Tax Reform Friday: Alabama Department of Revenue Releases 2017 Federal Tax Act Guidance for Taxpayers

On July 30, 2018, the Alabama Department of Revenue (DOR) released an executive summary assessing the impact of the changes made by the 2017 Tax Act on Alabama’s tax regime, as reported by the Daily Tax Report: State. The DOR publication addresses conformity issues for corporations, individual taxpayers (including sole proprietors), and financial institutions, but analysis for the tax treatment of pass-through entities and trusts was not provided.

The DOR acknowledges that, while the summary seeks to provide an analysis of all the 2017 Tax Act provisions and their impact on Alabama taxpayers, the DOR’s interpretation of the 2017 Tax Act is limited by the lack of regulations and forms yet to be released by the Internal Revenue Service.

Corporate Tax Guidance

Alabama decouples from several significant changes made by federal tax reform, including:

  • corporate income tax rate reduction (I.R.C. §§ 11, 1445);

  • the repeal of the alternative minimum tax (I.R.C. §§ 55, 56, and 59);

  • modifications to net operating loss carryover periods (I.R.C. § 172); and

  • the creation of a base erosion minimum tax (BEAT) (I.R.C. § 59A).

Additionally, the DOR notes that Alabama rule 810-3-35-.02 is being amended to address the federal limits on net interest deductions (I.R.C. §§ 163(j), 381, 382). Specifically, the federal business interest limitations will apply before Alabama’s add-back adjustment is applied, disallowing a deduction for certain related party interest expenses.

Banks and Financial Institutions Tax Guidance

Alabama banks and financial institutions, while generally not subject to Alabama’s corporate income tax, are subject to the state’s financial institution excise tax (FIET). The Alabama FIET ties to the federal tax code for certain provisions. Where the FIET does not conform specifically, Alabama issued guidance on provisions that are tied to the federal code for ease of administration purposes. Notably, the DOR issued guidance provides that, for purposes of computing the federal income tax deduction for taxpayers’ subject to FIET, Alabama excludes the following:

  • any global intangible low-taxed income (GILTI) (I.R.C. § 951A) payments made;

  • any repatriated income (I.R.C. § 65) payments made, unless 965 income is reported and sources to Alabama as a result of an underlying interest in a flow through entity; and

  • any additional federal payments made as a result of the tax due under BEAT (I.R.C. § 59A).

Will Alabama See a Tax Revenue Increase?

Alabama offers a full income tax deduction for federal income taxes paid so Alabama should see an increase in tax revenue due to the corporate income tax rate reduction. The corporate income tax rate after federal tax reform drops 11 percent, a reduction from 35 percent to 21 percent.  A reduced federal tax burden would reduce the income tax deduction available to taxpayers in Alabama, thus increasing their Alabama tax burden.

Additionally, the executive summary notes that FIET taxpayers must exclude federal BEAT, 965, and GILTI payments from the federal income tax deduction available at the state level which may provide an additional revenue boost where that income can be properly apportioned to Alabama.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will Alabama’s legislature address the 2017 Tax Act in its next legislative session?

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