Summary of Act 2019-284, the Financial Institution Excise Tax Reform Act

by Bruce Ely and Jimmy Long, Bradley

EDITOR’S NOTE: In May of 2018, at the request of the Alabama Department of Revenue (“ADOR”), the Alabama Bankers Association (“ABA”) established a working group of tax experts to study ways to modernize and clarify the statutes governing Alabama’s Financial Institution Excise Tax (“FIET”).  Originally enacted in the 1930s, these statutes had remain largely unchanged and, consequently, the differences between the state’s FIET laws and state and federal corporate income tax laws had become notable.  Over the next year, these experts – nearly two-dozen bankers, tax attorneys, CPAs, ABA staff, and ADOR officials – worked to craft revenue-neutral legislation that would improve every facet of the FIET, from filing to enforcement.  Introduced as House Bill 419 by Rep. Kyle South (R-Fayette), the FIET Reform Act unanimously passed both the House and Senate and was signed into law by Governor Kay Ivey on May 28.

Shortly after enactment, two members of the working group, attorneys Bruce Ely and Jimmy Long of the Bradley Arant Boult Cummings law firm in Birmingham, drafted a summary memo of the FIET Reform Act for ABA to distribute to its members.  With permission of the authors, that memo, dated June 6, is reprinted below in its entirety.

On May 28, Gov. Kay Ivey signed House Bill 419 into law as Act # 2019-284, the landmark Financial Institution Excise Tax Reform Act of 2019 (FIETRA) that resulted from a collaborative effort initiated by the Alabama Department of Revenue (ADOR) last summer. Several provisions of the Act are retroactively effective as simply clarifying existing law, while most provisions become effective for tax years beginning after December 31, 2019.

As the Birmingham Business Journal quoted your CEO Scott Latham: “A group of nearly two dozen bankers, CPAs, and tax attorneys worked for over a year with the Alabama Bankers Association staff and Department of Revenue officials to draft this legislation, which was the most substantial revision to the FIET statutes since they were enacted in the 1930s. The new law clarifies and modernizes every facet of the FIET – computing liability, filing paperwork, distributing proceeds, and enforcing the law – while remaining revenue-neutral overall. Thanks to the hard work of Rep. Kyle South (R-Fayette), the bill’s sponsor, as well as Sen. Shay Shelnutt (R-Trussville) and Sen. Steve Livingston (R-Scottsboro), who shepherded the legislation through the Senate, the bill unanimously passed the House (98-0) and the Senate (28-0)….”

The FIET’s current definition of net income (roughly equivalent to corporate taxable income) was both antiquated and incomplete, crafted in the late 1930s with subsequent amendments from time to time. The statutes failed to address the modern financial system or to tie to the federal income tax code, which was only exacerbated by the passage of the Tax Cuts and Jobs Act (“TCJA”) in December 2017. It was already difficult for both the ADOR and banks to interpret and administer these statutes, but a thorough analysis of the impact of the TCJA on the FIET statutes convinced officials at the ADOR to approach the ABA to form a working group. Following is a summary of the Act.

Most importantly, the Act clarifies the calculation of taxable income by, for the first time, tying it to federal taxable income as the starting point, with certain specified additions and subtractions. The Act brings the FIET much closer to its Alabama corporate income tax counterpart, as well as the Internal Revenue Code provisions, thus making the interpretation and administration of the statutes easier for all parties. “The bill is revenue neutral in terms of recurring revenue. The change to the calculation of taxable income was mechanical and not substantive. Through the specified additions to and the subtractions from federal taxable income, taxpayers should arrive at the same taxable income number that would have been produced under prior law,” according to Deputy Commissioner of Revenue Joe Garrett, one of the leaders of the effort. The material changes included in the Act are summarized below (also see our column in Board Briefs last month for the litany of problems the Act should cure):

Preservation of Existing FIET Treatment – with the adoption of federal taxable income as the starting point, several adjustments were needed to preserve the unique treatment of the following items for FIET purpose: (1) capital losses remain fully deductible in the year incurred; (2) the deduction for all state or local taxes (except the FIET or any taxes that are claimed as credits against the FIET); (3) the deduction for federal income taxes; and (4) the inclusion of state, county and municipal interest income in the FIET tax base.

Clarification of Certain TCJA Changes – the Act clarifies that the business interest limitations under IRC Section 163(j), the taxation of “global intangible low-taxed income:” (GILTI) under IRC Section 951A and the partially offsetting deduction for foreign-derived intangible income under the TCJA are not included in the FIET calculation, and it expressly decouples from these changes for future tax years. Finally, the Act also clarifies the FIET’s conformity to the TCJA’s accelerated depreciation deduction (including the enhancements to bonus depreciation and first year asset expensing) applies retroactively to all open tax years as well as to future tax years.

Retained Deduction for FDIC Premiums – the Act retroactively decouples from the TCJA’s disallowance of certain FDIC premiums, and thus amounts paid remain fully deductible.

Dividends Received Deduction (“DRD”) – the Act adopts the federal DRD with modifications similar to Alabama corporate income tax purposes, and thus replaces the former deduction that was limited to only dividends paid by Alabama corporations or certain liquidating dividends. The Act also confirms a 100% deduction for Captive REIT dividends, but that amount will be reduced to 80% in 2021 and each year thereafter until it is completely phased-out by 2025.

Net Operating Losses (“NOLs”) – the Act extends and conforms the carryforward period for NOLs to the same 15 year period for Alabama corporate income tax purposes, but eliminates the ability to carry NOLs back to the prior two years (both with respect to NOLs incurred in 2020 and forward). For consolidated return filers, the Act also preserves and clarifies the ordering rules for applying separate company NOLs and the share of NOL pushed down from the parent company under current law.

Consolidated Return Filing – the $6,000 annual filing fee is eliminated, and the ability to include more related financial institutions in the group was broadened, but the election will now require the affiliated group to file consolidated FIET returns for a ten year period (unless the federal consolidated election is revoked or terminated).

Administrative Changes – the due dates for future FIET returns were synched with the federal income tax return due dates, including quarterly estimated tax payments (beginning in 2020), but the Act provides a grace period of two years where the ADOR will not assess interest or penalties as long as the underpayment is not an “intentional disregard of the law.” Finally, the distribution of the portion of the FIET revenues due to the cities and counties is now calculated on an aggregate basis, and not based on where a specific bank conducts its business. That should relieve banks of some difficult recordkeeping.

Please let us know if you have any questions or need further information on any of the above points ( or Thank you for the opportunity to be of service to the ABA and to work with Scott and Jason on this crucial project.