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Could the state tax virus relief money? Yes, but lawmakers want to change that.

Many Alabama families and businesses that received federal coronavirus relief funds will be taxed by the state if legislative action isn't taken.

Several lawmakers told Alabama Daily News the Legislature has every intention of un-taxing the relief funds, including stimulus checks of up to $1,200 per person and forgiven Paycheck Protection Program loans to businesses, but state statutes must be tweaked to match federal law. Now, with the Legislature not scheduled to meet again until February, it’s a matter of exactly how and when to do that.

“No one intends to tax that money,” said Sen. Dan Roberts, R-Mountain Brook.  “The intention of these dollars is to stimulate the economy and help people make it through this epidemic. But legislation needs to be passed, so that's what we're doing.”

Late in the 2020 legislative session, Roberts and others proposed clarifying in state law that the stimulus money and loan forgiveness are not taxable. His substituted Senate Bill 250 cleared committee but died when the House, in the coronavirus-shortened session, wanted to focus solely on state budget bills and local legislation. 

Roberts is now working on new legislation that combines the tax exemptions with his previously filed SB250 to reduce Alabama’s corporate income tax rate and eliminate the federal income tax deduction for businesses. He says it is logical to combine the two tax-related items into one bill.

The new legislation will likely be done within the week and ready to go, should Gov. Kay Ivey call a special session this year. If she doesn’t, the bill will be pre-filed for the 2021 regular session that starts on February 2. 

Some lawmakers said this issue should have already been resolved.

“There was the ability to fix this last session,” Sen. Chris Elliott, R-Fairhope, said. He had a standalone bill addressing the stimulus tax issue in May.

“That is my frustration, something so basic that needed to happen wasn’t allowed to be considered in the last session,” he said. 

Elliott said that while he’s supportive of Roberts’ bill, he will likely file his own legislation that only addresses the untaxing of coronavirus relief funds.

“If Sen. Roberts’ bill passes, with the language I’ve put forth, I’m completely fine with it,” Elliott said.

Rep. Arnold Mooney, R-Birmingham, also filed in May a two-page bill excluding relief funds from state taxes. If it's not taxed federally, it shouldn't be taxed at the state level, Mooney said. Though he's supportive of the work being done on the corporate tax reform legislation, Mooney said he plans to file his bill again in the next session.

If lawmakers don't act, some, but not all, Alabamians would be taxed on the stimulus checks, according to the Alabama Department of Revenue.

“Stimulus payments could potentially affect the calculation of Alabama taxable income because they could change the federal tax deduction,” an ADOR spokesman told Alabama Daily News in an email. “Depending on income level and deductions, some taxpayers may not see an actual change in Alabama taxable income, but others will. Each family’s tax situation is different, depending on the type of income and the various credits available.” 

A similar situation exists for thousands of businesses that received the Paycheck Protection Program loans. If employers meet the terms set by the Small Business Administration and the U.S. Department of Treasury, those loans will be forgiven, a process that will soon be underway. 

“If that loan is forgiven, it’s revenue and if it’s revenue, it’s currently taxable,” Elliott said.

Yet many Alabamians likely assume their relief money is tax-free.

“That’s going to be a surprise to a lot of people,” said Bruce Ely, longtime partner at the Birmingham-based Bradley Arant law firm, who specializes in tax law. “I would bet that very few Alabama businesses know about this gotcha.” 

Ely was a technical adviser to the Legislature’s recent task force on tax cuts, chaired by Roberts and Rep. Danny Garrett, R-Trussville. He’s also assisted Roberts with his bill.

He said most state leaders agree that a fix is needed, it’s just a matter of when. Ely is still hopeful for a special session.

In the meantime, Ely said, those who pay their estimated income taxes quarterly should in theory be paying tax on the COVID-19 relief money.

“I guarantee you, most Alabamians have no idea these federal tax rebates or the PPP loan forgiveness are currently taxable,” he said.

 

 

 

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