Alabama won’t tax COVID stimulus payments or benefits

February 12, 2021

Businesses, individuals and nonprofits do not have to pay state income taxes on federal coronavirus relief benefits received in 2020 or 2021, plus Alabama businesses will see reduced taxes, under Act No. 2021-1, which the governor signed Friday, Feb. 12.

“That’s at least $8.7 billion in stimulus money to the people of Alabama that we are not going to tax,” Sen. Dan Roberts, R-Birmingham, said just moments after the Senate unanimously gave final approval Feb. 11 to HB170 by Rep. Danny Garrett, R-Trussville. Roberts sponsored the companion bill, SB98.

Eliminating the state income tax on federal relief benefits, including Paycheck Protection Program loans and stimulus checks, was a top priority of the Legislature and the governor. The law codifies an executive action taken by the governor Dec. 11. The Alabama Department of Revenue earlier issued guidance to help Alabama taxpayers prepare their 2020 state income tax returns based on the governor’s proclamation.

The legislation offered by Garrett and Roberts was among several proposed to eliminate state taxes on COVID benefits and payments –  SB7, SB75/HB152, HB19/HB35, HB86­ and HB98.

While the other bills dealt strictly with the income tax exemption, the new law also makes the state’s tax code work better with the federal government’s 2017 Tax Cuts and Jobs Act. Garrett said the business tax changes would “move some tax burden from inside the state to outside the state.” The law changes how business income is apportioned to Alabama to a single-sales-factor, clarifies the deduction for business interest expenses, decouples from provisions of the Tax Cuts and Jobs Act and allows pass-through entities to elect to be taxed at the entity level. The changes were recommended by the Joint Task Force on The Tax Cuts and Jobs Act of 2017. Overall, the law was effective immediately when the governor signed it, but it has varying effective dates related to tax years.

The fiscal note says the law will generate $12.95 million more in the first year for the Education Trust Fund and $12.75 million more each year thereafter.

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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