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FAQ Categories / Tax: Deductions and Credits

Yes. The federal limit is 10% of the federal taxable income without the benefit of the deduction.

Yes. Federal income tax may be deducted for the taxable year in which paid or accrued, according to the method of accounting used in computing taxable income. The federal income tax allowable as a deduction is the net tax liability as accrued and subsequently paid, that is, the amount after subtracting all deductible and/or refundable credits.

When computing the federal income tax deduction for any taxable year for members of qualified corporate group filing a consolidated federal income tax return the consolidated FIT liability must be apportioned only among the members of the group that individually report positive federal taxable income. Each member is apportioned a share of the consolidated FIT based on a fraction, the numerator of which is the member’s positive federal taxable income and the denominator of which is the sum total federal taxable income of all members separately reporting positive federal taxable income (without regard to any election under 26 U.S.C. §1502) for its consolidated federal return.

Financial institutions which do business in Alabama are allowed to deduct federal income taxes attributable to their Alabama income (Code of Alabama, 1975, §40-16-1.2).

  • State, county and city sales and use taxes paid on tangible personal property purchased and paid for by the institution for its consumption;
  • State utility taxes paid on telephone, electrical power, gas or water;
  • Rental or leasing taxes paid directly to the state for the privilege of leasing tangible personal property to others within Alabama;
  • Increases in the city or county license taxes imposed upon financial institutions between July 10, 1943, and October 1, 1951.


Credits will not be allowed on any taxes not levied on the financial institution.

Examples of these taxes:

  • State, county or city sales or use taxes on items purchased for resale such as checks, promotional items or equipment;
  • Gross receipts taxes levied on the seller;
  • Rental or leasing taxes paid to others;
  • Federal taxes of any nature;
  • Taxes paid to contractors or others on equipment attached to real property or in the construction of buildings, etc.;
  • the tax imposed by this chapter.


The Alabama Department of Revenue now requires the use of Schedule EC, Business Credits when claiming business tax credits.

Taxes not taken as a credit may be allowed as a deduction.

Some business credits are required to be submitted through My Alabama Taxes. For these credits, log in to My Alabama Taxes, click on the link for the Financial Institution Excise Tax account, under the “I Want To” section select “Submit a Credit Claim.” Choose the credit being claimed from the drop-down menu, complete the submission with the taxpayer’s information, and attach the supporting documentation or certificate. If you do not have a My Alabama Taxes account or the My Alabama Taxes Online Registration Card with the account information needed to set up a My Alabama Taxes account, then contact the Business Income Tax Section at 334-242-1170, option 6, to request this information.

Schedule EC. The Alabama Department of Revenue now requires the use of Schedule EC when claiming business tax credits. The schedule allows the taxpayer to compute the total amount of tax credits allowable. The amounts entered on the Schedule EC, Business Credit will carry over to the Form ET-1, page 1, line 17. This schedule must be submitted with the return to receive credit(s). See instructions for Schedule EC for additional information.

If the taxpayer owns 20 percent or more of the stock, by vote or value, of the distributing corporation, 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.

The amount treated as dividends under 26 U.S.C. § 78.

A financial institution may deduct the applicable percentage of dividend income from a Captive REIT if such dividend income would be deductible under 26 U.S.C. § 243 if received from an entity that is not a REIT, as defined in Section 40-18-1-(27), whose shares or certificates of beneficial interest are not regularly traded on an established securities market and are owned or controlled, at any time during the last half of the tax year, by an association taxable as a corporation that is not exempt from tax under 26 U.S.C. § 501(a) or a REIT, as defined in Section 40-18-1(27).

Dividends received from other credit unions and credit union service organizations as defined by federal law and the regulations of the National Credit Union Administration shall be subtracted from financial statement income for purposes of computing the net income of a credit.

Interest expense is allowed per the federal return (except for interest that was treated as paid or incurred in the current taxable year under 26 U.S.C.§163(j)(2)),

Interest not deductible for federal income tax purposes under 26 U.S.C.§163(j)(1), and

Interest not deductible for federal income tax purposes under 26 U.S.C.§265 or §291 related to tax-exempt securities