Summary of Newly Released ADOR Analysis of Federal Tax Reform's Impact on Alabama Income Tax Laws - SALT Alert: Alabama Edition

by Bradley Arant Boult Cummings LLP
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On July 31, the Alabama Department of Revenue (ADOR) released its long-awaited “Analysis of Federal Tax Law Revisions on the State of Alabama,” a comprehensive review of the changes brought about by the Tax Cuts and Jobs Act of 2017 (TCJA), commonly known as federal tax reform, and how those changes will likely affect Alabama taxpayers. The analysis includes a helpful executive summary and a warning that the document is still in a preliminary stage and subject to change, for example if the Alabama Legislature responds, as discussed below. The ADOR seeks input from the business and tax practitioner community.

The following charts point out only selected provisions of the TCJA and their effect on Alabama’s income tax law and revenues, according to the analysis. You may view the full analysis here. An impressive 50 state impact analysis was recently performed by the State Tax Research Institute (an affiliate of the Council on State Taxation) and Ernst & Young LLP and can be found here. We commend these two reports to your reading and encourage you to monitor the ADOR website as the agency issues further guidance, proposed regulations and the like.

E&Y projects an automatic 11-12 percent increase in Alabama corporate income tax revenues as a result of the TCJA, or approximately $60-70 million annually, but their revenue estimate doesn’t include the increased state income tax revenues that should result from lower federal tax payments (as a result of federal tax reform) and, therefore, a lower federal income tax deduction for both individuals and corporations. You may recall that Alabama is one of only a few states that allows such a deduction, in whole or in part. 

Although the ADOR’s analysis also discusses the likely impact of the TCJA on the state’s Financial Institution Excise Tax (FIET), we plan to issue a separate newsletter to our financial institution clients and friends at a later date. A working group of ADOR officials and Alabama Bankers Association members is now focused on these issues. That group’s recommendations could result in major changes to the FIET, subject of course to approval by the Alabama Legislature and Governor Ivey.

In summary, we may see a flurry of legislative activity next March, when the Alabama Legislature convenes, either to de-couple from certain TCJA provisions, add certain provisions that the ADOR analysis points out were not automatically incorporated into Alabama tax law, and perhaps enact a major rewrite of the FIET.  Additionally, the Alabama Society of CPAs task force recently called on the ADOR to establish a working group to study the idea (again) of simplifying our patchwork individual income tax system by adopting Federal AGI as the starting point, as most other states do. We applaud that recommendation.

TAX CUTS & JOBS ACT OF 2017 / IRC SECTIONS AMENDED/ADDED, WITH BRIEF DESCRIPTION ALABAMA CONFORMITY PER ADOR REPORT

SELECTED INDIVIDUAL TAX PROVISIONS
1. Decreased federal tax rates 1. No
2. Increased standard deduction 2. No
3. Personal exemption eliminated 3. No
4. $10,000 limitation on SALT deduction 4. No
5. Miscellaneous itemized deductions subject to 2% AGI limitation repealed (technically, suspended) 5. No
6. No deduction for personal casualty and theft losses 6. Yes
7. Gambling loss limitations 7. No
8. Alimony payments no longer deductible (post-2018) 8. Yes
9. New § 199A deduction for 20% of Qualified Business Income or QBI 9. No
10. § 529 college education plans can cover elementary or secondary school tuition ($10,000 per year cap); rollover from 529 plans into Achieving a Better Life Experience (ABLE) accounts permitted 10. Yes
11. No charitable deduction for contributions to your favorite university/college for preferred athletic seating rights (IRC § 170) 11. Yes
   
SOLE PROPRIETORSHIPS/OWNERS OF PASS-THROUGH ENTITIES  
1. New limitations on net interest deduction (IRC § 163(j)) 1. Yes
2. Extension and expansion of bonus depreciation (100% - full expensing – with phase down after 2022; used property allowed 100% bonus depreciation, etc.) 2. Yes
3. IRC § 179 expensing cap increases from $500,000 to $1 million and phase-out threshold increased to $2.5 million, etc. 3. Yes
4. Employer deductions for fringe benefits and entertainment expenses generally denied (IRC § 274) 4. Yes
5. Limitations on like-kind exchange treatment to real property not held primarily for sale (IRC § 1031) 5. Yes
6. Small business accounting method changes (IRC §§ 263A, 447, 448, 460 and 471), including increased threshold for use of cash method of accounting, alternatives to inventory accounting for certain small businesses, and “small construction contract” exception to percentage of completion method increased to $25 million of gross receipts 6. Yes
   
CORPORATE INCOME TAX REFORM  
1. Corporate income tax rates reduced from high of 35% to flat 21% 1. No
2. Corporate AMT repealed 2. No (but no AL counterpart)
3. Domestic production activities deduction or “DPAD” (IRC § 199) repealed 3. Yes
4. NOLs cannot be carried back, but indefinite carry forward; NOL deduction limited to 80% of taxable income for a given year 4. No (AL has separate rules)
5. Bonus depreciation for qualified property increased from 50% to 100%; phases down after 2022 (IRC § 168(k)) 5. Yes
6. § 179 expensing increased/expanded 6. Yes
7. New net interest deduction limitations under IRC §163(j) with exception for interest paid by one affiliated corporation to another, etc. 7. Yes; ADOR says this limit will apply before Alabama’s related party interest add-back statute, which can cause a double whammy for certain taxpayers
8. Limitations on deductions by employers of fringe benefits and entertainment expenses (IRC § 274) 8. Yes
9. Extended amortization of R&E expenditures (IRC§§ 41 and 74), requiring taxpayers to capitalize and amortize § 174 R&E expenditures over a five-year period (if domestic business) and expanding definition of R&E expenditures subject to capitalization 9. Yes
10. Previously tax-free contributions to capital of a corporation (IRC § 118) are limited, including contributions by a customer or a potential customer or by any governmental entity or civic group, with very limited grandfather exception 10. Yes (note – most economic developers oppose this)
11. Like kind exchange treatment (IRC § 1031) limited to exchanges of real property not held primarily for sale 11. Yes
   
INTERNATIONAL TAX REFORM  
1. New global intangible low-taxed income (GILTI) and related deduction (IRC §§ 951A and 250) added, taxing any U.S. shareholder of a controlled foreign corporation on its pro-rata share of GILTI but with 50% deduction if the shareholder is a U.S. “C” corporation 1. Yes (but Foreign Commerce Clause concerns) (see STRI/E&Y report)
2. A new base erosion and anti-abuse tax or “BEAT” (IRC § 959A), to prevent income shifting to foreign affiliates, structured like an alternative minimum tax 2. No
3. Deemed “repatriated” offshore earnings (IRC § 965), pre-2018 accumulated deferred foreign income must be included in Subpart F income, subject to corporate dividends received deduction 3. Yes but apply AL DRD instead (see helpful ADOR notices)
   
IMPACT ON TAX-EXEMPT ORGANIZATIONS  
1. New federal excise tax on excess executive compensation (21%) paid by certain tax-exempt organizations to any of their current or prior (beginning after 12/31/16) top five highest-paid employees. Includes IRC § 501(a) non-profit organizations, political organizations, and state or local government entities 1. No
2. New 1.4% federal excise tax on investment income of certain private colleges and universities (IRC § 4968) 2. No
3. Unrelated business taxable income (UBTI) must be separately computed for each trade or business activity (IRC § 512(a)(6), preventing losses from one unrelated trade or business from offsetting income from another unrelated trade or business of the tax-exempt entity 3. Yes
4. UBTI due on amounts of certain employee fringe benefit expenses that are not deductible under IRC § 274 (IRC § 512(a)(7)(highly controversial) 4. Yes

UPCOMING TAX SEMINARS/WEBINARS

Will Thistle and Bruce Ely will participate in a one-hour webinar at noon on Wednesday, August 15, sponsored by the Alabama Society of CPAs, along with Deputy Commissioner of Revenue Joe Garrett and Jim Watson, a partner with RSM and Chair of the ASCPA’s State Taxation Committee. The main focus of the webinar will be a review of the ADOR’s recently released report on the likely impact of the Tax Cuts and Jobs Act of 2017 on Alabama’s tax structure and particular segments of the Alabama business community. For more information, please contact Jessica Roberts at jroberts@ascpa.org or Ashley Peters at apeters@ascpa.org.

On Wednesday, August 22, Will Thistle, Jimmy Long, Bruce Ely and Chris Grissom will teach their annual “Alabama Sales and Use Taxes for CPAs” seminar at the Pelham Civic Complex. The eight-hour seminar is open to both ASCPA members and others and will cover several recent developments, including the recent landmark U.S. Supreme Court nexus ruling in Wayfair, Inc., and its potential impact on Alabama and its local governments and their contract auditing firms. The speakers will also discuss recent state legislative, administrative and judicial developments and cover the basics of the sales, use and rental tax. For more information, please contact Jessica Roberts at jroberts@ascpa.org or Ashley Peters at apeters@ascpa.org.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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