Key Alabama Income Tax Considerations Related to the CARES Act Provisions for Individuals and Businesses

After the enactment of the CARES Act in March, the ASCPA State Tax Committee closely monitored the status of the ongoing efforts to alert the state’s legislative delegation to the critical need for a special legislative session during which several pandemic-related bills could be considered. Legislation which would have addressed the Alabama individual and entity-level income tax implications of the provisions in the CARES Act had been included in the group of potential bills which could have been considered during a special session, if it had been called before the close of the calendar year. Despite the significant efforts of the ASCPA leadership team and the ASCPA State Tax Committee to continuously highlight the critical need for this legislation, a special legislative session was not called during the summer or the fall.

Acknowledging that both the regular legislative session and the potential scheduling of a special session had been adversely impacted by the pandemic, Governor Kay Ivey issued the “21st Supplemental Emergency Proclamation” (“Proclamation”) on December 11, 2020, to provide the critical guidance related to Alabama tax treatment of certain taxpayer benefits provided in the CARES Act, including the Economic Impact Payments, Recovery Rebate Credits, and the cancellation of indebtedness income associated with Paycheck Protection Program (PPP) loan forgiveness. Governor Ivey authorized the Commissioner of Revenue to revise the 2020 income tax forms and instructions as needed to reflect the provisions outlined in the Proclamation.

On December 18, 2020, the Alabama Department of Revenue issued formal guidance “to effectuate the implementation of the tax relief measures included in the Proclamation.” A summary of the items addressed in the guidance issued by the Alabama Department of Revenue is included below. Please note that this summary does not incorporate any of the Alabama tax considerations related to the federal legislation passed by Congress on December 21, 2020. The analysis of that legislation is ongoing, and the ASCPA will continuously update members as additional information becomes available. The ASCPA also encourages members to actively monitor the status of tax legislation as the regular Alabama legislative session convenes in early February.

Analysis of the Guidance Released by the Alabama Department of Revenue on December 18, 2020

Economic Impact Payments and 2020 Recovery Rebate Credits

In the Proclamation issued by Governor Ivey, Alabama individual taxpayers received the long-awaited clarification regarding the Alabama tax treatment of both the Economic Impact Payments provided under the CARES Act and the related Recovery Rebate Credits which will be reflected on the 2020 federal income tax returns of many Alabama taxpayers who did not receive the full amount of the 2020 income tax credit through the advance Economic Impact Payments. Governor Ivey’s Proclamation provided an exclusion from Alabama income taxation for the Economic Impact Payments and the related Recovery Rebate Credits and an exclusion from the calculations related to a taxpayer’s federal income tax deduction for purposes of calculating Alabama taxable income. (1) The guidance issued by the Department of Revenue provides for these exclusions as well, further clarifying that the worksheets for the calculation of the Federal Income Tax Deduction have been modified to exclude any adjustment for the 2020 Recovery Rebate Credits which may be reported by Alabama taxpayers on the 2020 federal income tax returns. (2)

Paycheck Protection Program (PPP) Loan Forgiveness

The Proclamation also provided an exclusion from the calculation of income taxes for individuals, corporations, and taxpayers subject to the financial institution excise tax for the cancellation of indebtedness income resulting from a PPP loan forgiven pursuant to section 1106 of the CARES Act. Additionally, the Proclamation provided for the exclusion of the cancellation of indebtedness income from the calculations associated with the determination of a taxpayer’s federal income tax deduction. (3)

At the time of the issuance of the Proclamation on December 11, 2020, significant uncertainty existed regarding the potential deductibility of the expenses paid with proceeds from PPP loans which were forgiven under section 1106 of the CARES Act and excluded from gross income. The Proclamation addressed this issue, noting that “any amount of cancellation-of-indebtedness income resulting from a loan forgiven pursuant to section 1106 of the CARES Act, as it now exists, shall only be considered for Alabama tax purposes in determining the deductibility of otherwise deductible expenses…to the same extent as such expenses are deductible in calculating federal income tax.” (4)

The guidance issued by the Alabama Department of Revenue on December 18, 2020, also provided additional commentary related to the deductibility of the expenses paid with proceeds from forgiven PPP loans, noting that taxpayers may not deduct the expenses, even if the taxpayer has not submitted an application for forgiveness of the loan by the end of the 2020 tax year. The Department referenced the guidance which existed for federal tax purposes as of December 18, 2020, in support of this conclusion. (5) Subsequent to the release of the Department’s guidance, Congress enacted the “COVID-related Tax Relief Act of 2020,” and Section 276 of this act provided that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.” At the time of the publication of this issue, Alabama’s conformity to this provision is still uncertain, and the ASCPA has requested that the Alabama Department of Revenue provide additional guidance which addresses Alabama’s conformity, or lack thereof, to this provision in the “COVID-related Tax Relief Act of 2020.” Practitioners are encouraged to monitor the updates from the ASCPA with respect to this issue in the coming weeks.

The guidance released by the Alabama Department of Revenue provided further clarification and instruction regarding the exclusion from gross income and the exclusion from the calculation of the taxpayer’s federal income tax deduction for corporate taxpayers and taxpayers subject to the financial institutions excise tax. Because the calculation of the Alabama corporate income tax and the calculation of the financial institution excise tax begin with a taxpayer’s federal taxable income, the Department noted that no adjustment would be needed to report the Alabama exclusion from gross income for the cancellation of indebtedness income associated with PPP loans or the disallowance of the deduction for the expenses paid with the proceeds from the PPP loan. (6)

The treatment of any non-deductible expenses associated with the PPP loan proceeds in calculating a multistate taxpayer’s apportionment factors has been debated by many states since the enactment of the CARES Act. The Department provided guidance with respect to this issue in the release on December 18, 2020, confirming that any non-deductible PPP expenses should be included in the calculation of the apportionment factors for Alabama income tax purposes. (7)

Other Direct Benefits Received by Taxpayers Under the Federal CARES Act

In addition to providing the exclusion from gross income for the Recovery Rebate Credits, the Economic Impact Payments, and the cancellation of indebtedness income resulting from PPP loan forgiveness, the Proclamation also noted that the exclusion would apply to “other direct benefits a taxpayer receives under the federal CARES Act.”(8) The Proclamation did not define the phrase “other direct benefits,” and consequently there was uncertainty regarding the extent to which the exclusion from gross income would apply to certain other provisions included in the federal CARES Act. After the ASCPA State Tax Committee issued a request for guidance on this topic to the Alabama Department of Revenue, the Alabama Department of Revenue incorporated further clarification in the guidance released on December 18, 2020.

The Alabama Department of Revenue adopted a broad definition of the phrase “other direct benefits” and extended the exclusion from gross income to the following federal CARES Act provision:

1. Principal or interest payments incurred by an employer on behalf of the taxpayer on any qualified education loan that is excluded from the employee’s federal gross income pursuant to IRC Section 127(c)(1)(B), as amended under Section 2206(a) of the CARES Act; (9)(10).

2. Amounts received from the state Coronavirus Relief Fund (CRF), including Revive Alabama and Revive Plus grants (11); and

3. Qualifying disaster relief payments received by the taxpayer that would be excluded from federal income taxation under IRC Section 139. (12)

Regarding the CRF grant awards, the Department provided clarification regarding the differences between the federal tax treatment of the grants and the Alabama tax treatment of the grants. For federal purposes, the current IRS guidance indicates that grants of this type by state governments will be considered taxable gross income. Because the grants are taxable for federal purposes, the expenses paid with the grant funds are deductible in calculating federal taxable income, assuming that the normal criteria for deduction under IRC Section 162 are satisfied. Conversely, in calculating Alabama taxable income, the CRF grants will be excluded, and the expenses for which taxpayers were reimbursed through the CRF grant awards will be nondeductible. Given that the income inclusion for federal purposes is offset by the deduction for the expenses paid with the grant funds, the same net result is achieved for both federal and Alabama tax purposes. Accordingly, no adjustment will be needed in calculating Alabama taxable income. (13)

Additional Considerations for Employers

Regarding the exclusion from gross income for the employer-provided qualified education loan payments under IRC Section 127(c)(1)(B) and the employer-provided disaster relief payments under IRC Section 139, the Alabama Department of Revenue provided further clarification regarding the calculation of the Alabama wages reported on Form W-2 for the 2020 tax year. Both of the aforementioned employerprovided payments should not be included in Alabama wages for the 2020 tax year. (14)

Next Steps for Alabama Practitioners and Taxpayers

As highlighted at the beginning of the article, the legislation enacted by Congress on December 21, 2020, is still under evaluation by the ASCPA State Tax Committee and the Alabama Department of Revenue as of the time of publication for this issue. Any changes to the aforementioned conclusions resulting from the consideration of the legislation will be communicated by the ASCPA to its members as soon as possible. Practitioners are encouraged to monitor the email communications from the ASCPA on a frequent basis in the coming weeks.

1 Section I.B of the “21 st Supplemental Emergency Proclamation”

2 Section I.A and I.B of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue

3 Section I.C of the “21st Supplemental Emergency Proclamation”

4 Section I.C.2 of the “21st Supplemental Emergency Proclamation”

5 Section I.A.5 of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue

6 Section III.A.1 and 2 of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue

7 Section III.A.3 of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue

8 Section I.B of the “21st Supplemental Emergency Proclamation”

9 Section I.A.2 of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue

10 Note that the Alabama Department of Revenue highlighted the fact that “other forms of educational assistance as defined in IRC Section 127(c)(1)(A) and (C), provided by the taxpayer’s employer…continue to be includable in the calculation of Alabama income tax.” See Section I.A.2 of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue.

11 Section I.A.3 of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue

12 Section I.A.4 of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue

13 Section III.B of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue

14 Section II.A and B of the Guidance Related to Governor Kay Ivey’s 21st Supplemental Emergency Proclamation issued on December 18, 2020 by the Alabama Department of Revenue