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Alabama Makes Significant Changes to Income Tax Structure

AAFCPAs would like to make clients doing business in Alabama aware of significant changes to the state’s income tax structure.  On February 12th, Alabama enacted H.B. 170 which may affect 2020 tax returns as well as 2021 tax liability.

AAFCPAs Highlights Alabama’s Tax Law Changes Below:

Effective for Tax Years Beginning On or After January 1, 2021:

  • Single-sales factor apportionment
  • Repeal of the rule regarding “throwback” of sales
  • A taxpayer would not be subject to a Section 163(j) interest limitation for Alabama income tax purposes when the taxpayer or any federal consolidated return group of which the taxpayer is a member does not have a limitation for federal purposes
  • State and Local Tax (SALT) deduction limitation “workaround”
    • An electing pass-through entity (i.e. S corporation or partnership), may elect to pay tax on its income at the highest marginal individual income tax rate (currently 5%).
    • Owners of a pass-through entity that make this election are not liable for tax on their distributive shares of income.

Effective for Tax Years Ending On or After March 27, 2020:

  • Paycheck Protection Program (PPP) loan forgiveness is exempt from Alabama corporate income tax
  • The exemption applies to PPP loans forgiven under the CARES Act as amended by the Consolidated Appropriations Act of 2021

Retroactive to Tax Years Beginning After December 31, 2017:

  • Alabama decouples from GILTI income inclusion
  • Amounts included in income under IRC Section 951A are to be deducted from federal taxable income in calculating Alabama taxable income.

What Do We Advise?

Contact your AAFCPAs Tax Partner if you are doing business in Alabama. We will review the implications of H.B. 170 on your business, make determinations, and advise on the necessary changes as appropriate.  We will ensure your 2020 tax returns properly reflect the fact that Alabama is following the federal treatment related to PPP loan forgiveness being exempt. In addition, we will review how you are treating GILTI income inclusions on past returns and determine whether amended returns should be filed. And finally, we will assist in incorporating the changes effective 1/1/21 on any 2021 quarterly provisions or estimates.

As state and local needs for new revenue sources have grown nationwide, government entities have become increasingly aggressive in pursuing new taxation opportunities wherever possible. AAFCPAs leverages our deep knowledge of tax strategies and structures to help clients effectively manage and plan for the continuously evolving complexities of multistate taxation—and avoid penalties associated with noncompliance.

If you have questions, please contact Kelly Zack, MST, Director, State & Local Tax, at kzack@nullaafcpa.com, 774.512.4001; or your AAFCPAs Tax Partner.

 

About the Author

Kelly Zack, MST
Kelly is a senior leader in AAFCPAs’ Commercial Tax practice. She advises individuals, partnerships, corporations, and trusts operating in multiple states and municipalities on opportunities to save tax dollars through advanced tax planning and risk mitigation. She enthusiastically assists AAFCPAs clients in identifying all location-specific tax incentives and credits which could have a major impact on business entities and their owners.