The Alabama Department of Revenue issued helpful guidance on January 7, following its December 18, 2020 guidance implementing Governor Ivey’s landmark Supplemental Emergency Proclamation. The new guidance affirms the retroactive deductibility of business expenses funded, or that will be funded, by PPP loan proceeds, as authorized by the 5,500+ page Consolidated Appropriations Act, 2021 (the “Appropriations Act”), signed into law on December 27. Readers may recall the Internal Revenue Service took the position that those expenses were non-deductible since the income was exempt from federal income tax under the CARES Act. Congress clearly overrode the IRS’ position.
The previous ADOR guidance, following the Governor’s proclamation, excluded a number of CARES Act benefits from the calculation of Alabama taxable income, including: cancellation of indebtedness income resulting from a forgiven PPP loan; “Economic Impact Payments,” or stimulus payments, received during 2020; qualifying disaster relief payments under I.R.C. § 139; as well as employer payments of qualified student loans of certain employees under I.R.C. § 127.
The update focuses on taxable “C” corporations and financial institutions regarding deductibility of their expenses funded by a PPP loan “[b]ecause the calculation of the Alabama Corporate Income Tax and Financial Institution Excise Tax begins with a taxpayer’s federal taxable income…” The guidance also mentions individual taxpayers being allowed to deduct their loan-related expenses but does not cite any statutory authority.
Conversely, the updated guidance reaffirms that (in contrast to the federal tax treatment) grants issued by the Governor’s Office out of the state’s Coronavirus Relief Fund (CRF) to business taxpayers are exempt from Alabama income tax, but as a quid pro quo, expenses funded by those grants remain non-deductible. No surprise there.
There are still a number of open questions on how certain items will be treated for Alabama income tax purposes, both for 2020 and 2021. Highlighted below are a handful of those open questions.
Some Open Items Now Excluded from Federal Taxable Income Not Addressed:
As a result of either the CARES Act or the Appropriations Act, many types of income are now excluded from federal taxable income. Whether these federal tax benefits will or will not be included in Alabama taxable income is still an open question. The types of income in question include amounts received through the new Shuttered Venue Operator grants, SBA loan subsidy payments, and Economic Injury Disaster Loan (EIDL) grants and advances from SBA.
The Guidance Currently Applies Only to Calendar Year 2020:
The guidance does not address the extension in the Appropriations Act of several tax benefits beyond 2020. For example, under I.R.C. § 127, employer-provided student loan repayments can now be offered to employees as a tax-free fringe benefit through 2025. It’s not yet clear if this benefit can be claimed after 2020 under Alabama law. Also, the Governor’s proclamation and initial ADOR guidance only dealt with stimulus payments “received by the taxpayer during 2020.”
Perhaps another supplemental emergency proclamation will be issued by the Governor to address these open questions or the Governor may rely on the Alabama Legislature to step in and address these issues when it convenes on February 2 for its regular session.