Alabama enacts sweeping income tax changes

| 3/4/2021
Alabama enacts sweeping income tax changes

On Feb. 12, Gov. Kay Ivey signed House Bill (HB) 170, enacting sweeping changes for many Alabama taxpayers, including:

  • A change in the method of apportionment of income to a single-sales factor and elimination of throwback
  • Decoupling from global intangible low-taxed income (GILTI)
  • Conformity with respect to IRC Section 163(j)
  • Exclusion of loans received under the federal Paycheck Protection Program (PPP) from Alabama income and deductibility of expenses paid with those funds
  • An election for pass-through entities to be taxed at the entity level

Single-sales factor apportionment

HB 170 revises Alabama Code Section 40-27-1 to require apportionment based on a sales-only apportionment formula. The bill also eliminates the throwback rule, which required taxpayers to include sales in the Alabama sales factor if they shipped goods from a location in Alabama to a state where the taxpayer was not subject to taxation or to the U.S. government. These changes are effective for tax years beginning on or after Jan. 1, 2021. The bill retains the current throw out rule, which excludes from the Alabama sales factor sales of services and intangibles to a state where the taxpayer is not taxable.

Generally, the changes to apportionment benefit taxpayers with a presence in the state that have sales to other states, since property and payroll no longer are used in the apportionment of income. Alabama calendar year taxpayers should consider the apportionment changes when computing their 2021 quarterly estimates as well as for quarterly provision purposes.

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GILTI decoupling modifications

HB 170 provides that any amount included in federal taxable income under the GILTI provisions in IRC Section 951A is allowed as a subtraction for purposes of determining Alabama taxable income. This legislation reverses previous guidance issued by the Alabama Department of Revenue in July 2018, which provided that Alabama conforms to the federal rules on GILTI. The provision is effective for tax years beginning after Dec. 31, 2017.

Companies that included GILTI in the calculation of their Alabama taxable income in prior years should consider whether it is beneficial to amend their prior year Alabama income tax returns in order to deduct GILTI in accordance with the state’s new statute providing for such a deduction.

Interest expense limitation

Under HB 170, the business interest expense limitation under IRC Section 163(j) is computed on a separate entity basis or on an Alabama affiliated group basis in the case of an Alabama consolidated return for Alabama income tax purposes.

Exclusion of PPP loans from income, disallowance of deduction

HB 170 provides that any loan forgiveness income received by a taxpayer as part of the PPP is not included in income for Alabama income tax purposes. This is consistent with the federal income tax treatment of these proceeds. The bill also provides that any expenses paid with forgiven PPP loan proceeds are deductible to the extent they are deductible for federal income tax purposes. 

Pass-through entity election

HB 170 provides an election allowing pass-through entities to pay tax at the entity level rather than having the entity owners pay tax. For tax years beginning on or after Jan. 1, 2021, pass-through entities can elect to pay tax at the highest marginal individual tax rate. Owners of pass-through entities making this election are not liable for tax on their allocable share of income from the electing pass-through entity. The election can be revoked by the pass-through entity during any subsequent tax year. For purposes of this provision, a pass-through entity is defined as an S corporation or any Subchapter K entity under federal tax law.

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