Alabama Governor Kay Ivey on May 14, 2021signed House Bill 588 into law, amending the Electing Pass-Through Entity Tax Act ("Act 2021-1") enacted on February 12, 2021. The new law changes the taxable income reporting requirements for pass-through entity (PTE) members and authorizes the Alabama Department of Revenue to waive interest and penalties for underpayments of first-quarter estimated taxes as a result of the bill's retroactive effective date. (For prior coverage of the original version of Act 2021-1, (see Machen McChesney's blog).
Change to Reporting Pass-Through Entity Income
Retroactive to tax years beginning on or after January 1, 2021, HB 588 requires members of an electing PTE to report their share of income from the electing PTE. Members will now report their distributive share of income from the electing PTE but will be entitled to a refundable tax credit in return. This credit will equal a member's pro rata or distributive share of the Alabama income tax paid by the electing PTE. Previously under Act 2021-1, income would not flow through to members and, therefore, resident and nonresident members were not liable to pay Alabama income tax on their distributive share of PTE income.
Electing PTEs are still taxed at the highest Alabama marginal individual income tax rate calculated in accordance with the Internal Revenue Code Subchapter K or Subchapter S rules, as appropriate, and apportioned in accordance with the state's multistate apportionment rules.
Waiver of Estimated Payment Penalties and Interest
HB 588 also authorizes the Alabama DOR to waive interest and penalties resulting from the underpayment or failure to pay the estimated tax due on April 15, 2021, by the electing PTE and its members. According to updated temporary guidance issued by the Alabama DOR, if the underpayment is $500 or less, then penalties and interest will not be incurred. If the underpayment is greater than $500 and is due to the retroactive effect of HB 588, then taxpayers will be eligible for penalty and interest waivers.
Machen McChesney Insight
Form 2220AL (interest and penalty worksheet) has a K1 exception checkbox that should be checked if a member corporation's primary source of taxable income is from a K1. If a corporation meets the exception requirements, it will not be assessed a penalty.
View Alabama's DOR's updated temporary guidance addressing the waiver of estimated tax interest and penalties
For more information about the above article or other business tax services, contact Michael D. Machen, CPA, CVA, by calling (334) 887-7022 or leaving us a message below.
Bey Scott Smith | Technical Practice Leader, State and Local Tax
This article originally appeared in BDO USA, LLP's Insights/Tax/State and Local Tax -June 2021. Copywrite 2021 BDO USA, LLP. All rights reserved. www.bdo.com.