Alabama Passes the Alabama Taxpayer Stimulus Freedom Act of 2021

Thoughtware Alert Published: Feb 24, 2021
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On February 12, 2021, the governor of Alabama signed into law H.B. 170, Alabama Taxpayer Stimulus Freedom Act of 2021. H.B. 170 provides substantial changes to Alabama’s tax system and addresses numerous issues raised by the Tax Cuts and Jobs Act and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). 

Paycheck Protection Program (PPP) Loan Forgiveness

For tax years beginning on or after January 1, 2021, H.B. 170 includes an exemption from taxable income for cancellation of indebtedness income associated with PPP loans forgiven under Section 1106(i) of the CARES Act. Expenses paid with forgiven PPP loans will be deductible to the same extent the expenses are deductible in calculating federal taxable income.

Single-Sales Factor 

Beginning on or after January 1, 2021, H.B.170 adopts a single-sales factor apportionment formula for income tax purposes. 

Throwback Rule Repealed

Alabama’s throwback rule for its sales factor numerator is repealed effective for tax years beginning on or after January 1, 2021. Prior to this repeal, the Alabama sales factor numerator included sales of tangible personal property that are shipped from Alabama to a customer in a state where the taxpayer is not subject to tax and sales to the U.S. government.

GILTI Exclusion

H.B. 170 provides an exclusion from taxable income for all amounts included under Internal Revenue Code (IRC) §951A. The amount subtracted is only to the extent such amount is not deductible in determining federal taxable income. An addition to pre-apportioned income is required for all expenses deducted on the taxpayer’s federal tax return for the taxable year that are attributable, directly or indirectly, to the subtracted amount. The IRC §250 deduction applies only to the extent the same income was included in Alabama taxable income. The new exclusion for income under IRC §951A applies retroactively for tax years beginning after December 31, 2017. 

IRC §163(j)

Beginning on or after January 1, 2021, if a taxpayer or a taxpayer’s federal consolidated group does not have an IRC §163(j) limitation reported on its return for the tax year, the taxpayer will not be subject to a §163(j) limitation on its Alabama income tax return. If, however, the business interest expense deduction of the taxpayer or the taxpayer’s federal consolidated group is limited under IRC §163(j), then taxpayers shall compute the business expense deduction for Alabama income tax purposes on a separate entity basis, or a consolidated group basis if the taxpayer is filing an Alabama consolidated return. The gross receipts test under IRC §163(j)(3) applies to each separate Alabama taxpayer or the Alabama consolidated group. The IRC §163(j) limitation applies before the application of the related-party interest expense addback.

Pass-Through Entity Tax

Beginning on or after January 1, 2021, any partnership or S corporation may elect to be taxed as an electing pass-through entity. An electing pass-through entity will pay income tax at the highest marginal rate provided for individual taxpayers. The owners, members, partners, or shareholders will not be liable for the income tax/tax otherwise imposed on their pro rata or distributive shares of the electing pass-through entity’s income. The election is due on or before the 15th day of the third month following the close of the tax year for which the election would apply. In addition, the election is binding for the current tax year and all subsequent tax years, and it cannot be revoked unless permission is granted from the Alabama Department of Revenue. 

For additional guidance on H.B. 170, contact your BKD Trusted Advisor™ or submit the Contact Us form below.

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