Proposed Updates to Alabama Business Tax Laws: Summary of the Financial Institution Excise Tax Reform Act of 2019 and Alabama Innovation Act - SALT Alert: Alabama Edition

Bradley Arant Boult Cummings LLP

Bradley Arant Boult Cummings LLP

Two landmark bills were introduced in the Alabama Legislature on April 11, potentially affecting numerous businesses in the state. Committees of the House of Representatives are expected to consider the Financial Institution Excise Tax Reform Act of 2019 (H.B. 419) and the Alabama Innovation Act (H.B. 424) as soon as Wednesday, April 17. Each of these bills is supported by civic and business leaders throughout the state, to encourage the modernization of the state’s financial institution excise tax and the implementation of a long-awaited state tax incentive for increasing research and development activities.

Financial Institution Excise Tax Reform Act of 2019 (H.B. 419):

The Financial Institution Excise Tax Reform Act of 2019 (or FIETRA) is sponsored by Rep. Kyle South (R – Fayette), and has been assigned to the Ways and Means – General Fund Committee. The bill aims to update the antiquated FIET statutes to conform with the many federal tax changes that have occurred since the last substantial update of the tax, particularly as a result of the Tax Cuts and Jobs Act of 2017. The bill will also repeal the current (likely unconstitutional) provision that only allows a deduction for dividends from corporations formed in Alabama, while also phasing out the dividends received deduction for so-called Captive REITs over five years. The bill also requires banks to begin filing quarterly estimated tax payments while updating the consolidated return rules to make it easier for banks to file as a consolidated group. Finally, the bill will change the distribution formula for FIET revenues to the local governments to eventually base the distributions on the relative populations of the cities and counties in the state (subject to a phase-in).

Scott Latham, president of the Alabama Bankers Association (ABA), remarked that “the Financial Institution Excise Tax Reform Act is the most substantial revision to the FIET statutes since they were enacted in 1939. The primary change in the law is that the FIET’s base calculation will, for the first time, be federal taxable income. While revenue-neutral overall, this bill simplifies every facet of the tax – computation, preparation, filing, and distribution – making it easier for financial institutions, tax practitioners, and the Department of Revenue to better understand and enforce the law.” (Bradley’s Bruce Ely and Jimmy Long served on the ABA/Alabama Department of Revenue (ADOR) working group that developed the bill.)

Alabama Innovation Act (H.B. 424):

The Alabama House of Representatives will also consider a bill to create a long-awaited state income tax and FIET credit for increasing expenditures for research and development in the state. The bipartisan Alabama Innovation Act (H.B. 424) is sponsored by Reps. Lovvorn, Scott, Crawford, Carns and Whitt, and is designed to spur innovation within the state. The bill is supported by a coalition of businesses, regional chambers of commerce, the state Department of Commerce, the University of Alabama System, Auburn University, the University of South Alabama, the Hudson Alpha Institute for Biotechnology, and the Southern Research Institute (Bradley is advising the Birmingham Business Alliance (BBA), which supports the bill).

State Research & Development Tax CreditsThe bill authorizes an Alabama research and development tax credit in the amount of either (i) 25% of qualifying expenses paid by the company to a qualified “Alabama research entity” such as UA, AU, Alabama A&M, the Hudson Alpha or Southern Research Institute, etc., or (ii) 10% of qualifying research expenses incurred by the company itself, which is determined in a manner substantially consistent with the federal income tax credit for increasing research expenditures. The credit would align Alabama with the majority of states that have already adopted such a credit. The amount of annual credits would be capped at $25 million per year and $2 million per taxpayer, on a first come, first-served basis. The Alabama Department of Commerce and ADOR will jointly administer the R&D applications and subsequent tax return filings.

Waymond Jackson, senior vice president of public policy for the BBA, said Alabama is one of 13 states that doesn’t have a tax credit for research and development, and this would allow the state to gain a competitive edge in recruiting jobs and professionals for economic development. “This is a very important piece of legislation to not only the Birmingham region, but the state as a whole as it relates to the economic growth that’s beginning to occur and will occur in the Birmingham region with entities like Southern Research and others,” Jackson said. “This provides the type of knowledge-based incentives that will allow us to grow more research and development jobs here. Another component of it – from a workforce perspective, when you talk about talent – UAB right now is an overproducer of the type of talent with post-doc degrees, and many of the talent leaves the state. (This tax credit) will allow for a better opportunity to create types of jobs and types of companies that many of these individuals could work at after college.”

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Bradley Arant Boult Cummings LLP

Bradley Arant Boult Cummings LLP on:

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