Corporate Close-Up: Alabama Pass-Through Entity Owners, Rejoice! Why You May be Entitled to a Refund for The 2013 Through 2017 Tax Years


 

The Alabama Legislature made headlines recently with the passage of H.B. 384, introduced by state Rep. Rod Stott (D). The bill, signed into law by Gov. Kay Ivey (R) on March 22, maps out the calculation of credits for certain income and gross receipts-based taxes paid by Alabama residents to other states for directly or indirectly doing business within those states. This decision puts to rest the longstanding debate as to whether Alabama residents who own interests in partnerships, LLCs, S corporations and beneficiaries of estates and trusts can claim this credit for taxes paid to other states and territories.

Existing Alabama law permits resident individuals to claim a credit for taxes paid to other states and territories. The amount of the credit is limited to the lesser of taxes actually paid to the out-of-state jurisdiction or the amount of tax Alabama would impose on the same income using in-state tax rates to calculate the available credit. The Alabama Department of Revenue issued Ala. Admin. Code r. 810-3-21-.03 to provide guidance on the calculation of credits for taxes paid to out-of-state jurisdictions. This regulation effectively imposes another limitation on the de facto rule, limiting the maximum credit by requiring that the taxes paid to out-of-state jurisdictions be multiplied by a fraction (total non-Alabama adjusted gross income [AGI] as the numerator and total Alabama AGI as the denominator). However, the Alabama Tax Tribunal’s 2016 decision in Moody v. Alabama Dept. of Rev. invalidated this regulation. In this case, the tribunal rejected the additional limitation imposed by Ala. Admin. Code r. 810-3-21-.03 because it went against “the plain language of the statute” and “the plain language of the statue must be followed.”

H.B. 384 modifies Ala. Code § 40-18-21 to disallow claiming the credit for taxes paid to other states or territories as a way to offset taxpayers’ Alabama source income tax liability. Specifically, the bill allows for credits against a taxpayer’s Alabama income tax liability only if that liability is attributable to income from other states or territories to which income taxes were paid. A taxpayer’s income is attributed to another state or territory by multiplying the taxpayer’s Alabama income tax liability (before applying credits attributable to out-of-state tax payments) by a percentage, the numerator of which is Alabama AGI attributable to another state or territory that is paid by—or on behalf of—the taxpayer, and the denominator of which is total Alabama AGI.

Now that H.B. 384 provides certainty regarding how Alabama individual owners of an interest in a partnership, LLC, or S corporation, and beneficiaries of estates or trusts must calculate the credit for taxes paid to other states and territories, you may be wondering if you might get a refund. Taxpayers should examine and recalculate their Alabama tax liabilities for the 2013 through 2017 tax years. H.B. 384 requires refund claims for pre-2017 tax years to be filed with the Alabama Department of Revenue by June 30, 2018.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How will Alabama’s new tax credit calculation for taxes paid to out-of-state jurisdictions impact your past returns or those of your clients?

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