On May 14, 2021, Governor Kay Ivey signed HB 588, a bill which will have a potentially significant impact on the decision-making process for pass-through entities (PTEs) which are considering the new election to be taxed at the entity level in Alabama. The provisions of the bill are effective for all tax years beginning on or after January 1, 2021, and therefore are retroactive in nature. Read House Bill 588 here >
PTEs which operate in Alabama should immediately consider the impact of these new provisions in preparation for the estimated tax payments which are due on June 15, 2021.
What Has Changed?
Under the provisions of Act 2021-1, which was enacted in February, the members/owners/partners of a PTE which elected to be taxed at the entity level were not “liable for the tax otherwise imposed by Chapters 16 and 18 of Title 40, Code of Alabama 1975, on their pro rata or distributive shares of the Electing Pass-Through Entity’s income.” (Section 10(f) of Act 2021-1)
HB 588 now requires that the individual members/owners/partners (a) report their distributive share of the income from the Electing PTE on their Alabama individual income tax returns, and (b) receive a refundable tax credit equal to their distributive or pro-rata share of the Alabama income tax paid by the Electing PTE.
Impact for Q1 and Q2 Estimated Tax Payments
It is possible that the provisions of HB 588 could impact the underlying economic analysis of the potential benefits or detriments of the PTE election. Recognizing that the estimated tax payment calculated for April 15, 2021, for both the Electing PTE and its individual members/owners/partners, may no longer accurately reflect the circumstances after the enactment of HB 588, the legislature included a provision in HB 588 which authorizes the Alabama Department of Revenue to “waive any estimated tax penalties and interest assessments for the quarterly estimated tax payment due on April 15, 2021, which may otherwise be assessed for individual or pass-through entity taxpayers who are adversely impacted by the retroactive effective date of this section.” Consequently, PTEs which change their decision concerning the election to be taxed at the entity level as a result of the enactment of HB 588 will not be subject to any estimated tax penalties for underpayments associated with the estimated tax payment due on April 15, 2021, which may have occurred at either the PTE level or the individual owner/member/partner level, as long as the underpayment is made-up by the due date for the next quarterly estimated tax payment, which is on June 15, 2021.
On May 14, 2021, the Alabama Department of Revenue released detailed guidance which addresses the waiver of estimated tax penalties associated with the provisions of HB 588 and the procedures which should be followed by the PTEs and their members/owners/shareholders. The guidance can be accessed here >
To assist CPAs with the evaluation of the provisions in HB 588, the ASCPA will host a one-hour webinar on June 2, 2021, Critical Updates for Alabama Pass Through Entities Electing to be Taxed at the Entity Level, which will provide a detailed overview of this new legislation and highlight important considerations for PTEs. More information about this event can be found here >