HB384, Introduced February 6th, by Representative Rod Scott, Gross Income

Alabama Act 2012-427 permitted Alabama residents that owned interests in multistate pass-through entities (e.g., LLCs, partnerships, and S corporations) to claim a credit against their Alabama income tax liability for certain taxes paid by the entity to other states. This claim could be either on behalf of the nonresident owners as an income tax withholding or as a composite return filing obligation, or for certain entity-level taxes levied on the pass-through entity itself. The Act did not impose any additional restrictions on the calculation of the credit for taxes paid to other states.

However, shortly after the passage of the Act, the Alabama Department of Revenue (ADOR) changed the credit calculation on Form CR and promulgated a regulation, Rule 810-3-21-.03, effective January 1, 2013, which imposed new restrictions on the credit. Specifically, the Rule requires the allowable credit for taxes paid to other states on non-Alabama income to be calculated by multiplying the tax paid to other states by a fraction: total non-Alabama AGI divided by total Alabama AGI (the “percentage limitation”). 

This new credit computation effectively limited the amount of credit available based on Alabama’s effective tax rate (i.e., the rate after a taxpayer claims his or her federal income tax deduction). By limiting the amount of the credit available for taxes paid in other states, many Alabama residents were unable to receive the full benefit of their FIT deduction.

Because of the long-standing issue, the Alabama Society of CPAs, the Alabama Department of Revenue and legal counsel have collaborated to write legislation to fix Alabama Statute, HB384.  HB384 provides that the income tax credit on income derived from sources outside of the state only offset the portion of the taxpayer’s income tax liability that is attributable to income derived from non-Alabama sources.  

The legislation is a true collaborative effort with both sides giving and taking. Once the bill is passed, and it will take work to get it passed, the statute will provide clarity for a couple of things.  It will set forth the plan for refunds due; it will define assessments; and it will set forth an agreed-upon plan for the tax credit calculation going forward.

Please take a moment to review the bill.  Likely, there will be a member call to action for contacting your legislator requesting favorable support.  If you have questions, please contact Jeannine Birmingham, jbirmingham@ascpa.org.