By: Kim Smith, CPA, Tax Shareholder
Kim is a shareholder, a member of the JMF Tax Department and in charge of the JMF State and Local Tax (SALT) group. With over 20 years of experience, she assists clients with corporate, partnership, and individual income tax reporting as well as complex multi-state income and sales tax issues.
On February 12, Gov. Ivey signed into law the Alabama Electing Pass-Through Entity Tax Act. Beginning in 2021, Alabama pass through entities (S Corps, Partnerships and LLCs) may elect to pay Alabama income tax at the entity level.
As you might recall, the TCJA limited the state income tax itemized deduction to $10,000. That prompted many states to investigate or pass legislation to allow for pass through entity tax to be paid at the entity level to bypass the $10,000 limit. The IRS issued Notice 2020-75 which specified that income tax payments made by partnership or S Corporations at the entity level will not be taken into account in applying the SALT deduction limitation for any individual partner or shareholder. Therefore, if a state allows an entity to pay state tax at the entity level, it will reduce the amount of income reported by the shareholder/partner.
In response to the IRS Notice, Alabama enacted Act 2021-1 (HB 170). In May, Alabama HB 588 was signed into law which amended Act 2021-1, by replacing the original bill’s entity level tax with an entity-level tax system that restores flow through of income or loss to owners along with a refundable credit equal to the distributive share of Alabama income tax paid by the electing pass-through entity.
Under HB 588, Individual members/owners/partners will be required to report their distributive share of the income from the Election PTE on their Alabama individual income tax returns, and the refundable tax credit equal to their distributive or pro-rata share of the Alabama income tax paid by the Electing PTE.
Keep in mind that Act 2021-1 is not an option – we are now operating under HB 588.
How and when to elect: The election should be made no later than the 15th day of the 3rd month following the close of the tax year. The election may be revoked in a subsequent year.
Estimate payment requirement: Estimate payments are required if the estimated Alabama tax liability for electing PTE is greater than or equal to $500. Due dates are: 4/15, 6/15, 9/15 and 12/15. For a fiscal year taxpayer, due dates are the 15th day of the 4th, 6th, 9th, and 12th month. The required estimate is 25% of the required annual payment. The Required Annual Payment is the lesser of 100% of tax shown on the return for the current year or 100% of tax shown on return for the prior year. There is still a prior year safe harbor available for 2021.
The prior year safe harbor for 2021 is as follows:
- S Corps: Total of lines 1 – 17 in the Alabama column on Schedule K from the 2020 Form 20S * 5%.
- PTE other than S Corp: Total lines 1-17 in the Alabama column of Schedule K from 2020 Form 65 * 5%
HB 588 included a waiver of estimated tax penalties and interest associated with the payment due at 4/15/21. If the underpayment is $500 or less – no penalty is incurred. If the underpayment is in excess of $500, taxpayers are eligible for a waiver if the underpayment is due to the retroactive effect of HB 588. Requests for penalty waivers associated with estimated payments should be submitted at the time the taxpayer files its annual income tax or Financial Institution Excise tax return. Basically, you will file Form PWR (Penalty Waiver Request) with form 2210 if the penalty is at the individual or PTE level.
How to make estimated payments: Estimates greater than $750 will be made on My Alabama Taxes. Estimates less than $750 may be paid via check and submitted with PTE-V.