On May 28, 2019, Alabama Gov. Kay Ivey signed the Financial Institution Excise Tax Reform Act of 2019, or House Bill 419, providing various reforms to the taxation of financial institutions. House Bill 419 was the result of a collaborative effort between the Alabama Department of Revenue, the Alabama Bankers Association, and several tax practitioners who regularly advise banks in Alabama. The primary changes are highlighted below and include changes as a result of the Tax Cuts and Jobs Act of 2017.
The bill amends the Alabama Financial Institutions Excise Tax (FIET) from a post-payment system to a quarterly prepayment system patterned after the federal system effective for tax years beginning after Dec. 31, 2019. Financial institutions are now required to make quarterly estimated tax prepayments in accordance with federal section 6655 (federal failure to pay estimated income tax provisions), with certain exceptions.
Underpayment penalties and interest are waived for the first two years of this change, as long as the underpayment is not attributable to an intentional disregard of the law.
Net income changes
Additionally, the legislation revises the definition of “net income” for excise tax purposes to federal taxable income without the benefit of federal net operating losses, plus the additions prescribed and less the deductions and adjustments allowed. Financial institutions not subject to the federal income tax (e.g., credit unions) are required to begin the calculation of net income by performing a pro forma calculation of federal taxable income. The state’s previous definition of net income was closer to “taxable income” and was in use for the state for many decades with only minor amendments. Those provisions were often criticized for not providing much clarity to financial institutions in areas such as fixed asset recovery and conformity to the Internal Revenue Code.
The bill also decouples the Alabama FIET from the federal Tax Cuts and Jobs Act for excise tax purposes requiring that financial institutions add-back interest expense deductions under section 163(j)(2); add-back foreign-derived intangible income and GILTI under section 250; and allow the deduction of foreign-derived intangible income and GILTI under section 951. Additionally, the bill also decouples the Alabama FIET from the new federal limitation on the deduction of FDIC premiums for certain financial institutions.
The bill eliminates the $6,000 fee for qualifying corporate groups electing to file on a consolidated basis and makes the consolidating election binding for ten years. The election is terminated automatically upon the revocation or termination of the federal consolidated return election.
House Bill 419 makes the most significant Alabama Financial Institution Excise Tax reforms in decades. Institutions subject to the tax should carefully review the provisions and reach out to their state tax advisors with questions on complying with the new provisions.