The governor of Alabama has approved a bill that will exempt federal COVID-19 tax relief from state taxation and make other business-friendly tax changes, including decoupling from global intangible low-taxed income.
H.B. 170 was signed by Gov. Kay Ivey (R) February 12 along with two other bills, H.B. 192 and S.B. 30.
“While the impact of COVID-19 has been felt across the country and around the world, we remain committed to helping Alabamians and Alabama businesses get back on their feet and our state moving forward,” Ivey said in a release.
“These three bills, without question, were necessary to address upfront, and I am proud of the Alabama Legislature for taking care of the people’s business, despite the obvious challenges of this legislative session. Thanks to their work, the people of Alabama who received any type of [federal Coronavirus Aid, Relief, and Economic Security] Act dollars will not pay one penny in state income taxes on that relief. Additionally, we are ensuring that our state will continue to grow our diverse economy, and we are protecting our existing businesses from any frivolous lawsuits due to COVID-19,” Ivey said.
H.B. 170, sponsored by Rep. Danny Garrett (R), will exempt from state tax the economic impact payments, advance refunds, grants, and small business loans forgiven under the Paycheck Protection Program under the CARES Act and the federal Consolidated Appropriations Act of 2021.
The bill will shift Alabama from three-factor apportionment with a double-weighted sales factor to single-sales-factor apportionment and will repeal the state’s throwback rule.
The measure will retroactively decouple the state from the GILTI provision of the federal Tax Cuts and Jobs Act and limit the application of the business interest expense limitation in IRC section 163(j).
It will also create an elective workaround to the TCJA's $10,000 cap on the state and local tax deduction for passthrough entities. The workaround will allow passthroughs to be taxed at the entity level at the highest marginal individual income tax rate.
Bruce Ely of Bradley Arant Boult Cummings LLP told Tax Notes that companies with a heavy in-state presence that export goods to other states and countries will benefit from the switch to single-sales-factor apportionment.
The throwback rule won’t cause those sales to be thrown back if the taxpayer-seller isn’t subject to a net income tax in the destination state, Ely explained. “Conversely, those companies selling into Alabama will not be able to dilute their Alabama apportionment factor with payroll and property.”
Alabama joins Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin in adopting an elective workaround for passthrough businesses. Connecticut was the first state to adopt a workaround for passthrough entities, which is mandatory rather than elective.
Meanwhile, H.B. 192 reinstates the Growing Alabama Act, which expired September 30, 2020. It expands the taxes that credits may be claimed against to include the financial institutions excise tax, the insurance premium tax, and state public utility license tax, and it increases the annual cap on credits from $10 million to $20 million, according to the bill’s fiscal note.
The Growing Alabama credit was established in 2016 under H.B. 34, enacted as Act 102. The credit is available for corporations and individuals who contribute cash to state and local economic development organizations that create economic growth in industrial sites, industrial and research parks, inland ports and intermodal facilities, and STEM marketing and accelerator programs, according to the state Department of Revenue’s website.
H.B. 192 also extends the sunset date for the Alabama Jobs Act and increases the cap on jobs credits through the program from $300 million to $325 million for calendar year 2020 and $350 million for calendar year 2022.
The legislation’s enactment drew praise from the Business Council of Alabama, which thanked the governor and the Legislature in a February 12 tweet. “This is a major win for the people of Alabama and the business community,” the council said.
S.B. 30 would protect businesses, health care providers, educational entities, churches, government entities, and cultural institutions from litigation during the COVID-19 pandemic.