§ 40-18-35 — Deductions Allowed to Corporations

Alabama § 40-18-35

• Jurisdiction: Alabama
• Title 40: Revenue and Taxation
• Ch. 18: Income Taxes
• Art. 1: General Provisions

Text

(a) The following items shall be deducted from federal taxable income for purposes of computing taxable income under this chapter:
(1) Refunds of state and local income taxes.
(2) Federal income tax paid or accrued during the taxpayer’s taxable year. The portion of federal income tax deductible by a corporation earning income from sources both inside and outside of Alabama shall be determined by the ratio that the corporation’s taxable income, computed without the deduction for federal income tax, apportioned and allocated to Alabama bears to the corporation’s taxable income, computed without the deduction for federal income tax, apportioned and allocated everywhere.
(3) Interest income earned on obligations of the United States.
(4)a. Interest income earned on obligations of the State of Alabama or its subdivisions or instrumentalities thereof to the extent included in gross income for the purposes of federal income taxation.
b. Interest income earned on obligations of the State of Alabama or its subdivisions or instrumentalities thereof to the extent included in gross income for the purposes of federal income taxation if such obligations were issued prior to January 1, 1995, to pay the cost of assets to which subsections (c) through (e) of Section 40-9B-7 apply.
(5) The amount of any aid or assistance, whether in the form of property, services or monies, provided to the State Industrial Development Authority pursuant to Section 41-10-44.8(d) in order to induce an approved company to undertake a major project within the state.
(6) Expenses otherwise deductible that were not deducted on the federal income tax return as a result of an election to claim a credit for those expenses.
(7) If the taxpayer owns greater than 20 percent of the stock, by vote or value, of the distributing corporation the following deductions are allowed:
a. Amounts described in 26 U.S.C. § 78;
b. Dividend income, including amounts described in 26 U.S.C. § 951, from non-U.S. corporations to the same extent such dividend income would be deductible under 26 U.S.C. § 243 if received from U.S. corporations; and
c. Dividends received from foreign sales corporations as defined in 26 U.S.C. § 922.
d. Dividend income from a Captive REIT to the same extent such dividend income would be deductible under 26 U.S.C. § 243 if received from an entity that is not a REIT.
(8) The portion of total deductible interest expense classified as nonbusiness interest expense not deductible at arriving at apportioned income, but instead allocated to the situs of the related nonbusiness income producing assets, shall be based upon the ratio of the average cost of the corporation’s nonbusiness assets to the average cost of the corporation’s total assets.
(9) The interest portion of rent paid under lease agreements entered into prior to January 1, 1995, relating to obligations issued by the State of Alabama or subdivisions or instrumentalities thereof, to the extent that such obligations were issued to pay the cost of assets to which subsections (c) through (e) of Section 40-9B-7 apply.
(10) The amount by which the depletion allowance specified in Section 40-18-16(b) exceeds the depletion allowance deducted in calculating federal taxable income.
(b) Restrictions on the deductibility of certain intangible expenses and interest expenses with a related member.
(1) For purposes of computing its taxable income, a corporation shall add back otherwise deductible interest expenses and costs and intangible expenses and costs directly or indirectly paid, accrued, or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions, with one or more related members, except to the extent the corporation shows, upon request by the commissioner, that the corresponding item of income was in the same taxable year: a. Subject to a tax based on or measured by the related member’s net income in Alabama or any other state of the United States, or b. subject to a tax based on or measured by the related member’s net income by a foreign nation which has in force an income tax treaty with the United States, if the recipient was a “resident” (as defined in the income tax treaty) of the foreign nation. For purposes of this section, subject to a tax based on or measured by the related member’s net income means that the receipt of the payment by the recipient related member is reported and included in income for purposes of a tax on net income, and not offset or eliminated in a combined or consolidated return which includes the payor. Any portion of an item of income that is not attributed to the taxing jurisdiction, as determined by that jurisdiction’s allocation and apportionment methodology or other sourcing methodology, is not included in income for purposes of a tax on net income and, therefore, shall not be considered subject to a tax. That portion of an item of income which is attributed to a taxing jurisdiction having a tax on net income shall be considered subject to a tax even if no actual taxes are paid on such item of income in the taxing jurisdiction by reason of deductions or otherwise.
(2) The corporation shall make the adjustments required in subdivision (1) unless the corporation establishes that the adjustments are unreasonable, or the corporation and the Commissioner of Revenue agree in writing to the application or use of alternative adjustments and computations. Nothing in this section shall be construed to limit or negate the commissioner’s authority to otherwise enter into agreements and compromises otherwise allowed by law.
(3) The adjustments required in subdivision (1) shall not apply to that portion of interest expenses and costs and intangible expenses and costs if the corporation can establish that the transaction giving rise to the interest expenses and costs or the intangible expenses and costs between the corporation and the related member did not have as a principal purpose the avoidance of any Alabama tax and the related member is not primarily engaged in the acquisition, use, licensing, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property, or in the financing of related entities. If the transaction giving rise to the interest expenses and costs or intangible expenses and costs, as the case may be, has a substantial business purpose and economic substance and contains terms and conditions comparable to a similar arm’s length transaction between unrelated parties, the transaction will be presumed to not have as its principal purpose tax avoidance, subject to rebuttal by the Commissioner of the Department of Revenue.
(4) The adjustments required in subdivision (b)(1) shall not apply to that portion of interest expenses and costs and intangible expenses and costs that the corporation can establish was paid, accrued or incurred, directly or indirectly, by the related member during the same taxable year to a person that is not a related member.
(5) Nothing in this section shall require a corporation to add to its taxable income more than once any amount of interest expenses and costs or intangible expenses and costs that the corporation pays, accrues or incurs to a related member described in subdivision (1).
(6) Nothing in this section shall be construed to limit or negate the commissioner’s authority to make adjustments under this chapter.
(7) This subsection shall not limit the deduction of the interest portion of rent paid under lease agreements described in subsection (a)(9).
(c) Restrictions on the deductibility of Captive REIT dividends. For purposes of computing its taxable income, a Captive REIT shall add back any dividend paid to a related member that it deducted pursuant to Section 10-13-21 and/or 26 U.S.C. §§ 561 and 857.
(d) Except with regard to payments described in subsections (a)(4)b and (a)(9), nothing in this section shall be construed to allow any item to be deducted more than once or to allow a deduction for any item that is excluded from income or to allow any item to be included in the Alabama taxable income of more than one taxpayer.
(e) The following credits shall be allowed against the tax levied by Section 40-18-31:
(1) the amount provided to an approved company pursuant to Section 41-10-44.8(a)(1), subject however, to the limitations contained in Section 41-10-44.8(c); and
(2) the amount provided in Section 41-10-44.9 to an approved company for a payment by such company into a tax increment fund.

Legislative History

(Acts 1935, No. 194, p. 256; Acts 1939, No. 399, p. 521; Code 1940, T. 51, §402; Acts 1945, No. 317, p. 510; Acts 1963, 2nd Ex. Sess., No. 107, p. 289, §1; Acts 1969, Ex. Sess., No. 24, p. 55, §1; Acts 1969, No. 1136, p. 2115, §1; Acts 1973, No. 1071, p. 1819, §1; Acts 1973, No. 1170, p. 1969; Acts 1982, No. 82-465, p. 759, §7; Acts 1982, 1st Ex. Sess., No. 82-667, p. 85, §7; Acts 1985, No. 85-515, §16; Acts 1985, No. 85-545, §1; Acts 1988, 2nd Ex. Sess., No. 88-954, §2; Acts 1990, No. 90-583, p. 588, §9; Acts 1996, No. 96-550, p. 803, §2; Act 98-502, p. 1083, §1; Act 99-664, 2nd Sp. Sess., p. 124, §1; Act 2000-702, p. 1425, §1; Act 2001-1088, 4th Sp. Sess., p. 1095, §1; Act 2008-543, p. 1175, §1.)