Alabama Acts 2021-1 or 2021-2, please feel free to contact the authors at bely@bradley.com or wthistle@bradley.com.