CARES Act Issue Update

1. If legislation to provide an exclusion from Alabama gross income and from the calculation of the Alabama FIT deduction is not passed by year-end (due to the lack of a special session or other reasons), what guidance will the ADOR provide to individuals who either received stimulus payments in 2020 or will receive the payment through a credit on the 2020 federal tax return?
   
   Answer (as of December 10, before release of proclamation):   The ADOR indicated that the instructions for Form 40, including the Federal Income Tax deduction worksheet, are in the process of being updated to show that under current Alabama law the stimulus payments received and the 2020 recovery rebate credits will reduce the calculation of the 2020 Federal Income Tax deduction.   CPAs should watch for the release of the updated Form 40 instructions in the coming weeks.   If legislation is passed, either through a special session or through the regular session in February, the ADOR will issue additional guidance at that time.
   
   ASCPA Revised Answer (awaiting confirmation from ADOR):  Based on the guidance provided in Section I.B.1 and 2 of the Twenty-first Supplemental Emergency Proclamation issued by Governor Kay Ivey on Friday, December 11, the stimulus payments received during 2020 and the recovery rebate credits reported on the federal 2020 tax return will be excluded from Alabama income taxation and will also be excluded from all calculations in determining a taxpayer’s federal income tax deduction for Alabama income tax purposes.

1. If legislation to provide an exclusion from Alabama gross income for the amount of PPP loan forgiveness is not passed by the state legislature by year-end (due to the lack of a special session or other reasons), would the ADOR agree with the following analysis of the PPP loan forgiveness income and the deduction of expenses paid with PPP loan proceeds under existing Alabama law for individual sole proprietors, individual partners, and individual S Corporation shareholders?
   
   Answer (as of December 10, before release of proclamation):   The ADOR indicated that the following analysis would apply:

1. PPP loan forgiveness amount – not excluded from Alabama gross income and therefore taxable under current Alabama law
2. Expenses paid with PPP loan proceeds which are forgiven – fully deductible under current Alabama law due to the fact that the PPP loan forgiveness income is included in Alabama gross income
3. Net result, assuming that all proceeds were used for deductible expenses, would be zero on the Alabama income tax return
   ASCPA Revised Answer (awaiting confirmation from ADOR):  Based on the guidance provided in Section I.C.1.a and b of the Twenty-first Supplemental Emergency Proclamation issued by Governor Kay Ivey on Friday, December 11, the amount of cancellation of indebtedness income resulting from a loan forgiven pursuant to Section 1106 of the CARES Act should be excluded from the calculation of Alabama individual income taxes and from all calculations related to the determination of the taxpayer’s federal income tax deduction.
   
   Based on the guidance provided in Section 1.C.2 of the Twenty-first Supplemental Emergency Proclamation issued by Governor Kay Ivey on Friday, December 11, the expenses paid with PPP loan proceeds which were forgiven pursuant to Section 1106 of the CARES Act are not deductible for Alabama income tax purposes, as the current federal guidance under Internal Revenue Code Section 265, Notice 2020-32, and Revenue Ruling 2020-27 disallows the deduction at the federal level.  The proclamation indicates that these expenses are deductible for Alabama purposes “to the same extent as such expenses are deductible in calculating federal income tax.”

1. If additional legislation is not passed by the state legislature by year-end, would corporations and financial institutions be able to rely on existing Alabama law regarding the federal taxable income starting point in calculating Alabama taxable income to conclude that there is conformity with the federal tax treatment of the PPP loan forgiveness and the expenses paid with PPP loan proceeds which were forgiven?
   
   Answer (as of December 10, before release of proclamation):  The ADOR indicated that corporations and financial institutions would begin the calculation of Alabama taxable income with federal taxable income.  Therefore, given that the PPP loan forgiveness amount is excluded from the calculation of federal gross income under the provisions of CARES Act Section 1106, the federal taxable income for corporations and financial institutions would exclude this amount.   Under this analysis, corporations and financial institutions would exclude the amount of PPP loan forgiveness from Alabama taxable income as well, but corporations and financial institutions would also not be able to deduct the expenses paid with PPP loan proceeds under the existing and newly updated IRS guidance and IRC Section 265.  Multi-state C Corporations and Financial Institutions shall include in the calculation of their apportionment factors any PPP non-deductible expenses.
   
   ASCPA Revised Answer (awaiting confirmation from ADOR):  Based on the guidance provided in Section I.C.1.a and b of the Twenty-first Supplemental Emergency Proclamation issued by Governor Kay Ivey on Friday, December 11, the amount of cancellation of indebtedness income resulting from a loan forgiven pursuant to Section 1106 of the CARES Act should be excluded from the calculation of Alabama corporate income tax and financial institution excise tax and from all calculations related to the determination of the taxpayer’s federal income tax deduction for purposes of the Alabama income tax and financial institution excise tax.
   
   Based on the guidance provided in Section 1.C.2 of the Twenty-first Supplemental Emergency Proclamation issued by Governor Kay Ivey on Friday, December 11, the expenses paid with PPP loan proceeds which were forgiven pursuant to Section 1106 of the CARES Act are not deductible for Alabama income tax purposes, as the current federal guidance under Internal Revenue Code Section 265, Notice 2020-32, and Revenue Ruling 2020-27 disallows the deduction at the federal level.  The proclamation indicates that these expenses are deductible for Alabama purposes “to the same extent as such expenses are deductible in calculating federal income tax.”
   
   The Alabama Department of Revenue has indicated that multi-state C Corporations and Financial Institutions shall include in the calculation of their apportionment factors any PPP non-deductible expenses.
   
   Note that these conclusions are consistent with the application of the existing Alabama statutory guidance for corporations and financial institutions.  For corporations and financial institutions, the calculation of Alabama taxable income begins with federal taxable income.  Therefore, given that the PPP loan forgiveness amount is excluded from the calculation of federal gross income under the provisions of CARES Act Section 1106, the federal taxable income for corporations and financial institutions would exclude this amount.   Under this analysis, corporations and financial institutions would exclude the amount of PPP loan forgiveness from Alabama taxable income as well, but corporations and financial institutions would also not be able to deduct the expenses paid with PPP loan proceeds under the existing and newly updated IRS guidance and IRC Section 265.  
   
   
2. For individual taxpayers who do not itemize, will Alabama conform to the new $300 federal above-the-line deduction for charitable contributions under IRC Section 62(a)(22)?
   
   Answer:  No, Alabama is not tied to Internal Revenue Code Section 62.

1. For individual taxpayers, will Alabama conform to the revised 2020 taxable income limit of 25% (rather than 15%) for charitable contributions of food inventory, as provided under Section 2205(b) of the CARES Act
   
   Answer:  Yes, because Alabama conforms to Internal Revenue Code Section 170.
   
   
2. For individual taxpayers, will 2020 employer contributions of up to $5,250 toward the payment of an employee’s student loans, which are now excluded from 2020 federal adjusted gross income, be taxable in Alabama under existing Alabama law (see IRC Section 127(c)(1)(B), as amended by CARES Act Sec 2206(a))?
   
   Answer:  Yes, as there is no existing statutory exclusion for these payments under current Alabama law.
   
   Question submitted to the Alabama Department of Revenue:  Does this conclusion change as a result of Governor Ivey’s proclamation?   Would this provision be considered a “direct benefit…under the federal CARES Act”?

1. For individual taxpayers, will the coronavirus disaster payments made by employers under IRC Section 139, which are excluded from the employee’s federal adjusted gross income, be taxable in Alabama, under existing Alabama law?
   
   Answer:  Yes, as there is no existing statutory exclusion for these payments under current Alabama law.
   
   Question submitted to the Alabama Department of Revenue:  Does this conclusion change as a result of Governor Ivey’s proclamation?   Would this provision be considered a “direct benefit…under the federal CARES Act”?

1. Does Alabama conform to the 2020 federal waiver of the required minimum distribution rules for certain IRAs and employer account-based defined contribution plans (IRC Section 401(a)(9)(l)(i), as amended by CARES Act Section 2203(a))?
   
   Answer:  Yes, Alabama will conform with these provisions.

1. Does Alabama conform to the new federal provision which allows the income from qualified coronavirus retirement fund distributions in amounts up to $100,000 to be spread over three tax years and which also allows taxpayers to recontribute funds to eligible retirement plans within three years of the date of distribution (CARES Act Section 2202, with reference to IRC Section 408A(d)(3)(E))?
   
   Answer:  Yes, Alabama will conform with these provisions.
   
   Additional questions submitted to the Alabama Department of Revenue:
   
   
2. Does the proclamation issued by Governor Ivey change the previously announced conclusions regarding the Alabama taxation of the Revive Alabama grants?  
   
   Would the grants which were issued by the State of Alabama under the Revive Alabama or the new Revive Plus program be considered “direct benefits…under the federal CARES Act” which would be excluded from Alabama income taxation, given that the original source of the funds was the CARES Act?
   
   Similarly, will the grants which have been issued directly to Alabama business entities by the Governor’s office from the state’s allocation of funds from the CARES Act be considered “direct benefits…under the federal CARES Act” and thus excluded from Alabama income taxation, given that the original source of the funds was the CARES Act?