Clearer credit for taxes paid for pass-through entities now law

A new law settles refund and outstanding assessment issues arising from a 2013 Alabama Department of Revenue rule change. The rule related to multistate pass-through entities, such as LLCs, partnerships and S corporations.

The Alabama Society of CPAs, the Revenue Department and others collaborated to write Act No. 2018-465 by Rep. Rod Scott, D-Fairfield, and Sen. Rodger M. Smitherman, D-Birmingham, to include the rule within state law. The new law will provide certainty regarding how Alabama residents calculate their credit for taxes paid to other states.

Under the legislative compromise and settlement with the department, an income tax credit for taxes paid to another state will only be used to offset a taxpayer’s income tax liability that is attributable to income from non-Alabama sources.

If the credit is not limited by the new rule, taxpayers could use that omission to eliminate Alabama state taxes,” Scott said.

The Revenue Department will grant refunds for tax years 2013-2016, if refund claims are filed before July 1, 2018. For the 2017 tax year, taxpayers will be able to claim the credit without consideration of the limitation in Department Rule 810-3-21-.03. The department will drop all assessments related to the calculation of the credit for taxes paid to other states based on the limitation contained in the rule.

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