Last-minute move resurrects tax exemptions for federal restaurant benefits, takes effect Aug. 1

As of Aug. 1, federal Restaurant Revitalization Fund grants issued as part of the American Rescue Plan program will be exempt from Alabama income taxes, under Act No. 2021-540.

The provision for the exemption was not originally in the legislation, which primarily establishes an income tax credit for storm shelters.

A conference committee inserted the income tax exemption into the legislation and both chambers adopted the conference report in the final hours of the Alabama Legislature’s 2021 regular session. The new law also excludes benefits received from the federal grant in determining the recipient’s federal income tax deductions. The governor signed the law on the final day possible, May 27.

Those changes were originally in SB379 by Sen. Dan Roberts, R-Birmingham, which died May 4 due to Senate inaction.

Roberts had argued accountants would recommend that recipients of the stimulus grants withhold a portion of the proceeds in anticipation of having to cover Alabama income taxes. That would have denied the recipients “desperately needed aid, which would not be deployed for over six months if this bill is not passed until October, and for these businesses who have suffered greatly over the past year,” Roberts told lawmakers during debate. On the session’s final day, he told reporters, “Helping our restaurants was simple and critical for their business timing.”

His original legislation also would have allowed exemptions for enhanced child, dependent care and earned income tax credits received in 2021. He said the federal rescue plan’s enhanced child tax credit, earned income tax credit and child and dependent care tax credit will be worth about $1.7 billion to Alabama taxpayers and will continue to be a priority for him should the Legislature meet in a special session later this year. On May 17, which also was the Legislature’s final regular session meeting day, the IRS and Treasury Department announced the first monthly child tax credit payment will be issued starting July 15.

Act No. 2021-423
further allows members of pass-through entities to deduct federal income taxes on their individual state tax returns. The governor signed the legislation by Rep. Danny Garrett, R-Trussville, and Sen. Dan Roberts, R-Birmingham, on May 14.

It provides an income tax credit beginning with the 2021 tax year to the owner, member, partner or shareholder in an amount equal to its pro rata or distributive share of the Alabama income tax paid by the electing pass-through entity with respect to the corresponding tax year. Garrett said when federal income taxes are paid at the entity level, this law allows a state income tax deduction on the individual returns of each member based on their share of the income. Roberts said the legislation “assures there is no double taxation.

The law authorizes the Alabama Revenue Department to waive any estimated tax penalties and interest assessments for the quarterly estimated tax payment that was due April 15, 2021, which might be assessed for individual or pass-through entity taxpayers who are adversely impacted by the retroactive nature of the law.

The good people of Alabama will not be dinged with interest fees for filing their taxes by May 17,” Gov. Kay Ivey said April 15 as she signed Act No. 2021-203 by Sen. Arthur Orr, R-Decatur, and Rep. Chris Pringle, R-Mobile.

The Alabama House had given final approval April 13 to the legislation tying Alabama’s income and excise tax filing and payment deadlines to the federal timetable in an effort to avoid interest accruing on 2020 Alabama income taxes paid between the traditional tax filing deadline of April 15 and May 17, the adjusted deadline for both state and federal income taxes.

Without this legislation, which became effective when the governor signed it, the Alabama Revenue Department didn’t have the authority to waive interest for state income taxes originally due April 15.  The state and federal government moved the income tax filing deadline to May 17.

The law revised the payment date for income taxes as well as financial institutions excise taxes to coincide with the revised due dates for the corresponding federal payments. It also authorizes the Department of Revenue to delay the due date for filing and payment of any tax administered by the department for taxpayers living in areas under a declared state of emergency or disaster. The department will write rules to govern the changes.

Moving forward, if we are in a declared emergency, the Alabama Department of Revenue can quickly and efficiently extend the deadline to best serve the people of our state,” Pringle said.

On March 29, the IRS extended additional tax deadlines. Earlier in the 2021 regular session, the Alabama Legislature passed a law eliminating state income taxes on federal relief benefits.

Starting July 1, employers and state agencies are to follow a specific IRS rule and the safe harbor provision of the Revenue Act of 1987 when determining whether a worker is an employee for purposes of benefits and tax liabilities, under Act No. 2021-226.

The law, which the governor signed Monday, April 19, gives “clear and consistent guidance” to use the IRS rule, said the sponsor, Rep. Wes Kitchens, R-Arab. Kitchens said state businesses were being flagged for federal tax audits because they weren’t sure whether to use U.S. Labor Department or IRS guidance.

The federal guidelines nor this state law apply to workers’ compensation.

Other tax-related bills introduced in the 2021 regular session included:

  • SB316, introduced March 9 by Sen. Garlan Gudger, R-Cullman, would have excluded the amount of any state/local tax or fee on an electronic payment transaction from the amount on which an interchange fee is based. It sought to require a credit or debit card processor to either deduct or rebate the amount of state and local taxes and fees from the calculation of the credit card swipe fee charged to the retailer or other business. If a merchant or seller was unable to capture and transmit tax or fee amounts at the time of sale, the payment card network would have then be required to accept proof of tax or fee amounts collected on sales and to promptly credit the merchant’s or seller’s settlement account. The Senate Fiscal Responsibility and Economic Development Committee never considered the bill.
  • HB442 by Rep. Mary Moore, D-Birmingham, would have phased out the 4% state sales and use taxes on food by reducing the state tax by one percentage point over a four-part reduction schedule beginning Oct. 1. Food would have been fully exempt from Alabama sales and use taxes by Oct. 1 2025, under this plan. It died in the House Ways and Means Education Committee.

This article is part of the Alabama Retail Report, a communication for Alabama Retail Association members. Not a member? Join us!

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