Alabama enacts single-sales factor, tax reform relief, and other significant changes

Overview

Enacted on February 12, H.B. 170 makes significant changes to Alabama’s income tax, including the following effective for tax years beginning on or after January 1, 2021:

• single-sales factor apportionment;
• throwback repeal;
• specified treatment for calculating Section 163(j) limitations
• implementation of an elective pass-through entity tax.

Additionally, the state decouples from GILTI income inclusions retroactive to tax years beginning after December 31, 2017.

Alabama taxpayers should be prepared for significant modifications to their Alabama taxable income.  Change to a single-sales factor may benefit in-state taxpayers while out-of-state taxpayers may see an increase in tax.  Throwback repeal and tax relief provisions may provide some Alabama taxpayers with tax relief.  Although certain favorable provisions have retroactive relief, the legislation prohibits refunds for tax years ending before January 1, 2020, to the extent such refunds are related to provisions of the new law.  

With the state’s pass-though entity tax, Alabama joins a growing number of states that have enacted SALT deduction limitation ‘workarounds.’

The takeaway

H.B. 170 represents one of the most significant changes to Alabama’s corporate income tax in many years.  Out-of-state taxpayers generally will see an increase in Alabama apportionment due to the change to a single-sales factor.  However, the relief provisions around tax reform may reduce many Alabama taxpayers’ tax liabilities.  Furthermore, eliminating throwback will provide relief to in-state companies.  

Although the GILTI deduction and the exclusion for amounts contributed by Alabama or its political subdivisions are both retroactive, the legislation largely erases the benefit of these favorable adjustments by prohibiting refunds from being granted or paid for tax years ending before January 1, 2020, to the extent related to the provisions of H.B. 170.  Although it appears taxpayers may be able to file amended returns to increase attributes (e.g., net operating losses and credits) that could be carried into later years, it is not clear how other taxpayers may be able to benefit from the retroactive provisions.  Additional guidance may be offered by the state that would provide some relief for affected taxpayers who otherwise would be eligible for refunds in these prior years.  

With the state’s pass-through entity tax, Alabama joins a growing number of states that have enacted SALT deduction limitation ‘workarounds.”  Read our Insight here that discusses the states that have enacted these pass-through taxes.  

The Section 118 treatment is welcome relief for taxpayers receiving government payments such as tax incentives from Alabama that may have been treated as included in federal taxable income.