The Alabama Department of Revenue issued helpful guidance on Jan. 7, following its Dec. 18, 2020 guidance implementing Governor Ivey’s Supplementary Emergency Proclamation. The new directive affirms the retroactive deductibility of business expenses financed, or to be financed, by the proceeds of PPP loans, as authorized by the Law of 2021 on consolidated appropriations of more than 5,500 pages (the “Law on appropriations”), promulgated on December 27. Readers may recall the Internal Revenue Service argued that these expenses were not deductible since the income was exempt from federal income tax under the CARES Act. Congress has clearly overstepped the IRS ‘position.
Previous ADOR guidelines, following the governor’s proclamation, excluded a number of benefits of the CARES Act from calculating Alabama’s taxable income, including: forgiveness of debt income resulting from a canceled PPP loan ; “Economic impact payments”, or stimulus payments, received in 2020; eligible disaster relief payments under IRC § 139; as well as payments by the employer of qualified student loans of certain employees under IRC § 127.
The update focuses on “C” corporations and taxable financial institutions with respect to the deductibility of their expenses financed by a PPP loan “[b]ecause the calculation of Alabama corporate income tax and excise tax on financial institutions begins with a taxpayer’s federal taxable income … ”The guidelines also state that individual taxpayers are allowed to deduct their loan-related expenses, but does not cite any legal authority.
Conversely, the updated guidelines reaffirm that (unlike federal tax treatment) grants issued by the governor’s office from the state’s Coronavirus Relief Fund (CRF) to commercial taxpayers are exempt from income tax. Alabama income, but in return, expenses funded by these grants remain non-deductible. There, no surprise.
There are still a number of open questions as to how certain items will be treated for Alabama income tax purposes, both for 2020 and 2021. Below are a handful of these questions. open.
Some Open Items now excluded from federal taxable income not addressed:
Due to the CARES Act or the Appropriation Act, many types of income are now excluded from federal taxable income. Whether or not these federal tax benefits will be included in Alabama’s taxable income remains open. The types of income in question include amounts received through new grants from closed site operators, SBA loan grant payments, and SBA economic disaster loan grants and advances (EIDL).
The guidelines currently only apply to the calendar year 2020:
The guidelines do not address the extension in the Credit Act of several tax benefits beyond 2020. For example, under IRC § 127, employer-provided student loan repayments can now be offered to employees as a tax-free benefit until 2025. It is not yet clear whether this benefit can be claimed after 2020 under Alabama law. In addition, the governor’s proclamation and initial ADOR guidelines only addressed stimulus payments “received by the taxpayer. in 2020. “
Perhaps another additional emergency proclamation will be issued by the governor to answer these open questions or the governor can count on the Legislative Assembly of Alabama to step in and resolve these matters when it meets on the 2nd. February for its ordinary session.