Alabama Burrows Into Federal Tax Changes, State Impact

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Andrew M. Ballard

The Alabama Department of Revenue has released an analysis of the impact of the 2017 federal tax act on the state’s tax code.

In guidance released July 31, the department assessed how the changes under the Tax Cuts and Jobs Act (Pub. L. No. 115-97) were tied to Alabama’s tax structure, as it relates to individuals, corporations, and financial institutions. The DOR said the guidance was preliminary and is subject to future revisions.

Alabama is only one of a handful of jurisdictions that allows a full state income tax deduction for federal income and employment taxes that are paid. Therefore, if individuals and businesses in Alabama pay less in federal taxes after the changes, they are likely to pay more in state taxes absent changes to the law, Bruce Ely, a tax attorney and partner at Bradley Arant Boult Cummings LLP in Birmingham, Ala., told Bloomberg Tax July 31.

“Since the Alabama corporate income tax is tied to the definition of federal taxable income ‘as in effect from time to time’, much of the fiscal impact of the TCJA on our corporate income tax revenues is automatic,” he said in an e-mail. “In contrast, our individual income tax scheme selectively conforms to the IRC counterpart and is outdated in many respects, so benefits like the new Section 199A deduction for owners of pass-through entities apparently won’t carry over into Alabama law—at least not without curative legislation.”

He said a special session is “doubtful” this fall to potentially consider compromise legislation on adding to or decoupling from Alabama’s IRC conformity laws. He said the March start of the 2019 legislative session would be the next opportunity for legislative action.

“In the meantime, we’ll request regulatory guidance from the Department in several key areas,” he said. Attorneys and other tax officials will focus on the new guidance, and conformity issues, later this week at the Council On State Taxation’s Southeast Regional Tax Update, he added.

Fiscal Impact?

Frank Miles, a spokesman for the DOR, told Bloomberg Tax July 31 that “we are unable to provide a projected fiscal impact at this time” of the federal changes. The effects of federal tax changes on pass-through entities or trusts aren’t covered by the new state analysis.

According to the guidance, Alabama isn’t tied to federal changes to the standard deduction amount and the elimination of the deduction for personal exemptions. The state is linked to the federal limits on the deduction for qualified mortgage interest, the elimination of certain loss deductions, and the boost in charitable contribution deduction limit, among other personal income tax provisions, DOR says.

Alabama also is impacted by federal small business accounting method changes and revisions to corporate tax provisions related to the repeal of domestic production activities income deduction, property expensing, bonus depreciation, net interest deductions, and like-kind exchanges, among other things.

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