IRC Section 965 (Transition Tax): Additional Guidance for Corporate Taxpayers subject to the IRC Section 965
Any taxpayer, or taxpayer filing as part of a federal consolidated group, that paid or accrued transition tax must remove the transition tax from the standard calculation of Alabama’s federal income tax deduction. Transition Tax is included as part of Schedule J, Part I, Line 11 of Federal Form 1120, or a related federal return.
Example 1: Company A is an accrual, Alabama taxpayer and does not file as part of a federal consolidated group for federal tax purposes. Company A calculated transition tax of $50 and total tax of $150 (Schedule J, Part I, Line 11 of Federal Form 1120) for tax year 2017. In calculating Alabama’s federal income tax deduction for tax year 2017, Company A should enter $100 ($150-$50) as “Federal income tax to be apportioned” on Line 6, Schedule E of Form 20C.
Example 2: Company B is an accrual, Alabama taxpayer and files as part of a federal consolidated group. The group calculated transition tax of $100 and total tax of $250 (Schedule J, Part I, Line 11 of Federal Form 1120) for tax year 2017. In calculating Alabama’s federal income tax deduction for tax year 2017, the taxpayer should enter $150 ($250-$100) as “Consolidated federal income tax” on Line 4, Schedule E of Form 20C.
Transition Tax is allowed as a component of federal income tax deduction, but only if some portion of the IRC Section 965 income remains in the Alabama tax base after related Alabama deductions are allowed.
The Alabama Department of Revenue has developed a worksheet to assist taxpayers in the computation of the deductible portion of Transition Taxes paid or accrued on IRC Section 965 Income. This worksheet is available on the Forms page of the Department of Revenue’s website, and is titled, “Federal Income Tax Deduction Worksheet – IRC Section 965.” Any taxpayer who includes Transition Taxes in the calculation of the federal income tax deduction must include this worksheet as an attachment.
Any questions regarding the mechanics of this worksheet should be directed to the Corporate Income Tax Section at 334-242-1200.