ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-2 PERSONS AND SUBJECTS GENERALLY SUBJECT TO TAX 810-3-2-.01 Individuals Subject To Alabama Income Tax. (1) Individuals domiciled within Alabama (residents) are taxable on their entire income, whether earned within or without Alabama, subject to certain exclusions and exemptions as provided under Alabama income tax law, regardless of their physical presence within Alabama at any time during the taxable year. Individuals domiciled within Alabama should file a Resident Individual Income Tax Return, Form 40 or 40A each year. (a) Domicile is the home, the fixed place of habitation; while residence is a transient place of dwelling. Domicile is the place where one lives and has his permanent home and principal establishment, and to which he has the intention of returning when he is absent. Domicile may be established by birth, by choice, or by operation of law. (b) Each person has one and only one domicile. Once established, a domicile continues until a new one is established coupled with the abandonment of the old. 1. Domicile is established by physical presence in a jurisdiction, coupled with the present intent to establish domicile in the subject jurisdiction. (i) A person's intent will be ascertained by examining his actions. 2. A taxpayer has the burden of proof in establishing a change in domicile. (c) Federal employees, including military personnel, domiciled in Alabama continue to be so domiciled, irrespective of their period of absence or actual place of residence, and are subject to the Income Tax Law of Alabama until proof of change of domicile has been made. (d) A husband and wife will be presumed to have the same domicile, unless clearly established otherwise. 1. An Alabama resident who marries a nonresident will continue to be an Alabama resident until and unless a new domicile is established as provided in subparagraph (b) above. Revenue Rule 810-3-2-.01 2-.01-1

2. A nonresident who marries an Alabama resident will continue to be a nonresident until and unless a new domicile is established in Alabama as provided in subparagraph (b) above. (e) A minor child will be presumed to have the same domicile as the custodial parent or guardian. (2) Individuals not domiciled within Alabama who maintain a permanent place of abode within Alabama, or who spend more than a total of seven months (whether or not consecutive) of the taxable year within Alabama shall be presumed to be residents, and taxable on their net income from within and without Alabama during the taxable year. They should file Resident Individual Income Tax Return, Form 40 or Form 40A each year. For instructions for individuals who are residents for less than one year (part-year residents), see Rule 810-3-2-.01(4). (a) A permanent place of abode is interpreted to mean a dwelling place permanently maintained by the taxpayer; it is not necessary that he be the owner, or that he occupy it himself. (b) The Department may require individuals claiming domicile outside the State of Alabama to furnish a statement of information with details to support their claim. (3) Nonresident individuals receiving taxable income from property owned or business transacted (including wages for personal services) within Alabama are taxable on such income from within Alabama. They should file Nonresident Individual Income Tax Returns, Form 4ONR, each year. See Rules 810-3-14-.05 (relating to taxable income of nonresidents) and 810-3-15-.21 (relating to allowable deductions of nonresidents). (a) Resident individuals living in federal areas located within Alabama or any other state over which the United States exercises exclusive or concurrent jurisdiction, such as the Muscle Shoals reservation and military areas such as Maxwell Air Force Base and Redstone Arsenal, are taxable on their entire net income. See Rule 810-3-2-.01(2). (b) Nonresident individuals (other than military personnel) living in federal areas located within Alabama over which the United States exercises exclusive or concurrent jurisdiction are taxable on income earned in such areas; including income from business transacted in these areas. (c) This paragraph (3) applies only to income or receipts received after December 31, 1940, the effective date of Public Law No. 819, known as the Buck Act. Under this act the United States has ceded to the States the jurisdiction to tax persons residing within or receiving income from transactions Rule 810-3-2-.01 Revenue 2-.01-2

occurring or services performed, in all federal areas heretofore or hereafter acquired by the United States. The term "Federal Area" means any land or premises held or acquired by or for the use of the United States, or any Department, Establishment, or Agency thereof, and over which the United States exercises exclusive or concurrent jurisdiction. (d)1. Military personnel who are not residents of Alabama and who receive military pay while stationed in Alabama, shall be deemed not to have received such income for services performed within, or from sources within Alabama. This subparagraph (d) applies to all military compensation received after September 8, 1939, in accordance with §514 of Public Law 732. 2. Wives of military personnel who earn income in Alabama, unless specially exempt under Public Law 111-97 referred to as the Military Spouses Residency Relief Act, and military personnel who earn nonmilitary income in Alabama, are taxed on such income. (e) Spouses will be presumed to have the same domicile, unless proven otherwise. 1. EXAMPLE Income Resident Ior includable as Income from all sources if Nonresident) Taxable to Nonresident Taxable to Income During Taxable Year Military Member Not in combat zone $ 6,000 $6,000 $-0- In combat zone 1,000 -0- -0- Quarters allowance 1,500 -0- -0- Subsistence allowance 600 -0- -0- Uniform allowance 100 -0- -0- Travel allowance 100 -0- -0- Flight pay 200 200 -0- Sea duty 200 200 -0- Revenue Rule 810-3-2-.01 2-.01-3

Trailer allowance 100 -0- -0- Income from Other States Compensation 200 200 -0- Business, Interest, Dividends, Rents, etc. 800 800 -0- Income from Alabama Compensation 700 700 700 Business, Rental Income, etc. 300 300 300 Total Income $11,900 Taxable if Taxpayer is a resident $ 8,400 Taxable if Taxpayer is not a resident $1,000 Spouse Income from Other States Compensation (Including Federal Civil Service) $ 500 $ 500 $-0- Business, Interest, Dividends, Rents, etc. 500 500 -0- Income from Alabama Compensation (Including Federal Civil Service) 5,600 5,600 5,600 Business, Rental Income, etc. 400 400 400 Total Income $7,000 Taxable if Taxpayer is a resident $7,000 $6,000 Rule 810-3-2-.01 Revenue 2-.01-4

Taxable if Taxpayer is not a resident (4) An individual who becomes a resident of Alabama must include in gross income all income from sources both within and without Alabama for the period of residence. A resident moving away from Alabama during the year includes in gross income only income from sources both within and without Alabama until date of termination of his residence in this state. The Department should be notified of the termination of taxpayer's residence, including all pertinent facts relating to the termination. (a) EXAMPLE: Taxpayer moved from New York to Alabama on September 1. Prior to that date he had no Alabama income. After moving to Alabama, he had an income of $5,000. He must file a return on Form 40, (Resident Individual Income Tax Return) reporting the $5,000, but need not report any income earned before September 1. He is entitled to the same annual exemptions as a resident for a full year. See Rule 810-3-19-. 02(3). (b) EXAMPLE: Taxpayer moved from Alabama to Mississippi on November 1. Prior to that time he earned $8,000 taxable income in Alabama, and had no Alabama income during November and December. He should notify the Department of the termination of his residence in Alabama, and file a return on Form 40 (Resident Individual Income Tax Return) reporting the $8,000 income. He may claim the annual exemptions to which he would be entitled were he a resident for the entire year. (c) An individual, a resident for part of the taxable year and a nonresident for the other part of the taxable year, having taxable income in both periods, should file two returns: 1. One return should be filed on Form 40 as a resident, covering the period of residence. All income, from whatever source within or without the state, earned during such period of residence should be included in this return, and exemptions should be claimed for the total annual exemptions to which the taxpayer is entitled. 2. A second return should be filed on Form 4ONR as a nonresident, covering income from sources in Alabama for the period of nonresidence. No personal exemptions and/or credit for dependents would be allowable on the nonresident return as the full annual amount would have been allowed on the resident return. (i) EXAMPLE: Taxpayer, married and having two dependents, moved from Alabama to Tennessee on April Revenue Rule 810-3-2-.01 2-.01-5

1. Prior to April 1, his income from Alabama sources amounted to $2,000. After April 1, his Alabama income was $3,000 and his income from other sources was $6,000, or a total income from all sources of $9,000 after April 1. Taxpayer must file two returns: (I) His return as a resident (Form 40) should report income of $2,000, and the annual exemption he could claim were he a resident for the entire year. (II) His return as a nonresident (Form 4ONR) would report $3,000. No personal exemptions and/ or credit for dependents would be allowable on the nonresident return as the full annual amount would have been allowed on the resident return. Author: Neal Hearn, Ann Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5),40-18-2. History: Amended: February 8, 1989; Filed March 20, 1989. Amended: Filed January 27, 2014; effective March 3, 2014. Rule 810-3-2-.01 Revenue 2-.01-6

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-2 PERSONS AND SUBJECTS GENERALLY SUBJECT TO TAX 810-3-2-.02 Corporations Subject To Alabama Income Tax. (1) Corporations, associations, or joint-stock companies subject to tax only in the state of Alabama are taxable on income from all sources, both inside and outside the state of Alabama. Corporations, associations, or joint-stock companies subject to tax in multiple states, shall allocate and apportion their income as defined in the statute and rules under §40-27-1, Code of Ala. 1975. (2) For a corporation acting in a fiduciary capacity in Alabama, see Rule 810-3-2-.03. (3) A corporation qualified to do business or doing business in this state and having a valid S election under 26 U.S.C. §1362 shall be an Alabama S corporation under the provisions of §40-18-160, Code of Ala. 1975, et seq. Generally, an S corporation will not pay income tax at the corporate level, but will act as a conduit to pass through income to its shareholders. See §40-18-160 Code of Ala. 1975, and related rules. (4)(a) Every organization described in §40-18-32, Code of Ala. 1975, which receives "unrelated business taxable income" as defined in 26 U.S.C. §512, shall file Form 20C reporting such "unrelated business taxable income" and pay any tax due thereon. (b) Any organization, whether incorporated or not, which receives such "unrelated business taxable income" shall file Form 20C and report income and deductions in the same manner as a corporation. Any organization subject to income tax which receives such "unrelated business taxable income" shall file Form 20C and report the income and deductions attributable to Alabama. See the statute and rules under §40-27-1, Code of Ala. 1975, for guidance on apportionment and allocation of income and deductions. Author: Christina Hall, Chris Sherlock Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-2, 40-27-1, and 26 U.S.C. §§512 and 1362. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed March 4, 1997; effective April 8, 1997. Amended: Filed July 13, 2018; effective August 27, 2018. Amended: Filed January 25, 2019; effective March 11, 2019. Revenue Rule 810-3-2-.02 2-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-2 PERSONS AND SUBJECTS GENERALLY SUBJECT TO TAX 810-3-2-.03 Estates, Trusts And Fiduciaries Subject To Alabama Income Tax. (1) Every individual or corporation acting in a fiduciary capacity, receiving income from sources within the State of Alabama, is subject to the Alabama income tax with respect to such income. For definitions of resident individuals and resident corporations, see Rules 810-3-2-.01 and 810-3-2-.02. (2) An estate or trust resident in the State of Alabama, or having a resident fiduciary, is subject to the Alabama income tax. An estate or trust having income from sources within the State is subject to tax on such income. Author: Nancy Butler, Roy Wiggins, John H. Burgess Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-2. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Amended: Filed April 14, 2017; effective May 29, 2017. Revenue Rule 810-3-2-.03 2-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-3 INCOME OF OFFICERS OR AGENTS OF THE UNITED STATES, ETC. 810-3-3-.01 Compensation Of Federal Employees. (1) Salaries, fees, commissions and other income received by officers or agents of the United States, its agencies, instrumentalities, or contractees from the United States or from its agencies and instrumentalities are subject to income taxes levied by the State of Alabama. (a) These income taxes must be levied only as the State of Alabama is constitutionally or legally authorized to tax such income, and must be taxed without discrimination and only to the same extent and in the same manner other income is taxed. (2) Compensation received from the United States for active service as a member of the Armed Forces in a combat zone designated by Executive Order of the President of the United States is not taxable under the Alabama income tax laws. Prior to January 1, 1965, all military pay was taxable except during a period of hostilities. (a) For deferment of tax in hardship cases under Soldiers' and Sailors' Civil Relief Act, Public Law No. 861, see Reg. 810-3-42-.03. For definition of gross income, see Reg. 810-3-14-.01. For exclusions from gross income, see Reg. 810-3-14-.02. For domicile of military personnel and federal civilian employees, see Reg. 810-3-2-.01. Author: Rebecca S. Whisenant, John H. Burgess. Statutory Authority: Code of Ala. 1975, §40-18-3. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996;effective October 23, 1996. Revenue Rule 810-3-3-.01 3-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-4 ANY INCOME RECEIVED FROM OBLIGATIONS OF THE UNITED STATES 810-3-4-.01 Interest Or Other Income Received From Obligations Of The United States OrIts Possessions, Agencies, Or Instrumentalities. Section 40-18-4, Code of Ala. Section 40-18-4, Code of Ala. 1975 is superseded by §40-18-14(2)d which excludes this interest income from obligations of the United States or its possessions, agencies or instrumentalities from gross income. Author: John Burgess Statutory Authority: Code of Ala. 1975, §§40-18-4, 40-18-57. History: Amended: Filed November 21, 1986. Amended: Filed September 18, 1996; effectiveOctober 23, 1996. Revenue Rule 810-3-4-.01 4-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-5 TAX ON INDIVIDUALS 810-3-5-.01 Tax On Individuals. (1) For tax years ending prior to January 1, 1982, the tax rates for individuals are: Rate TAXABLE INCOME 1.5% up to $1,000 3.0% over $1,000, but not more than $3,000 4.5% over $3,000, but not more than $5,000 5.0% over $5,000 (2) For tax years beginning after December 31, 1981, the tax rates for individuals are: TAXABLE INCOME Single, Head of Family, Married Rate Married Filing Separate Filing Joint Up to and including 2% 0 - $500 0 - $1,000 4% $500 - $3,000 $1,000 - $6,000 5% $3,000 and over $6,000 and over Author: John H. Burgess, Income Tax Division Statutory Authority: Code of Ala. 1975, §40-18-5. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Revenue Rule 810-3-5-.01 5-.01-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.01 Basis In Property. (1) For the purposes of Chapter 6 of these regulations, the following definitions apply: (a) Unadjusted basis in property - The original cost of the property if acquired after January 1, 1933. If the property was acquired prior to January 1, 1933 the unadjusted basis is the fair market value on January 1, 1933. (b) Adjusted basis in property (for transactions before January 1, 1985) - The unadjusted basis in the property, plus the cost of improvements of a permanent character made to the property that have been properly classified as a capital expenditure, minus prior return of investment, depreciation, amortization, depletion, and other reductions in the original cost. (c) Fair market value - The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and each having knowledge of all relevant facts. 1. The determination of the fair market value of property is generally a question of fact and shall be established by competent evidence. The general way of determining the fair market value of stock, in the absence of knowledge of sales on any given date, is to value the stock on the basis of the corporate assets underlying the stock as disclosed by a balance sheet as of this date. (2) The general rule is that the unadjusted basis of property is its cost. The term "adjusted basis" means, in substance, the original capital investment ("unadjusted basis") adjusted to the date the taxpayer disposes of the property. "Basis" for determining gain or loss on sale or other disposition is also the "basis" for computing depreciation, and in some cases, depletion. (a) The adjusted basis for determining the gain or loss from the sale or other disposition of property is the basis of the property defined in §40-18-6(a), Code of Ala. 1975, adjusted to the extent provided in §40-18-6(b)(1) as in effect prior to January 1, 1985, or adjusted to the extent provided in Revenue Rule 810-3-6-.01 6-.01-1

§40-18-6(b) as in effect after December 31, 1984; and interpreted below: 1. Expenditures made by the taxpayer after acquisition of a property for improvements, additions or betterments of a relatively permanent character, such as to prolong the life or increase the utility of the property in substantial degree beyond the life or utility reasonably to be expected from properties of like age and character, shall be added to and increase the original basis of such property for the purpose of determining gain or loss upon the disposition thereof. No adjustment shall be made in respect of any item which, under any applicable provision of law or regulation, is treated as an item not properly chargeable to a capital account but is allowable as an expense deduction in computing net income for the taxable year. 2. Adjustments to basis may be made for carrying charges such as taxes and interest, with respect to unimproved and unproductive real property, if the taxpayer elects to treat these items as chargeable to asset accounts rather than as an allowable expense deduction. The term "taxes" for this purpose includes duties and excise taxes but does not include income taxes. 3. In any case in which a portion of the taxpayer's cost or investment has been returned to him in any form or manner since acquisition, or any losses have been incurred, or other items or events have transpired, resulting in a return of capital, the amount thereof shall apply against and reduce the original basis to the taxpayer. Thus, any receipts or credits arising from or related to the ownership of an item of property, which receipts or credits do not constitute income taxable under the law, are to be treated as a refund of a portion of the original cost. (3) If a casualty loss has been sustained, the cost basis in the property must be reduced by the amount of the casualty loss claimed as a deduction in the computation of net income. If the loss is reimbursed, in part or total, by insurance proceeds; the insurance proceeds must be used to repair the property to its original state. For losses occurring in tax years ending before January 1, 1985, if the insurance proceeds are not used to repair the property to its original state, the casualty must be treated as an involuntary conversion and any gain recognized and reported as income. See Reg. 810-3-8-.06 for involuntary conversions. For losses in tax years beginning after December 31, 1984, see Reg. 810-3-8-.06(2) for determination of recognizable gain, (if any). (a) EXAMPLE: A rental dwelling was partially destroyed by fire. The fair market value of the property immediately before Rule 810-3-6-.01 Revenue 6-.01-2

the fire was $20,000.00 ($2,000.00 for the land and $18,000.00 for the dwelling). The fair market value just after the fire was $12,000.00 ($2,000.00 for the land and $10,000.00 for the dwelling). The insurance reimbursement was $5,000.00. The entire amount of the insurance proceeds were used to repair the property to its original state. Taxpayers adjusted cost basis in the property before the casualty was $6,000.00 ($1,000.00 for the land and $5,000.00 for the dwelling). The adjusted basis in the property following the casualty is as follows: Land Building a. Cost/basis $ 1,000 $ 5,000 b. Fair market value before 2,000 18,000 c. Fair market value after 2,000 10,000 d. Change in fair market value 0 8,000 e. Smaller of cost or change in market value 0 5,000 f. Less insurance proceeds 0 5,000 g. Casualty loss (e-f) 0 h. New adjusted basis before repairs $ 1,000 0 (b) EXAMPLE: Same facts as in example (3)(a) above, except the dwelling is a personal residence. The casualty loss and adjusted basis would be computed as follows: Homesite a. Cost/basis $ 6,000 b. Fair market value before 20,000 c. Fair market value after 12,000 d. Change in market value 8,000 e. Smaller of cost or change in market value 6,000 f. Less insurance proceeds 5,000 g. Casualty loss (e - f) 1,000 h. New adjusted basis before repairs 0 Revenue Rule 810-3-6-.01 6-.01-3

(4) The original basis must also be decreased by the amount of maximum allowable deductions for exhaustion, wear and tear, obsolescence (these three items hereinafter referred to as "depreciation"), amortization, and depletion under the law applicable to the periods of time prior to January 1, 1935 and subsequent to January 1, 1935. Deductions allowable shall reduce the original basis of the property to the adjusted basis for determining gain or loss. These deductions shall be the greater of the following two amounts: (a) the amount allowed as deductions in computing taxable income to the extent resulting in a taxpayer's income taxes, or (b) the amount allowable for the years involved. (c) The general rule is "Always in the amount allowed, but never less than the amount allowable." (d) It is not necessary for this depreciation, amortization, or depletion to have been claimed on tax returns or entered in taxpayer's records. It shall be assumed that the taxpayer has claimed maximum allowable deductions regardless of the expiration of the statutory period for claiming deductions. A taxpayer is not permitted to take advantage in a later year of his prior failure to take any such allowance or his taking an allowance plainly inadequate under the known facts in prior years. In the case of depreciation, if in prior years the taxpayer has consistently taken proper deductions under one method, the amount allowable for such prior years shall not be increased even though a greater amount would have been allowable under another proper method. (5) In the case of stock, the original basis must be decreased by the amount of distributions previously made which at the date of distribution were either tax free or applicable in the reduction of basis. This does not apply to exempt dividends paid from income earned since January 1, 1933, by the corporations paying the dividend. (6) For transactions occurring in a tax year beginning before January 1, 1985, whenever it appears that the basis of property of the taxpayer is a substituted basis, then the adjustments provided in §40-18-6(b), and this regulation shall be made after first making, in respect to such substituted basis, proper adjustments of a similar nature in respect of the period during which the property was held by the transferor, donor, or grantor, or during which the other property was held by the person from whom the basis is to be determined. A similar rule shall be applied in case of a series of substituted bases. Author: Lloyd B. Byrd, Roy Wiggins, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-6. Rule 810-3-6-.01 Revenue 6-.01-4

History: Amended June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996;effective October 23, 1996. Revenue Rule 810-3-6-.01 6-.01-5

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.02 Basis For Computing Gain Or Loss - Exceptions. (1) The basis of property shall be the cost of the property with the following exceptions: (a) Inventory - If the property should have been included in the last inventory, the basis shall be the amount used in the last inventory. (b) Gifts or Transfer in Trust - See Rule 810-3-6-.04. (c) Property Transmitted at Death - See Rule 810-3-6-.05. (d) Property Acquired Upon Like-Kind Exchange - See Rule 810-3-6-.06. (e) Transfers to a Corporation - See Rule 810-3-6-.07. (f) Property Acquired on Liquidation of a Subsidiary - See Rule 810-3-6-.08. (g) Basis of Property of Subsidiary After Acquisition - See Rule 810-3-6-.09. (h) Basis of Property Received in Liquidation in which a Gain or Loss was Recognized - See Rule 810-3-6-.10. (i) Basis of Stock after a Stock Dividend - See Rule 810-3-6-. 11. (j) Involuntary Conversion - See Rule 810-3-6-.12. (k) Property Acquired Before January 1, 1933 - See Rule 810-3-6-.13. (l) Property Acquired from a Spouse or Former Spouse - See Rule 810-3-6-.14. (m) Basis of Replacement Property in Sale of Stock to ESOP or Cooperative - See Rule 810-3-6-.15. (n) Basis of Property to Subchapter K Entity - See Rule 810-3-6-.03. Revenue Rule 810-3-6-.02 6-.02-1

(o) Basis of Interest in a Subchapter K Entity - See Rule 810-3-6-.03. (p) Basis of Property Distributed by a Subchapter K Entity - See Rule 810-3-6-.03. (q) Basis of Property - Individuals Establishing Alabama Domicile - See Rule 810-3-6-.16. (r) Allocation of Basis - See Rule 810-3-6-.17. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996;effective October 23, 1996. Repealed and New Rule: Filed April 28, 1999; effective June2, 1999. Rule 810-3-6-.02 Revenue 6-.02-2

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.03 Basis In Subchapter K Entity. (1) For all taxable years with respect to which a preliminary assessment of income tax could be made under the provisions of §40-2A-7, Code of Ala. 1975, as of May 27, 1997, and thereafter: (a) Basis of property to subchapter K entity - A subchapter K entity's basis in property contributed to it under §40-18-8(o),Code of Ala. 1975, by a partner or member shall be determined according to 26 U.S.C. §723. (b) Basis of interest in subchapter K entity - 1. A contributing partner's or member's initial basis in a subchapter K entity interest acquired by a contribution of property (including money as described in §40-18-8[o]) to the subchapter K entity shall be determined according to 26 U.S.C. §722. 2. Increases and decreases to the initial basis determined under paragraph 1 shall be made according to 26 U.S.C. §705, and those adjustments to the initial basis shall be determined without regard to the allocation and apportionment rules of Section 40-18-22. 3. Special basis adjustments - The basis of the property of the subchapter K entity shall be determined according to 26 U.S.C. §§734 and 743, if the subchapter K entity has in effect an election under 26 U.S.C. §754 (relating to optional adjustment to basis of partnership property). (c) Basis of property distributed by subchapter K entity - The basis of property (other than money) distributed by a subchapter K entity to a partner or member other than in liquidation of the partner's or member's interest shall be determined according to 26 U.S.C. §732. (2) No refunds shall be due or issued by reason of this regulation with respect to taxable years beginning before January 1, 1997. (3) For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. Author: Ann Fondren Winborne, CPA, Nancy D. Hatfield Revenue Rule 810-3-6-.03 6-.03-1

Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed March 26, 1998; effective April 30, 1998. Amended: Filed April28, 1999; effective June 2, 1999. Rule 810-3-6-.03 Revenue 6-.03-2

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.04 Basis Of Property Acquired By Gift Or Transfer In Trust. (1) Property Acquired After December 31, 1997. The basis of property acquired by gift or by a transfer in trust shall be determined according to 26 U.S.C. §1015. For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. (2) Property Acquired After March 14, 1985, but before January 1, 1998. The basis shall be the same as the basis would be in the hands of the donor or the last preceding owner from whom the property was not acquired by gift; except that if such basis is greater than the fair market value of the property then for the purpose of determining the amount of loss the basis shall be the fair market value. (a) Donor's Basis Unknown. If the basis of the property acquired by gift or transfer in trust after March 14, 1985, is unknown to the donee, the Department will attempt to obtain such facts as to determine the basis in the hands of the donor or the last owner who did not receive the property by gift or a transfer in trust. If the Department is unable to obtain such facts, the basis of the property will be determined, according to the best information available to the Department, to be the fair market value of the property at the time acquired by the donor or last preceding owner. (b) Transfer in Trust Other Than Gift, Bequest, or Devise. If the property was acquired by a transfer in trust, other than a transfer in trust by a gift, bequest or devise, the basis shall be the same as in the hands of the grantor, increased by the amount of gain (or decreased by the amount of loss) recognized by the grantor on such transfer of the property. (3) Property acquired after December 31, 1932, but prior to March 15, 1985. The basis shall be the fair market value of the property at the date of acquisition. (4) Property acquired prior to January 1, 1933. The basis shall be the fair market value at the close of December 31, 1932. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. Revenue Rule 810-3-6-.04 6-.04-1

History: New Rule: Filed April 28, 1999; effective June 2, 1999. Rule 810-3-6-.04 Revenue 6-.04-2

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.05 Property Transmitted At Death. (1) After December 31, 1997: The basis of property acquired from a decedent will be determined according to 26 U.S.C. ɂ1014. For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. (2) Prior to January 1, 1998: Basis for the following shall be the fair market value of the property at the time of decedent's death: (a) Personal property acquired by specific bequest, (b) Real property acquired by general or specific devise or by intestacy, (c) Property acquired by the decedent's estate from the decedent. (d) In all other cases of property acquired by will or intestacy, basis shall be the fair and reasonable market value of the property at the time of distribution to the taxpayer. (e) The value of property as of the date of the decedent's death as appraised for the purpose of the federal estate tax or the alternate value as appraised for such purpose, whichever is applicable, shall be deemed to be its fair market value. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-6-.05 6-.05-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.06 Basis Of Property Acquired Upon Like-Kind Exchange. (1) After December 31, 1984: The basis of property acquired in a like-kind exchange shall be determined according to 26 U.S. C. 1031. For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. (2) Prior to January 1, 1985: The basis of property acquired in a like-kind exchange is the same as that of the property exchanged less the amount of money and the fair market value of other property received, less any loss (or plus any gain) recognized on the exchange. (a) Corporate Stock. This rule does not apply in case of property received by a corporation in whole or in part in exchange for the stock or securities of that corporation. (b) Mixed Exchanges. If the property acquired consisted of both like and unlike property, the basis shall be allocated between the properties (other than money) received, and for the purpose of allocation there shall be assigned to the unlike property an amount equal to its fair market value at the date of the exchange. Author: Lloyd B. Byrd, Judy A. Robbins Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-6-.06 6-.06-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.07 Basis Of Property Transferred To A Corporation. (1) For tax periods beginning after December 31, 1984: (a) the basis of property received by a distributee in a transaction described in subsection (e) or (f) of §40-18-8, Code of Ala. 1975, shall be determined in accordance with 26 U.S.C. §358. For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. (b) the basis of property acquired by a corporation in a transaction described in subsection (e) or (f) of §40-18-8, shall be determined in accordance with 26 U.S.C. §362. For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. (c) Transactions described in subsection (e) or (f) of §40-18-8 are those transactions meeting the requirements of 26 U.S.C. §351, where property is transferred to a corporation controlled by the transferor, or those reorganizations as defined by 26 U.S.C. §368. (2) Transfers to corporation where control of property remains in same person - prior to January 1, 1985. Property transferred to a corporation in connection with a reorganization as defined in §40-18-8(f) after December 31, 1932, but before January 1, 1985, where control as defined in 26 U.S.C. §368(c) remains with the transferor, shall have the same basis as it would have in the hands of the transferor together with gain or loss recognized to the transferor on the transfer. This rule does not apply if the property acquired consists of stock or securities in a corporation, a party to the reorganization, unless the consideration in whole or in part is the stock or securities of the corporation acquiring the property. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-6-.07 6-.07-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.08 Basis Of Property Acquired On Liquidation Of A Subsidiary. (1) Basis of Property Acquired on Liquidation of Subsidiary. The basis of property acquired by a corporation as a result of a liquidation of a subsidiary to which §40-18-8(h), Code of Ala. 1975, applies shall be determined in accordance with 26 U.S.C. §334(b). For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. (2) §40-18-8(h) concerns the complete liquidation of subsidiaries satisfying the requirements of 26 U.S.C. §332. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-6-.08 6-.08-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.09 Basis Of Property Of A Subsidiary After Acquisition. If an election under 26 U.S.C. §338 is in effect for federal income tax purposes, the basis of property owned by a corporation shall be determined under 26 U.S.C. §338 relating to the treatment of certain stock purchases as asset acquisitions. For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-6-.09 6-.09-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.10 Basis Of Property Received In Liquidation In Which Gain Or Loss IsRecognized. If property is received in a distribution in complete liquidation in which a gain or loss is recognized on receipt of the property, the basis of the property received shall be determined in accordance with 26 U.S.C. §334(a). For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-. 01, Operating Rules. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-6-.10 6-.10-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.11 Basis Of Stock After Stock Dividend. The basis of stock with respect to which a corporation makes a distribution of its stock and the basis of the stock distributed shall be determined in accordance with 26 U.S.C. §307. For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-6-.11 6-.11-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.12 Basis Of Property Acquired In Connection With An Involuntary Conversion. (1) After December 31, 1984. The basis of property acquired in connection with an involuntary conversion in which a gain or loss was not recognized shall be determined according to 26 U.S.C. §1033. For interpretation of federal statutes adopted by the Alabama Legislature see Rule 810-3-1.1-.01, Operating Rules. (2) Prior to January 1, 1985. The basis of property acquired in connection with an involuntary conversion (as described in §40-18-8(f), Code of Ala. 1975, in effect prior to January 1, 1985) shall be the same as the property converted, less the amount of money received but not expended by the taxpayer, increased by any recognized gain or decreased by any recognized loss upon the conversion. Author: Judy A. Robbins Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-6-.12 6-.12-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-6 GAIN OR LOSS - BASIS OF PROPERTY; ADJUSTED BASIS 810-3-6-.13 Basis Of Property Acquired Before January 1, 1933. If property was acquired prior to January 1, 1933, the basis for determination of gain, loss, depreciation or depletion is the fair market value on January 1, 1933. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-6. History: New Rule: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-6-.13 6-.13-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-10 DISTRIBUTION OF STOCK PURSUANT TO ORDER ENFORCING THE FEDERAL ANTI-TRUST LAWS 810-3-10-.01 Distribution Of Stock Pursuant To Order Enforcing The Federal Anti-Trust Laws (Repealed 6/2/99). (REPEALED) Author: Verlon R. Frost, Jeff Taylor Statutory Authority: Code of Ala. 1975, §40-18-10. History: Filed July 27, 1988. Amended: Filed March 4, 1997; effective April 8, 1997. Repealed: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-10-.01 10-.01-1

ALABAMA DEPARTMENT OF REVENUEINDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-11 INVENTORY 810-3-11-.01 Inventory Procedures. When the production, purchase, or sale of merchandiseis an income producing factor, inventories at the beginning and ending of each taxableyear are necessary in order to correctly compute income. In these cases, inventoriesshall be taken, computed and used in accordance with the methods prescribed or permittedby the Internal Revenue Service pursuant to 26 U.S.C. §§263A, 471, 472 and 474 andregulations thereunder. Author: Ewell Berry, Ann F. Winborne, CPA, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-11. History: Rule effective October 1, 1982. Amended: Filed July 27, 1988; May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Amended: Filed April 28,1999; effective June 2, 1999. Revenue Rule 810-3-11-.01 11-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-13 NET INCOME OF INDIVIDUALS - COMPUTATIONS 810-3-13-.01 Taxable Year. (1) Taxable income shall be computed and a return shall be made for a period known as the "taxable year." The taxable year may be a calendar year, a fiscal year, an elected 52-53 week year, or an accounting period of less than twelve months resulting from a change in accounting periods. The taxable year for Alabama purposes must tie to the same tax period the taxpayer utilizes for federal tax purposes. (2) A taxpayer elects a taxable year when the first federal return is filed. This election must be consistently followed in filing subsequent returns, and all Alabama returns.. (a) A calendar year is the twelve consecutive month period beginning January 1 and ending December 31. (b) A fiscal year is the twelve consecutive month period ending on the last day of any month other than December. (c) There is no provision in Alabama income tax law for the 52-53 week year; however, the Department does permit the election of the 52-53 week year. When this election is made, the Department will follow the methods prescribed by the Internal Revenue Service pursuant to 26 U.S.C. §441(f). (3) An accounting period of less than twelve months is one that results from changing the accounting period from the calendar year to the fiscal year, from fiscal year to calendar year, from one fiscal year to another, when the taxpayer is not in existence for the entire taxable year, when the taxpayer goes out of business, or when there is a change in entity, or for any other reason required for federal purposes. (4) Effect of election under §40-18-8(j), Code of Ala. 1975, (and 26 U.S.C. §338), for entities filing separate returns. If the target corporation must change its taxable year to conform to that of a new consolidated parent company for federal purposes, then the same changes will be made for Alabama purposes. (5) If the taxpayer's accounting period is other than the taxable year as described in this rule, or if the taxpayer has no accounting period or does not keep records, the net income shall be computed on the basis of the calendar year. Revenue Rule 810-3-13-.01 13-.01-1

(6) For tax years beginning after December 31, 1998, a taxpayer making an election to file an Alabama consolidated return, as provided in §40-18-39, must use the same taxable year as employed for Federal Income Tax purposes. Author: Angie Cumbie Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-8(j), 40-18-13, 40-19-39, and 26 U.S.C. §§338 and 441. History: Amended: June 17, 1988; filed July 27, 1988; filed July 22, 1992; October 30, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Amended: Filed March 31, 2000; effective May 5, 2000. Amended: Filed July 13, 2018; effective August 27, 2018. Rule 810-3-13-.01 Revenue 13-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-13 NET INCOME OF INDIVIDUALS - COMPUTATIONS 810-3-13-.02 Maintenance Of Accounting Records. (1) Each taxpayer must maintain such accounting records as will clearly reflect his income for each accounting period, and must file his returns based on these records. (2) If the taxpayer does not maintain such accounting records, or if such records do not clearly reflect the income or deductions of the taxpayer for any given taxable year, the Department may prescribe the method and basis for computation of such income. A taxpayer who does not keep adequate accounting records will be required to report his income on the calendar year basis and use the cash receipts and disbursements method of accounting. (3) For record keeping requirements, see §40-2A-7(a)(1), Code of Ala. 1975. Author: Rebecca S. Whisenant, Cynthia D. Norwood, Carmen Mills, Anne Glenn Statutory Authority: Code of Ala. 1975, §§40-18-13, 40-1-5. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Amended: Filed March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-13-.02 13-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-13 NET INCOME OF INDIVIDUALS - COMPUTATIONS 810-3-13-.03 Method Of Accounting. (1) For tax years beginning after December 31, 1998, a taxpayer making an election to file an Alabama consolidated return, as provided in §40-18-39, Code of Ala. 1975, must use the same method of accounting as employed for federal income tax purposes. (2) For tax years beginning after December 31, 1989, a taxpayer must use the same accounting method for Alabama purposes as that used for federal income tax purposes. Author: Cindy D. Norwood, Jeffrey Taylor, Carmen Mills, Anne Glenn Statutory Authority: Code of Ala. 1975, §§40-2A-7, 40-18-13. History: Amended: June 17, 1988; filed July 27, 1988; filed July 22, 1992; October 30, 1992. Filed September 18, 1996; effective October 23, 1996. Amended: Filed March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-13-.03 13-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-13 NET INCOME OF INDIVIDUALS - COMPUTATIONS 810-3-13-.04 Change In Method Of Accounting. (1) For tax years beginning before January 1, 1990, a taxpayer desiring to change his method of accounting should request permission from the Department of Revenue to make the change. Applications for such change should set forth clearly the nature of the business, the method of accounting used in keeping the books, and the reasons for changing the method of reporting. (2) For tax years beginning after December 31, 1989, the accounting method used for Alabama purposes will automatically change whenever a different method is permitted or required for federal income tax purposes. (3) Alabama law has no counterpart to 26 U.S.C.§481; therefore, any increase or decrease in income resulting from a change in accounting method must be taken into account in full in the year of change. There is no provision in Alabama law to defer the effect of a change in accounting method over a number of years. In changing from a cash method of accounting to an accrual method, income accrued but not yet collected as of the close of the year of change shall be added to income actually received in cash during the year, and expenses accrued but not yet paid as of the close of the year shall be added to expenses actually paid during the year. In making a change from accrual to cash method of accounting, items previously reported as income and expenses should be excluded from the cash basis return. Author: Cindy D. Norwood, Jeffrey Taylor, Carmen Mills, Anne Glenn Statutory Authority: Code of Ala. 1975, §40-18-13. History: Amended: June 17, 1988; filed July 27, 1988; filed: July 22, 1992; October 30, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Amended: Filed March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-13-.04 13-.04-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.01 Gross Income In General. (1) The term "gross income" means all wealth flowing to the taxpayer from whatever source derived other than as a return of his capital and other than those items exempted by Section 40-18-14(3), Code of Ala. 1975. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized in the form of services, meals, accommodations, stock, or other property, as well as in cash. Such income is to be reported for the year in which received, or accrued and reported in accordance with accepted accounting procedures applicable to the taxpayer's particular type of business. See Reg. 810-3-13-.03 for discussion of accounting methods. (2) In the case of a manufacturing, merchandising, or mining business, gross income means the total sales less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income of a business, subtraction should not be made for losses, or for items not ordinarily used in computing the cost of goods sold. (3) Earnings constitute gross income before deductions for withholding for federal income tax, social security tax, insurance and retirement programs (including those allowable as a deduction under Code of Ala. 1975, Section 40-18-15(11)) or other voluntary or involuntary withholdings. (4) Income actually received or accrued must be included in gross income, although losses may later incur against this income. An exception to this general rule occurs in situations involving the renegotiation of war contracts under federal statutes. Where repayment is made to the government as a result of renegotiation, the amount of income for the year of original payment is the amount of such payment less the amount refunded to the government, even though the repayment is made to the government in a later year. As long as the matter of renegotiation is open, the extent of the gain or profit of the contractor, if any, for that year of payment remains undetermined. (5) If services are paid for with something other than money, the fair market value of the property or services taken in payment is the amount to be included as gross income. If living quarters or meals are furnished to employees for the convenience of the employer, the ratable value need not be added to the compensation Revenue Rule 810-3-14-.01 14-.01-1

of the employees, but if a person receives a compensation for service rendered compensation in the form of living quarters or meals, the value to such person of the quarters furnished constitutes income subject to tax. For living quarters furnished to ministers, see Reg. 810-3-14.02(1)(g). (6)(a) An employee who is given an annuity by his employer must pay income tax on the amount of the premium in the year in which the premium is paid. The annuity is considered as additional compensation for services rendered and not as a gratuity. The payments that qualify as a deduction under Code of Ala. 1975, §40-18-15(11) shall be included in gross income. (b) An employee who is the insured or owner of a group life insurance policy with a face value in excess of $50,000, and the premiums on such policy are paid by the employer, must include in gross income the value of such premiums for coverage in excess of $50,000. (7) For procedure in reporting the income of minors, see §40-18-27 and regulations thereunder. (8) The Federal Internal Revenue Code contains provisions similar to those of §40-18-14(1). Decisions and interpretations of the federal courts and agencies will be given due weight in interpreting this section. (9) Gross income includes recovery of items deducted in previous years. See Reg. 810-3-14-.04. (10) For tax years beginning after December 31, 1981, gross income includes alimony and separate maintenance according to I.R.C. §71 in effect January 1, 1982. For tax years beginning after December 31, 1984, gross income includes alimony and separate maintenance payments as defined in I.R.C. §71, as in effect on January 1, 1985. For tax years beginning after December 31, 1989, gross income includes alimony and separate maintenance payments as defined in I.R.C. §71, as in effect from time to time. Decisions and interpretations of the federal courts and agencies interpreting I.R.C. §71 will be given due weight in interpreting Code of Ala. 1975, Section 40-18-14(1) and this regulation as it relates to alimony and separate maintenance payments. Regulations pertaining to I.R.C. §71 are hereby made a part of this regulation. (a) Alimony or separate maintenance payments received under a divorce or separation instrument executed after March 1, 1954, but prior to January 1, 1985, will be included in gross income as follows: 1.(i) Periodic payments, (for definition of periodic payments see section 2. below) whether or not received at Rule 810-3-14-.01 Revenue 14-.01-2

regular intervals, received after January 1, 1982 are includible in gross income if - (I) Payments received are in discharge of (or attributable to property transferred, in trust or otherwise, in discharge of) a legal obligation, and (II) the obligation is imposed on or incurred because of a marital or family relationship, and (III) the legal obligation is under the decree, or written agreement incident to divorce or separation, and (IV) the payment received does not represent payment in support of minor children, and (V) the payment received does not represent a settlement of property rights. (ii) The source of the payments is immaterial. The payments may be from property held in trust, life insurance, endowment or annuity contract, any other interest in property or from income or capital of the payor whether paid directly or indirectly by him. (iii) If the decree or written agreement specifies an amount to be paid in support of minor children, the payment received goes first to satisfy this obligation. If the payment is less than the amount specified as support of minor children, then the payment received shall be considered a payment of support of minor children. (I) If the decree or written agreement specifies one amount as payment of both alimony or separate maintenance and child support, the entire amount will be considered as alimony or separate maintenance and will be included in gross income of the recipient. 2. In general, periodic payment means "payable over a period of indefinite duration". Payments made for an unspecified principal amount are considered periodic payments even if, by provision of the decree or written agreement or local law, payments will be terminated by death of either spouse, remarriage, or change in economic status of either spouse. 3. Payment of a specified amount, in terms of money or property, under the decree or written agreement to be made over a period of 10 years or less from the date of Revenue Rule 810-3-14-.01 14-.01-3

the decree or agreement will be considered periodic payments if - (i) payments are subject to one or more of the contingencies of death, remarriage, or change in the economic status of either spouse, and (ii) payments are in the nature of alimony or an allowance for support. 4. If payment of a specified amount, in terms of money or property, under the decree or written agreement, is to be made over a period of more than 10 years from the date of the decree or agreement, payments will be considered periodic payments but only to the extent that the installment payment, or sum of the installment payment, received during the recipient's taxable year does not exceed 10 percent of the principal sum. This 10 percent limitation applies to installment payments made in advance, but does not apply to delinquent installment payments for a prior taxable year of the recipient made during the current taxable year. 5. A transfer of property in settlement of marital rights may result in a recognizable gain or loss. The gain or loss is the difference between the adjusted basis of the property and its fair market value at the time of the transfer. (i) If the property has appreciated, there may be a taxable gain on the transfer. Property has appreciated if its fair market value is more than its adjusted basis. The difference is a gain. (ii) If the fair market value is less than the adjusted basis, a loss is realized. Such a loss is deductible if it is on business or investment property, but is not deductible if it is on property held for personal use. (iii) An equal division of property that is co-owned by husband and wife does not result in a gain or loss. (iv) If husband and wife each keep their separately owned property in a divorce settlement, there is no taxable gain or loss. (v) If one spouse transfers separately owned property to the other spouse, the spouse transferring the property realizes a gain or loss. The spouse receiving the property has no gain or loss on the transaction. The basis of the property to the Rule 810-3-14-.01 Revenue 14-.01-4

receiving spouse is its fair market value on the date of the transfer. (vi) Taxpayers report the gain or loss in a property settlement the same as any sale or exchange of an asset. (b) Alimony or separate maintenance payments received from divorce or separation instruments executed after December 31, 1984, (and to divorce or separation agreements executed prior to January 1, 1985, if modified to expressly provide for the application of this subparagraph) is includible in gross income as follows: 1. the term "alimony or separate maintenance payment" means any payment in cash, if - (i) such payment is received by (or on behalf of) a spouse under divorce or separation instrument, and (ii) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under §40-18-14 and not allowable as a deduction under §40-18-15, and (iii) in the case of an individual legally separated from his spouse under a separate maintenance instrument or decree of divorce, the payee and payors are not members of the same household at time such payment is made and do not file a joint income tax return, and (iv) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or other property) as a substitute for such payments after the death of the payee spouse. 2. The term "divorce or separation instrument" means: (i) a decree of divorce or separate maintenance or a written instrument incident to such a divorce, or (ii) a written separation agreement, or (iii) a decree (not described in subsection (I) above) requiring a spouse to make payments for the support of the other spouse, such as temporary alimony. 3. The term "alimony or separate maintenance" shall not apply to that part of any payment which the terms of the divorce or separation instrument designates (in terms of Revenue Rule 810-3-14-.01 14-.01-5

an amount of money or a part of a payment) as a sum which is payable for the support of children of the payor. If any amount specified in the instrument will be reduced - (i)(I) on the happening of a contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school, or a similar contingency), or (II) At a time which can be clearly associated with a contingency of a kind specified in (I); an amount equal to the amount of such reduction will be treated as an amount designated or fixed as payable for the support of children of the payor. (ii)(I) If any payment is less than the amount specified in the instrument as support of the children of the payor, then so much as such payment as does not exceed the sum payable for support shall be considered a payment for such support. (II) If the instrument specifies a single amount in payment of both alimony or separate maintenance and child support with no more contingency of the type provided in sections 3. (I)(I) or (II) above, or no support of money or part of the payment specifically designated as child support, the entire payment will be considered as alimony or separate maintenance and will be included in gross income of the recipient. 4. Alimony or separate maintenance payments in excess of $10,000 during any calendar year paid to a single payee will not be treated as alimony or separate maintenance unless such payments are to be made by the payor to the payee in each of the six (6) post-separation years (not taking into account any termination contingent on the death of or remarriage of either spouse). 5. If there is an excess amount determined under section 6. below for any computation year - (i) the payor spouse shall include such excess in gross income for the taxable year beginning in the computation year, and (ii) the payee spouse shall be allowed a deduction in computing adjusted gross income for such excess amount for the taxable year which ends on or after the taxable year of the payor spouse beginning in the computation year. 6.(i) The excess amount determined under this section for any computation year is the sum of - Rule 810-3-14-.01 Revenue 14-.01-6

(I) the excess (if any) of - I. the amount of alimony or separate maintenance payments paid by the payor spouse during the immediately preceding post-separation year, over II. the amount of alimony or separate maintenance payments paid by the payor spouse during the computation year increased by $10,000, plus (II) a like excess for each of the other post- separation years. (ii) In determining the amount of alimony or separate maintenance payments made by the payor spouse during any preceding post-separation year, the amount paid during such year shall be reduced by any excess previously determined in respect of such year under this section 6. (I) EXAMPLE: H makes alimony payments to W of $25,000 in 1985 and $12,000 in 1986. The excess amount with respect to 1985 that is recaptured in 1986 is $3,000 ($25,000 - ($12,000 + $10,000)). For purposes of subsequent computation years, the amount deemed paid in l985 is $22,000. If H makes alimony payments to W of $1,000 in 1987, the excess amount that is recaptured in 1987 will be $12,000. This is the sum of an $11,000 excess amount for 1985 ($22,000 - $1,000 + $10,000)) and a $1,000 excess amount with respect to 1986 ($12,000 - ($1,000 + $10,000)). If, prior to the end of 1990 (the end of the six year post- separation period), payments decline further, additional recapture will occur. 7. For purposes of this subparagraph, the term "post- separation year" means any calendar year in the six (6) calendar year period beginning with the first calendar year in which the payor spouse paid alimony or separate maintenance payments to the recipient spouse, and the term "computation year" means the post-separation year for which the excess under section 6. above is being determined. 8. The recapture rule provided in section 5. above shall not apply to any post-separation year (and subsequent post-separation years). (i) either spouse dies or the payee spouse before the close of such post-separation year, and (ii) the alimony or separation maintenance payments cease by reason of such death or remarriage, or Revenue Rule 810-3-14-.01 14-.01-7

(iii) the payments are received under a decree described in section 2. (iii) above, or (iv) the payment is made pursuant to a continuing liability (over a period not less than six years) to pay a fixed portion of the income from a business or property or from compensation or employment or self- employment. 9. To qualify for the deduction provided in §40-18-15, alimony or separate maintenance payments may not be made in any form other than cash. Transfers of services or property (including a debt instrument of a third party or any annuity contract), executing of a debt instrument by the payor, or the use of property of the payor, do not qualify as alimony or separate maintenance payment. See §§40-18-8(m) and 40-18-6(a)(13) for treatment of gain or loss on transfers of property incident to a divorce. (c) Alimony or separate maintenance payments received from divorce or separation instruments executed after December 31, 1989 (and to divorce or separation agreements executed prior to January 1, 1990, if modified to expressly provide for the application of this subparagraph (is includible in gross income in the same manner as provided in subparagraph (b) of this regulation with the following exceptions; 1. the payments must be cash payments received by (or on behalf of) a spouse or former spouse: 2. the payments must be under a divorce or separation instrument; 3. the payments must not extend after the death of a payee-spouse (need not be expressly stated in the instrument); 4. the spouses (or former spouses) must not be members of the same household and must not file joint returns; 5. the divorce or separation instrument can designate such payment which is not includible in gross income under I.R.C. §71 and not allowable as a deduction under I.R.C. §215 (if so designated, the payments are not considered as alimony): 6. the payment must not be for child support; and 7. the payments need not be made in discharge of marital obligations imposed by state law, nor need the payments be "periodic." (11) Except for plans specifically exempt by law from tax, payments received from pension, profit-sharing, stock bonus, Rule 810-3-14-.01 Revenue 14-.01-8

retirement, annuity, or bond purchase plans, in excess of the taxpayer's investment in such plans, shall be included in gross income. (a) This includes all payments received, not just those received upon completion of the plan. (b) The taxpayer's investment in the above plans is the taxpayer's contributions to such plans, excluding those allowable as a deduction under §§40-18-15(a)(11) and 40-18-15(a)(12) and/or those allowable as an exclusion from gross income under §40-18-14(1)(I). See also Reg. 810-3-14-. 10. (c) Those employer contributions previously included in gross income of the taxpayer but not allowable as a deduction by the taxpayer are included in the taxpayer's investment. (12)(a) For tax years beginning after December 31, 1981, but before January 1, 1990, in accordance with §40-18-14(2)e (I.R.C. §105 as in effect January 1, 1982), any amount an employee receives for disability through an accident and health insurance plan that is attributable to his employer's contributions is included in gross income except: 1. Payments for permanent loss of, or loss of use of a member or function of the body, or for permanent disfigurement, 2. Payments under a plan as reimbursement for expenses incurred by the employee for medical care for himself, spouse or dependents, or 3. Payments, within limits that are in lieu of wages for a period during which an employee is absent from work on account of permanent and total disability if the employee has not attained age 65 before the close of the taxable year and has retired on disability. (i) The disability income exclusion of this paragraph (c) is limited to $100 per week, and (ii) The disability exclusion to which the taxpayer would be entitled shall be reduced by the amount that adjusted gross income, including disability income, exceeds $15,000.00. (iii) EXAMPLE: A disabled taxpayer under age 65 received $6,000.00 in disability retirement income in lieu of wages. He also had $10,000.00 of other income which, together with the $6,000.00 of disability payments in lieu of wages, gave him an adjusted gross income of $16,000.00. Assume that before reduction Revenue Rule 810-3-14-.01 14-.01-9

the taxpayer is entitled to an exclusion of $5,200.00 for the year. Since the taxpayer's adjusted gross income exceeds $15,000.00, his exclusion is reduced by the $1,000.00 excess. Consequently, his maximum exclusion is $4,200.00 ($5,200.00 minus $1,000.00). (b) The exclusion provision of paragraph (a) above does not apply to disability income received after December 31, 1989. (13) Gross income includes the fair market value of the personal use (including commuting) of an employer (including a governmental employer) owned automobile, together with the fair market value of any fuel furnished by the employer. The rates and methods for determining the values for this paragraph will be as provided in I.R.C. §61(a)(1) (and I.R.C. Reg. 1-61-2T) as in effect January 1, 1985. (14)(a) For taxpayers who are shareholders of an Alabama S corporation with a tax year which began before January 1, 1990 - 1. Gross income includes the deemed distributive share of separately stated and nonseparately stated income (or loss) for shareholders of an electing Alabama S corporation. (i) For electing Alabama S corporations with income from more than one state, gross income includes only the deemed distributive share attributable to Alabama. 2.(i) Gross income does not include actual distributions from electing Alabama S corporations which have been previously included in gross income under subparagraph (a)1. above. (ii) For resident shareholders, all other actual distributions from a S corporation, including distributions representing income taxable in other states, is included in gross income. 3. Gross income does include actual distributions from S corporations which have not elected to be Alabama S corporations, but does not include deemed distributive shares of income (or losses) of such corporations. 4. See §§40-18-160, et seq., and regulations thereunder, relating to Alabama S corporations. (b) For taxpayers who are shareholders of an Alabama S corporation with a tax year which began after December 31, 1989 and before January 1, 1997 - Rule 810-3-14-.01 Revenue 14-.01-10

1. Gross income includes the deemed distributive share of separately stated and nonseparately stated income (or loss) of the Alabama S corporation. 2. Gross income does not include actual distributions from an Alabama S corporation which have been previously included in gross income under subparagraph (a)1. above. (c) For taxpayers who are shareholders of an Alabama S corporation with a tax year which began after December 31, 1996 and before January 1, 2011: 1. Gross income includes the shareholder's pro rata share of separately stated and nonseparately stated items of income, loss, deduction, or credit attributed to Alabama by the Alabama S corporation for the corporation's taxable year which ends with or during the individual's tax year. 2. Gross income does not include actual distributions from an Alabama S corporation which have been previously included in gross income under subparagraph (a)1. above. 3. Gross income does not include actual distributions from an Alabama S corporation which are determined to be nontaxable under the provisions of §40-18-165 and the regulations thereunder. (d) For taxpayers who are shareholders of an Alabama S corporation with a tax year which began after December 31, 2010 gross income is determined in accordance with Code of Ala. 1975, §§40-18-162 and 40-18-14 and without regard to (c)above. (15)(a) For taxpayers providing foster care services who are not engaged in the trade or business of providing such services, gross income includes payments received in excess of expenses incurred in providing such services but does not include expenses in excess of receipts. (b) For taxpayers engaged in the trade or business of providing foster care services, gross income includes all payments received for such services, less expenses incurred in the performance of such services. A taxpayer will be presumed to be engaged in the trade or business of providing foster care services when such services are provided for more than ten (10) minors or more than five (5) adults. (c) The provisions of this paragraph are substantially similar to the provisions of I.R.C. §131, and regulations and decisions regarding the interpretation and implementation of I.R.C. §131 will be given due consideration in the administration of this paragraph. Revenue Rule 810-3-14-.01 14-.01-11

(16)(a) For tax years beginning after December 31, 1996 and before January 1, 2011, gross income for a resident partner or member of a subchapter K entity includes the following: 1. For a multi-state subchapter K entity doing business within and without the State of Alabama, only that income which is required to be allocated and apportioned to Alabama under the rules of Section 40-18-22. (If the multi-state subchapter K entity is not doing business in Alabama, no income is reportable to Alabama from that subchapter K entity.) 2. For a subchapter K entity doing business in only one state, whether the State of Alabama or another state, the distributive share of the entire income from that subchapter K entity. (b) For tax years beginning after December 31, 2010, the amount of income, deduction, gain, loss or credit includable or deductible by an owner of an interest in a subchapter K entity shall be determined in accordance with subchapter K of the Internal Revenue Code, 26 U.S.C. §§701-761, Code of Ala. 1975, §§40-18-24 and 40-18-14 and without regard to (a) above. (17) Property transferred in connection with performance of service-Tax years beginning after December 31, 9891. (a) Inclusion in gross income. 1. If stock or other property is transferred to any person other than the person for whom the services are performed, the excess of - (i) the fair market value of such property (determined without restrictions other than restrictions that will never lapse) at the first time the rights of the person having beneficial interest in such property are transferable or are not subject to substantial risk of forfeiture, whichever occurs first, over (ii) the amount actually paid for such property, shall be included in the gross income of the transferee who performed the service in the first tax year during which a fair market value under provisions of (a)(I) above can be determined. 2. Paragraph (a)1 shall not apply if the transferee sells or otherwise disposes of such property in an arms length transaction before his rights in such property become transferable or not subject to substantial risk of forfeiture. Rule 810-3-14-.01 Revenue 14-.01-12

(b) Election to include in gross income in the year of transfer. 1. The transferee may elect to have paragraph (a) above apply in the year of transfer. 2. The election must be made in the same manner and within the same time frame as required by regulations pertaining to 26 U.S.C. §83. 3. The statement of election required by regulations pertaining to 26 U.S.C. §83 shall be made a part of the Alabama income tax return for the year of transfer. (c) Special rules - For the purpose of this regulation - 1. Substantial risk of forfeiture. - The rights of a person in property are subject to a substantial risk of forfeiture if such person's rights to full enjoyment of such property are conditioned upon the future performance of substantial services by the individual. 2. Transferability of property - The rights of a person in property are transferable only if the rights in such property of the transferee are not subject to substantial risk of forfeiture. 3. Sales which give rise to suit under section 16(b) of the Securities Exchange Act of 1983. - So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person's rights in such property are - (i) subject to substantial risk of forfeiture, and (ii) not transferable. (d) Restrictions which will never lapse. 1. Valuation - Property subject to restrictions which by its terms will never lapse, and which allows the transferee to see such property for a price determined under some formula, the formula price shall be determined to be the fair market value of the property. 2. Cancellation - If, property subject to a restriction which by its terms will never lapse has the restriction canceled, then unless the transferee establishes - (i) that such cancellation was not compensatory, and Revenue Rule 810-3-14-.01 14-.01-13

(ii) that the taxpayer, if any, who would be allowed a deduction for compensation, will treat the transaction as non-compensation: (I) the excess of the fair market value of the property (computed without regard to the restrictions) at the time of the cancellation over the fair market value of the property (computed by taking the restriction into account) immediately before the cancellation plus the amount paid for the cancellation, shall be treated as compensation for the tax year in which the cancellation occurs. (e) Applicability, - This regulation shall not apply to - 1. a stock option to which 26 U.S.C. §421 applies. 2. a transfer to or from a trust described in 26 U.S.C. §401(a) or a transfer under an annuity plan which meets the requirements of 26 U.S.C. §404(a)(2). 3. the transfer of an option without a readily ascertainable fair market value. 4. the transfer of property upon the exercise of an option with a readily ascertainable market value at the date of the grant, or 5. group term life insurance to which 26 U.S.C. §79 applies. (f) Code of Ala. 1975, §40-18-14(1) stipulates that 26 U.S.C. §83 will be the guiding document for determining amount and time that income under this regulation is to be included in gross income; therefore, regulations pertaining to 26 U.S.C. §83 are hereby made a part of this regulation. Judicial and administrative decision of Federal agencies will govern in administering this regulation. (18) With the exception noted below, the amendments to this regulation which were filed with the Legislative Reference Service on March 21, 2011 are effective for tax years beginning after December 31, 2010. The Department of Revenue will not enforce these regulatory changes for tax periods ending prior to January 1, 2011, or for gains associated with the taxable disposition of all or any portion of a taxpayer’s assets or Subchapter K interests where the parties to the transaction can document that negotiations began prior to January 1, 2011 and continued with regularity until the transaction was completed in 2011. These amendments are consistent with the Administrative Law Division’s Ruling, McNees v. Department of Revenue, DOCKET NO. 06-523, entered December 12, 2006. Rule 810-3-14-.01 Revenue 14-.01-14

(19) The Department will not rely on the amendments to this regulation which were filed with the Legislative Reference Service on March 21, 2011 for tax periods beginning after December 31, 2011. For tax periods beginning after December 31, 2011, the Department will issue new regulatory language addressing the issues to which these amendments pertain. Author: Ann Winborne, CPA, Individual and Corporate Tax Division, Joe Garrett, Tax Policy Administrator Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-1.1(c), 40-18-14. History: Amended: February 8, 1989; Filed March 20, 1989; Filed July 22, 1992; October 30, 1992. Amended: Filed March 26, 1998; effective April 30, 1998. Amended: Filed August 3, 2011; effective September 7, 2011. Revenue Rule 810-3-14-.01 14-.01-15

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.02 Exclusions From Gross Income. (1) Items which are excluded from gross income are listed in §40-18-14(3), Code of Ala. 1975, as follows: (a) Amounts received under life insurance policies and contracts paid by reason of the death of the insured, in accordance with 26 U.S.C. §101. (b) Amounts received, other than amounts paid by reason of the death of the insured, under life insurance, endowment or annuity contracts determined in accordance with 26 U.S.C. §72. (c) The value of property acquired by gift, bequest, devise, or descent, in accordance with 26 U.S.C. §102 - the income from such property shall be included in gross income. 1. Gross income does not include a fellowship or grant that is an outright gift with no obligation on the part of the recipient. Payments to an individual as a scholarship at an educational institution or as a fellowship grant are excluded from the gross income of the student to the extent that services are not required of the student in order to receive the payments. The value of contributed services and accommodations are also excluded from gross income. If there is a condition that a person must teach or enter into employment, payments are not gifts. 2. Payments for teaching, research, or other services in the nature of part-time employment required as a condition to receiving the scholarship or fellowship grant are not exempt and should be included in gross income. 3. Prizes, awards, and scholarships are not specifically addressed by Alabama income tax law. The Department will look to 26 U.S.C. §74, Prizes and Awards, and 26 U.S.C. §117, Qualified Scholarships, as guidance to determine whether specific prizes, awards, and scholarships are excluded from gross income. (d) Interest upon obligations of the United States or its possessions; or securities issued under provisions of the Federal Farm Loan Act of July 18, 1916. Examples of exempt Revenue Rule 810-3-14-.02 14-.02-1

obligations include U.S. Savings Bonds, U.S. Treasury Notes or Bills, obligations of the Bank for Cooperatives, Federal Land Banks, Federal Intermediate Credit Banks, Federal Home Loan Banks, Productions Credit Associations, Federal Financing Bank, and the Tennessee Valley Authority. Interest received from the United States government earned on other than investment obligations, such as interest on tax refunds, is subject to Alabama income tax and should be included in gross income. (e) Amounts received which are excludable from gross income under 26 U.S.C. §104, relating to compensation for injuries or sickness. (f) Amounts received which are excludable from gross income under 26 U.S.C. §105, relating to amounts received from accident or health plans. (g) Interest on obligations of the State of Alabama and any county, municipality, or other political subdivision thereof. It should be noted that interest on obligations of other states and political subdivisions thereof is taxable. (h) The rental value of a parsonage provided to a minister of the gospel, to the extent excludable under 26 U.S.C. §107. (i) Income from discharge of indebtedness to the extent allowed by 26 U.S.C. §108, with the exception that the reductions in tax attributes required by 26 U.S.C. §108 shall be applied only to the net operating losses determined under Alabama income tax law and to the basis of depreciable property. The basis reductions of depreciable property shall not exceed the basis reductions for federal income tax purposes. All other tax attribute reductions required by 26 U.S.C. §108 shall not be recognized. (j) Gain from the sale of a personal residence to the extent excludable for federal income tax purposes under 26 U.S.C. §121. (k) Contributions made by an employer on behalf of an employee to a trust which is a part of a qualified cash or deferred arrangement, as defined in 26 U.S.C. §401(k)(2) or 5 U.S.C. §8437, subject to the limitations of 26 U.S.C. §402(g). (l) Contributions, made by an employer for an employee for an annuity contract, which would be excludable from the gross income of the employee, in accordance with 26 U.S.C. §403(b), subject to the limitations of 26 U.S.C. §402(g). (m) Amounts excludable in accordance with 26 U.S.C. §125, relating to cafeteria plans. Rule 810-3-14-.02 Revenue 14-.02-2

(n) Amounts excludable in accordance with 26 U.S.C. §132, relating to certain fringe benefits. (o) Amounts excludable in accordance with 26 U.S.C. §129, relating to dependent care expenses. (2) In addition, items of income which federal law prohibits the states from taxing, or which are otherwise exempt from taxation by the Code of Ala. 1975, are excluded from gross income. For example, the daily subsistence allowance paid to state law enforcement officers pursuant to §36-21-2, Code of Ala. 1975, is excluded from gross income. Also, federal law exempts from taxation allowances for quarters, subsistence, uniforms and travel furnished military personnel by the United States Government. (3) Other items of income are exempt: (a) Income of foreign missionaries - see §40-18-2.1, Code of Ala. 1975. (b) Certain retirement allowances, net income realized from a financial business, personal exemptions and dependent exemptions - see §40-18-19. (c) Certain severance payments - see §40-18-19.1. (d) Military retirement benefits - see §40-18-20. (4) For interpretation of federal statutes adopted by the Alabama legislature, see Rule 810-3-1.1-.01, Operating Rules. (5) The provisions of the federal "Taxpayer Relief Act of 1997" which were adopted by Alabama Act 98-502 have the same effective date for Alabama income tax purposes as they do for federal income tax purposes. Author: Ann F. Winborne, CPA, Ed Cutter, CPA, John Danziger, and Rebecca S. Whisenant Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-14. History: Amended: June 17, 1988; February 8, 1989; filed March 20, 1989. Amended: Filed July 27, 1988; May 15, 1992. Repealed and New Rule: Filed May 3, 2000; effective June 7, 2000. Revenue Rule 810-3-14-.02 14-.02-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.03 Gross Income Of Farmers. (1) A taxpayer is engaged in the business of farming if he cultivates, operates, or manages a farm for gain or profit, either as owner or tenant. A taxpayer who receives a rental (either in cash or in kind) which is based upon farm production is engaged in the business of farming. However, a taxpayer who receives a fixed rental (without reference to production) is engaged in the business of farming only if he participates to a material extent in the operation or management of the farm. A taxpayer engaged in forestry or the growing of timber is not thereby engaged in the business of farming. A person cultivating or operating a farm for recreation or pleasure rather than a profit is not engaged in the business of farming. For the purpose of this rule, the term "farm" is used in its ordinary, accepted sense and includes stock, dairy, poultry, fish, fruit, and truck farms, and also plantations, ranches, ranges, and orchards. (2) A farmer shall make a return using the same taxable year and in accordance with the same method of accounting that the farmer uses for federal income tax purposes, as provided for under §40-18-13, Code of Ala. 1975. (3) Crop shares shall be included in gross income as of the year in which the crop shares are reduced to money or the equivalent of money. (4) If farm produce is exchanged for merchandise, groceries, or the like, the market value of the articles received in exchange is to be included in gross income. (5) Proceeds of insurance, such as hail and fire insurance on growing crops, should be included in gross income, whether received in cash or its equivalent for the crop injured or destroyed. (6) Inventory shall be taken by a farmer in accordance with the methods and procedures prescribed under §40-18-11. Author: Ann F. Winborne, CPA, John Danziger, Rebecca Whisenant Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-14. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Amended: Filed May 3, 2000; effective June 7, 2000. Revenue Rule 810-3-14-.03 14-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.04 Collections Of Items Previously Deducted. (1) If an amount which was properly allowed as a deduction in a prior year is subsequently recovered or refunded, the amount recovered or refunded must be included in income for the year of recovery to the extent that a tax benefit resulted from the deduction. (2) A tax benefit includes a net operating loss available for carryback or carryforward. (3) The phrase "recovery of an amount properly allowed as a deduction" does not include the "recovery" of depreciation on the sale or other disposition of an asset for more than its depreciated basis. Such "recovery" is included in the amount of gain to be recognized pursuant to §40-18-8, Code of Ala. 1975, and regulations thereunder. Author: Ann F. Winborne, CPA, John Danziger, Rebecca S. Whisenant Statutory Authority: Code of Ala. 1975, §§40-2A-7-(a)(5), 40-18-14. History: Amended: September 7, 1988; filed October 26, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Amended: Filed July 26, 1999; effective August 30, 1999. Revenue Rule 810-3-14-.04 14-.04-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.05 Gross Income Of Nonresidents. (1)(a) The gross income of a nonresident includes compensation for personal services only to the extent that the services were rendered in this State. (b) Compensation for personal services rendered by a nonresident outside this State and not connected with the management or conduct of a business in this State is excluded from gross income even if payment is made from a point within this State or the employer is a resident individual, partnership or corporation. 1. Compensation for personal services rendered by a nonresident within this State is to be included in gross income although payment is received at a point outside this State or from a nonresident individual, partnership or corporation. 2. Where compensation is received for personal services rendered partly within and partly without this State, that part of the income attributable to this State is included in gross income. In such cases the test of physical presence is used to determine the situs of the rendition of the services, except where the peculiar nature of such services causes the objective of the employment to be accomplished or to take effect within this State, as, for example, where a nonresident acts as a fiduciary of an Alabama estate or trust. The gross income from commissions earned by a nonresident traveling salesman, agent, or other employee for services performed or sales made, whose compensation is in the form of a specified commission on each sale made, or service rendered, includes the specific commissions earned on sales made, or services rendered, in this State; and allowable deductions must be computed on the same basis. The gross income of all other nonresident employees, including corporate officers, includes that portion of the total compensation for services which the total number of working days employed within this State bears to the total number of working days employed both within and without this State during the taxable period. In the case of corporate officers and executives who spend only a portion of their time within this State, but whose compensation paid by a corporation operating in Alabama Revenue Rule 810-3-14-.05 14-.05-1

is exclusively for managerial services rendered by such officers and executives while within this State, the entire amount of compensation so earned is taxable without apportionment. (2)(a) Gross income of a nonresident includes income from real and/or tangible personal property located within Alabama, or intangible personal property with a business situs in Alabama. (b) The income from property may be derived from the operation of the property, from rents or royalties for its use, or from the sale, exchange or other disposition of the property. 1. For real property located within Alabama, gross income includes gains or losses from the sale, exchange or disposition of such property. See Chapters 6 and 8 of these regulations for computation of gains and losses to be recognized. 2. For tangible personal property located within Alabama, gross income includes gains from the sale, exchange or disposition of such property. Losses are included in gross income from the sale, exchange or disposition of such property only if such property was "business income" producing property (as defined in Reg. 810-3-31-.02). 3. For intangible personal property which has a business status in Alabama, gross income includes gains from the sale, exchange or disposition of such property. Losses are included in gross income from the sale, exchange or disposition of such property only if such property was "business income" producing property (as defined in Reg. 810-3-31-.02). 4. As a general rule, for the purpose of determining the source of income attributable to the sale of personal property, a sale is consummated at the place where the seller surrenders all his right, title, and interest to the buyer. Where bare legal title is retained by the seller, the sale will be deemed to have occurred at the time and place of passage to the buyer of beneficial ownership and risk of loss. (3)(a) Gross income includes the deemed distributive share of separately stated and nonseparately stated income (or loss not to exceed basis) for shareholders of an electing Alabama S corporation. 1. For electing Alabama S corporations with income from more than one state, gross income includes only the deemed distributive share attributable to Alabama. Rule 810-3-14-.05 Revenue 14-.05-2

(b) Gross income does not include actual distributions from electing Alabama S corporations which have been previously included in gross income under subparagraph (a) above. (c) Gross income of a nonresident does not include actual distributions from S corporations which have not elected to be Alabama S corporations, nor does it include deemed distributive shares of income (or losses) of such corporations. (d) See §§40-18-160, et seq. Code of Ala. 1975, and regulations thereunder, relating to Alabama S corporations. (4) Gross income of a nonresident partner of a partnership includes the distributive share of the partnership income (or loss not to exceed basis), plus any "Guaranteed Payments to Partner." See Regs. 810-3-24-.01(3) and 810-3-24-.03. If the partnership has income from Alabama and any other state, Alabama gross income includes only the amount attributed to Alabama as provided in Reg. 810-3-24-.02(2). (5) Gross income of a nonresident beneficiary of an estate or trust includes income from such estate or trust attributable to Alabama. See Reg. 810-3-25-.05. Author: Rebecca Whisenant, John H. Burgess, Amanda G. Scott, CPA Statutory Authority: Code of Ala. 1975, §40-18-14. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Revenue Rule 810-3-14-.05 14-.05-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.06 Payments By Employers For Past Services To Those No Longer In Their Employment; Payments To Widows Of Deceased Employees. (1) Bonus or other post-employment payments made by an employer to his employee in the military service are considered to be compensation for services and includable in gross income, where the plan and agreement are that the employee is to return to his position when discharged from military service. If the payments are made as a gift, then the payments are not includable in gross income of the recipient. The deduction by the payer of the payments as a business expense is prima facie evidence that the payments are not gifts. (2) Payments made by an employer to the widow of a deceased officer or employee as additional compensation, in recognition of and in consideration of services of said deceased officer or employee, are includable in the gross income of the widow. (3)(a) Payments received by the widow of a deceased partner from a partnership are includable in gross income to the extent the payments represent a distribution of profits. (b) If the payments represent a purchase or cancellation of the deceased partner's interest in the partnership, gain or loss will be recognized as provided in §40-18-8, Code of Ala. 1975. (c) Any payments which constitute a gift from the partnership to the widow are not includable in gross income. Author: Ann F. Winborne, CPA, John Danziger, Rebecca S. Whisenant Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-14. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Amended: Filed May 3, 2000; effective June 7, 2000. Revenue Rule 810-3-14-.06 14-.06-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.07 Nonrecognition Of Gain On Sale Of Personal Residence (Repealed 11/16/01). (Repealed) Author: Royce Lader, Ann F. Winborne Statutory Authority: Code of Ala. 1975, §40-18-14. History: Amended: June 17, 1988; filed July 27, 1988. Filed May 15, 1992. Repealed: Filed October 12, 2001; effective November 16, 2001. Revenue Rule 810-3-14-.07 14-.07-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.08 Sale Of Principal Residence By Taxpayer Who Has Attained Age 55 (Repealed 11/16/01). (Repealed) Author: Royce Lader, Ann F. Winborne Statutory Authority: Act 90-583. History: Amended: June 17, 1988; filed July 27, 1988. Filed July 22, 1992; October 30, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed: Filed October 12, 2001; effective November 16, 2001. Revenue Rule 810-3-14-.08 14-.08-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.09 Rental Value Of Home Or Rental Allowance Furnished A Minister Of The Gospel (Repealed 6/7/00) . (Repealed) Author: Rebecca S. Whisenant, Amanda G. Scott, CPA Statutory Authority: Code of Ala. 1975, §40-18-14. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed: Filed May 3, 2000; effective June 7, 2000. Revenue Rule 810-3-14-.09 14-.09-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.10 Estate And Trust Beneficiary Taxable Income (Repealed 6/7/00) . (Repealed) Author: Roy Wiggins, Amanda G. Scott, CPA, Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-14. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed: Filed May 3, 2000; effective June 7, 2000. Revenue Rule 810-3-14-.10 14-.10-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-14 GROSS INCOME OF INDIVIDUALS 810-3-14-.11 Severance Pay Exemption (Repealed 3/12/09) . (Repealed) Author: Edward F. Cutter, CPA; Richard H. Henninger, Jr.; Judy A. Robbins, Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-19.1. History: New Rule: Filed February 20, 1998; Effective March 27, 1998. Amended: Filed May 3, 2000; effective June 7, 2000. Repealed: Filed February 5, 2009; effective March 12, 2009. Revenue Rule 810-3-14-.11 14-.11-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.01 General Provisions. (1) For tax years beginning after December 31, 1997, no deduction shall be allowed for any losses, expenses, or interest deferred or disallowed pursuant to 26 U.S.C. §267. For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. (2) For tax years beginning after December 31, 1986, no expenses shall be allowed for any cost required to be capitalized in accordance with 26 U.S.C. §263A. (3) An individual who is a part-year resident of Alabama may deduct expenses allowed by §40-18-15, Code of Ala. 1975, only to the extent that the expenses were paid during the period the taxpayer was a resident of Alabama. If a deduction was paid for the entire year, such as interest or taxes, and the amount actually paid while a resident cannot be determined, the taxpayer may prorate the deductible amount based on the number of months of Alabama residency. (4) Double deductions are not permitted. Amounts deducted under one provision of this title cannot be deducted under another title. Author: Ann F. Winborne, CPA, Roger Frost, Sharon Norman, Hugh Kirland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Amended: June 17, 1988; filed July 27, 1988. Amended: Filed May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.01 15-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.02 Business Expenses. (1) Business expenses deductible from gross income include the ordinary and necessary expenses paid or accrued during the taxable year, directly connected with or pertaining to the taxpayer's trade or business, as determined in accordance with 26 U.S.C. §162. (2) The provisions and limitations of 26 U.S.C. §274 also apply to expenses for business travel, meals, and entertainment otherwise allowable under 26 U.S.C. §162. (3) Unreimbursed employee business expenses and certain other miscellaneous itemized deductions are deductible only to the extent that the aggregate of the deductions exceeds 2-percent of adjusted gross income as defined in Code of Ala. 1975, §40-18-14.2. (4) A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carrying on of the business of farming in accordance with 26 U.S.C. §162. (5) Alabama income tax law requires that taxpayers maintain such records as will be sufficient to enable the Department of Revenue to correctly determine tax liability. It is to the advantage of taxpayers who may be called upon to substantiate deductions to maintain as adequate and detailed records as is practical since the burden of proof is on the taxpayer to show that such deductions were not only paid or accrued but also were ordinary and necessary business expenses, as defined in 26 U.S.C. §162. (6) For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. (7) The provisions of the federal “Taxpayer Relief Act of 1997” which were adopted by Alabama Act 98-502 have the same effective date for Alabama income tax purposes as they do for federal income tax purposes. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles, Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. Revenue Rule 810-3-15-.02 15-.02-1

History: Amended: June 17, 1988; May 9, 1989; filed May 16, 1989. Filed July 22, 1992; October 30, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Rule 810-3-15-.02 Revenue 15-.02-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.03 Interest Expense. (1) Effective for all taxable years beginning after December 31, 1997, interest paid or accrued within the taxable year on indebtedness shall be limited to the amount allowable as an interest deduction for federal income tax purposes in the corresponding tax year or period pursuant to the provisions of 26 U.S.C. §§163, 264, and 265. Educational loan interest is not deductible for Alabama income tax purposes. For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. (2) Effective for all taxable years or periods beginning after December 31, 1987, and prior to December 31, 1997, interest paid or accrued within the taxable year on indebtedness shall be limited to the amount allowable as an interest deduction for federal income tax purposes in the corresponding tax year or period pursuant to the provisions of 26 U.S.C. §163. (3) For taxable years beginning prior to January 1, 1988, all interest paid or accrued within the taxable year on indebtedness was fully deductible. (4) The provisions of the federal “Taxpayer Relief Act of 1997” which were adopted by Alabama Act 98-502 have the same effective date for Alabama income tax purposes they do for federal income tax purposes. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Amended June 17, 1988; May 9, 1989; filed May 16, 1989. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.03 15-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.04 Deductibility Of Taxes. (1) The following taxes imposed by the United States or any possession of the United States are deductible by the taxable entity upon whom the taxes are imposed: (a) Income taxes (b) Federal Insurance Contribution Act (FICA) taxes (c) Self-employment taxes (d) Estate and gift taxes 1. Estate taxes are imposed on the estate. 2. Gift taxes are imposed on the donor. (2) State, local, and foreign occupational license taxes and contributions to state unemployment funds are deductible. (3) The following taxes are deductible to the same extent that the taxes are deductible for federal income tax purposes under 26 U.S.C. §164, in accordance with federal regulations for 26 U.S.C. §164: (a) State, local, and foreign real property taxes. (b) State and local personal property taxes. 1. The term "personal property tax" means an ad valorem tax which is imposed on an annual basis in respect to personal property. (c) The generation-skipping transfer (GST) tax imposed on income distributions by 26 U.S.C. §2601. (4) There shall be allowed a deduction for state, local, and foreign taxes, and taxes imposed by authority of the United States or any possession of the United States, which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in 26 U.S.C. §212 (relating to expenses for production of income). Revenue Rule 810-3-15-.04 15-.04-1

(5) Notwithstanding the preceding sentence, any tax which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition. Cross references: Code of Ala. 1975, §§40-18-6, 40-18-15, 40-18-16, and 40-18-17. (6) See also Rule 810-3-15-20, Federal Income Tax Deduction - Individuals. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted September 30, 1982. Amended: July 27, 1988. Amended: February 8, 1989; filed March 20, 1989; filed May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Rule 810-3-15-.04 Revenue 15-.04-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.05 Depreciation, Amortization And Section 179 Expense. (1) Effective for all taxable years beginning after December 31, 1997, there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) of property used in a trade or business, or of property held for the production of income, in accordance with 26 U.S.C. §§167 and 168. For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. (2) Effective for all taxable years beginning after December 31, 1997, intangible assets which are used in a trade or business or held for the production of income may be amortized in accordance with 26 U.S.C. §197. For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. (3) A deduction is allowable for the amortization of start-up expenditures in accordance with 26 U.S.C. §195, but in the case of a nonresident, only if the principal place of business being investigated, created, or acquired is located in the State of Alabama. (4) For taxable years beginning after December 31, 1989, a taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to a capital account in accordance with 26 U.S.C. §179. (5) For taxable years beginning before January 1, 1998, Alabama income tax law and regulations were similar to the provisions of the Internal Revenue Code and regulations concerning depreciation and amortization of intangible assets. Applicable federal regulations and determinations pertaining to depreciation and amortization of intangible assets will be followed in administering this rule for those tax periods. See also Rule 810-3-1.1-.01, Operating Rules. (6) The provisions of the federal "Taxpayer Relief Act of 1997" which were adopted by Alabama Act 98-502 have the same effective date for Alabama income tax purposes as they do for federal income tax purposes. Revenue Rule 810-3-15-.05 15-.05-1

Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles, Ewell Berry, Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted September 30, 1982. Amended: Filed July 27, 1988. Amended: February 8, 1989; filed March 20, 1989. Filed May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Rule 810-3-15-.05 Revenue 15-.05-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.06 Depletion. (1) There shall be allowed as a deduction in computing taxable income in the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion. (a) Depletion allowance for standing timber shall be computed solely on the adjusted basis of the property. (b) Depletion allowance for oil and gas may be computed on either the cost depletion method or on a percentage of gross income from the property, see Reg. 810-3-16-.01. (c) Depletion allowance for other exhaustible natural resources shall be computed on the cost depletion method. (d) The basis for depletion shall be determined in accordance with §§40-18-16 and 40-18-6, Code of Ala. 1975. (2) Annual depletion deductions are allowed only to the owner of an economic interest in mineral deposits or standing timber. An economic interest consists of a capital investment in timber or mineral in place together with recovery of the investment through production. (a) The allowance for depletion should be equitably apportioned between the lessor and lessee. Each should compute cost depletion from his own adjusted basis; each should compute percentage depletion from his own income from the property. One may use percentage depletion while the other may use cost. (3) Computation of depletion on basis of cost (mines, oil and gas properties). When the adjusted basis applicable to the mineral deposit has been determined under §40-18-16 cost depletion for the taxable year is computed by: (a) Dividing the adjusted basis of the property by the number of recoverable units to arrive at the rate per unit. (b) Multiply the rate per unit by the number of units sold in the taxable year if the taxpayer is on the accrual method, or the number of units for which payment is received if the taxpayer is on the cash method. Revenue Rule 810-3-15-.06 15-.06-1

Cost depletion = adjusted basis X Units sold or paid for recoverable units in taxable year 1. In the selection of a unit of mineral for depletion, preference shall be given to the customary unit or units paid for the product sold, such as tons of ore, barrels of oil, or thousands of cubic feet of natural gas. 2. The number of recoverable units is the number of units of mineral determined by geological survey to be available for recovery. (i) After the predetermined number of units have been recovered, no cost depletion is then allowable on any excess recovered. 3. In determining the amount of the adjusted basis of the mineral deposit there shall be excluded: (i) amounts representing the cost or value of the land for purposes other than mineral production, (ii) the amount recoverable through depreciation and through deductions other than depletion, and (iii) the residual value of the property at the end of operations, but there shall be included, in the case of oil and gas wells, those amounts of capitalized drilling and development costs which are recoverable through depletion. (4) Computation of depletion on basis of cost (timber). Only cost depletion is allowed in computing depletion of timber. The amount of depletion to be deducted during the year is the number of units of timber cut times the depletion unit. The depletion unit is the basis of the timber under §40-18-16 divided by the total depletable units (M board feet, cords, etc.). Depletion is deducted in the same year the cut timber is sold or otherwise disposed of, except that if a taxpayer elects to treat cutting as a sale, depletion is taken in the year of cutting as basis of timber cut: Basis X units cut = depletion allowable Total depletable units (a) A timber account should normally be set up to include all the timber in one "block", a block being an operational unit which includes all of the taxpayer's timber which logically goes to a single given point of manufacture, or the timber which would logically be removed by a single logging development. Rule 810-3-15-.06 Revenue 15-.06-2

(b) The "total depletable units" shall be determined by a professional cruising of the timber. (c) After the above determined number of units have been used in computing the depletion allowed, no further depletion is allowable on any excess units removed. (5) Computation of depletion on basis of percentage of gross income (oil and gas wells). For a description of the calculation of percentage depletion, see Reg. 810-3-16-.01. (6) Computation of depletion on basis of discovery value (mines, oil and gas properties). With respect to any property for which discovery value is the taxpayer's basis for depletion, the depletion for any taxable year shall be computed by: (a) Determining the number of units available to be removed and the unmined value of each unit by a professional geological survey. (b) As each unit is sold depletion is allowable at the above predetermined unmined value. (c) When the above total predetermined units have been allowed as depletion, no further depletion is allowed on any excess units removed and/or sold. (7) Determination of fair market value. If the fair market value of the property at a specified date is to be determined for the purpose of ascertaining the basis for depletion and depreciation deductions, such value must be determined, subject to approval or revision by the Department, by the owner of the property in the light of the conditions and circumstances known at that date, regardless of later discoveries or developments in the property or subsequent improvements in methods of extraction and treatment of the mineral product. The value sought should be established assuming a transfer between a willing seller and a willing buyer existed as of that particular date. The Department will give due weight and consideration to any and all factors and evidence having a bearing on the market value, such as cost, actual sales and transfers of similar properties, market value of stock or shares, royalties or rentals, valuation for local taxation, partnership accountings, records of litigation in which the value of the property was in question, the amount at which the property may have been inventoried in a probate court, and, in the absence of better evidence, disinterested appraisals by approved methods. (8) Depreciation of improvements. A reasonable provision for depreciation shall be allowed with respect to tangible properties, other than land and inventory properties, which are not subject to depletion, as in the case of mines, oil and gas wells, and other natural deposits and timber. It shall be optional with the taxpayer whether the cost or other basis of the plant and Revenue Rule 810-3-15-.06 15-.06-3

equipment plus allowable capital additions and minus salvage value shall be recovered, (a) by reasonable charges for depreciation (see Reg. 810-3-15-.05) at a rate determined by the physical or economic life of such plant or equipment, or (b) at a rate established by the exhaustion of the wasting asset, or (c) according to the particular conditions of the case, by a method satisfactory to the Department. Author: Ann F. Winborne, CPA, Jerilyn P. Christian Statutory Authority: Code of Ala. 1975, §40-18-15. History: Adopted September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Rule 810-3-15-.06 Revenue 15-.06-4

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.07 Losses. (1) The following losses sustained during the taxable year and not compensated for by insurance or otherwise are deductible by individuals: (a) Losses incurred in a trade or business, in accordance with 26 U.S.C. §165(c)(1). (b) Losses incurred in any transaction entered into for profit, though not connected with a trade or business, in accordance with 26 U.S.C. §165(c)(2), but in the case of a non-resident, only as to those transactions within the state. (c) Casualty and theft losses sustained during the taxable year of property not connected with the conduct of a trade or business or a transaction entered into for profit as determined in accordance with 26 U.S.C. §165(c)(3) and (h). In the case of a nonresident, the deduction shall be allowed only for the losses arising from property located within the State of Alabama and the limitations in 26 U.S.C. §165 shall be applied only with regard to the taxpayer's Alabama adjusted gross income. (d) Losses from debts ascertained to be worthless and charged off during the taxable year of ascertainment, if sustained in the conduct of the regular trade or business of the taxpayer. The reserve method for bad debts is not allowed for individuals. (2) For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. (3) Losses from personal bad debts not incurred in a trade or business, nor in a transaction entered into for profit, are not deductible. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted: September 30, 1982. Amended: June 17, 1988; filed July, 27, 1988. Filed May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.07 15-.07-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.08 Expenses And Losses Of Farmers (Repealed 1/18/00). (Repealed) Author: Ann F. Winborne, CPA, Roy Wiggins Statutory Authority: Code of Ala. 1975, §40-18-15. History: Adopted: September 30, 1982. Amended: Filed July 27, 1988. Filed May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.08 15-.08-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.09 Nontrade Or Nonbusiness Expenses. (1) In accordance with 26 U.S.C. §212, an individual is allowed a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year: (a) for the production or collection of income; (b) for the management, conservation, or maintenance of property held for the production of income; or (c) in connection with the determination, collection, or refund of any tax. (2) The provisions and limitations of 26 U.S.C. §274 also apply to deductions for travel, entertainment, and meals. (3) Except as otherwise provided in Alabama law, nontrade or nonbusiness expenses are not deductible. (4) For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted September 30, 1982. Amended: Filed July 27, 1988; May 15, 1992. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.09 15-.09-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.10 Employee Business Expenses (Repealed 1//18/00). (Repealed) Author: Ann F. Winborne, Jerilyn P. Christian Statutory Authority: Code of Ala. 1975, §40-18-15. History: Rule effective October 1, 1982. Amended: Filed July 27, 1988; May 15, 1992. Amended: Filed September 18, 1996; effective October 23,1996. Repealed: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.10 15-.10-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.11 Proration Of Personal And Business Expenses (Repealed 1//18/00). (Repealed) Author: Ann Winborne, CPA Statutory Authority: Code of Ala. 1975, §40-18-153. History: Adopted September 30, 1982. Amended: Filed July 27, 1988; May 15, 1992. Amended: Filed September 18 1996; effective October 23, 1996. Repealed: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.11 15-.11-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.12 Moving Expenses. (1) Effective for taxable years beginning January 1, 1990, a deduction is allowed for moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work in accordance with 26 U.S.C. §217; provided, however, that the "new principal place of work" is located within the State of Alabama. For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-. 01, Operating Rules. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted September 30, 1982. Amended: Filed July 27, 1988; May 15, 1992. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.12 15-.12-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.13 Alimony And Separate Maintenance Payments. (1) Effective for taxable years beginning January 1, 1990, alimony and separate maintenance payments will be deductible in accordance with 26 U.S.C. §215. For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. (2) For taxable years ending after December 31, 1984, and before January 1, 1990, alimony and separate maintenance payments will be deductible as provided in 26 U.S.C. §215 as in effect on January 1, 1985. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted September 30, 1982. Amended: Filed July 27, 1988; May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.13 15-.13-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.14 Deductions Allowable For Retirement Savings-IRA, SEP And Keogh Plans. (1) A deduction is allowed for an individual's qualified retirement contribution in accordance with 26 U.S.C. §219. (2) A deduction is allowed for contributions of an employer to an employees' trust or annuity plan, or for compensation paid or accrued on account of an employee under a deferred-payment plan, in accordance with 26 U.S.C. §404. (3) For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §40-18-15. History: Adopted September 30, 1982. Amended: Filed July 27, 1988; May 15, 1992. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.14 15-.14-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.15 Disability Income Exclusion (Repealed 1/18/00). (Repealed) Author: Rebecca S. Whisenant, Roy Wiggins, Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §40-18-15; Act 90-583. History: Adopted September 30, 1982. Amended: Filed July 27, 1988; May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.15 15-.15-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.16 Medical And Dental Expenses. A deduction is allowed for expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent, in accordance with 26 U.S.C. §213; provided, however, that the limitation of the deduction to the excess of those expenses over 7.5 percent of adjusted gross income as provided in 26 U.S.C. §213 shall instead be limited to the excess of those expenses over 4.0 percent of adjusted gross income as defined in Code of Ala. 1975, §40-18-14.2. For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted October 1, 1982. Amended: Filed July 27, 1988; May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.16 15-.16-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.17 Charitable Contributions. A deduction for charitable contributions is allowable to the extent allowed for federal income tax purposes under 26 U.S.C. §170; provided, however, that the contributions base shall be the adjusted gross income as defined in Code of Ala. 1975, §40-18-14.2, except for any net operating loss carryback deduction allowable by §40-18-15.2. For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted September 30, 1982. Amended: Filed July 27, 1988; May 15, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.17 15-.17-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.18 Conversion Of Primary Heating Source To Wood (Repealed 1/18/00). (Repealed) Author: Mary L. Gifford, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-15. History: Adopted September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.18 15-.18-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.19 Optional Standard Deduction (Repealed 11/14/22). (REPEALED) Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Repealed: Published September 30, 2022; effective November 14, 2022. Revenue Rule 810-3-15-.19 15-.19-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.20 Federal Income Tax Deduction – Individuals. (1) DEFINITIONS. For the purpose of this regulation, the following words, phrases and abbreviations have these meanings: (a) FIT: Federal income tax. Depending on the method used for computing FIT (cash basis or accrual method), deductible federal income tax may include: 1. Federal income tax withheld by employers during the taxable year. 2. Excess social security or Medicare tax (FICA) and railroad retirement tax (RRTA) withheld during the taxable year and claimed as federal income tax on the federal return for the same year. Regular FICA and RRTA tax withheld cannot be claimed as federal income tax since these can only be claimed as itemized deductions. 3. All federal income tax payments made during the year for liabilities of prior years, including the previous year's payment made when the previous year return was filed. 4. All federal income tax estimate payments made during the year. Any overpayments of previous years which are applied to the current year's estimated tax are not deductible unless the overpayment is included in income as a refund of federal income tax. 5. Earned income credit of the previous year which was applied to the previous year's federal income tax liability. 6. Alternative Minimum Tax. (b) Federal income tax does not include: 1. Federal accumulated earnings tax, 2. Self-employment taxes, 3. Social security and Medicare tax on tip income not reported to employers, Revenue Rule 810-3-15-.20 15-.20-1

4. Tax on excess contributions to Individual Retirement Arrangements, 5. Tax (10% Additional Tax) on early distributions from a qualified retirement plan (including IRAs), 6. Tax on excess accumulations in qualified retirement plans (including IRAs), 7. Tax on excess distributions from qualified retirement plans (including IRAs), 8. Advance earned income credit payments, 9. Household employment taxes, 10. Penalties and interest. (c) FIT Paid: Payment includes FIT withholdings, FIT paid by the taxpayer, and FIT paid through wage garnishments. (d) FIT Accrued: Imposed FIT payable for the year. 1. The imposed FIT payable for the year is the net federal income tax liability as shown due on the federal income tax return. 2. The net federal income tax which can be deducted on the Alabama income tax return is the “Tax” amount shown on the federal income tax return as computed on federal taxable income, less all credits which reduce the amount of the taxpayer’s federal income tax liability and all credits which are shown as “Payments” on the federal income tax return. In no case will the amount be reduced below zero. (i) Examples of credits which reduce the federal income tax liability include, but are not limited to: Earned income credit (EIC); Education credits; Credit for child and dependent care expenses; Child tax credit; First-time homebuyer credit; Recovery rebate credit; etc. (ii) Amounts shown on the federal income tax return as “Payments” which are not credits and which do not reduce the federal income tax liability include, but are not limited to: Estimated tax payments; Federal income tax withheld from Forms W-2 and 1099; Amount paid with request for extension to file; etc. (e) Paid or Accrued: Either paid or accrued, but not both. Rule 810-3-15-.20 Revenue 15-.20-2

(f) Transition Year: The year in which the method of computing the FIT deduction is changed; i.e., from cash method to accrual method or vice versa. The change in method can be the result of taxpayer's request or a Revenue Department directive. (g) To Contest: To challenge via some objective act of protest, substantiated by some affirmative evidence of denial of liability by the taxpayer. (2)(a) FEDERAL INCOME TAX DEDUCTION FOR RESIDENTS: Net federal income tax may be deducted for the taxable year in which paid or accrued. Taxes are deductible only by the person or entity upon whom they are imposed. A cash basis taxpayer may allocate his federal income tax deduction on the cash basis or accrual basis. Once a method is selected, it shall be consistently applied from year to year, unless approval for a change is obtained from the Department. An accrual basis taxpayer must allocate his federal income tax deduction using the accrual basis. (b) FEDERAL INCOME TAX DEDUCTION FOR NONRESIDENTS: The FIT deduction for Alabama shall be apportioned according to the ratio of adjusted gross income from Alabama sources to the total adjusted gross income from all sources (as computed under Alabama law, not federal law). Each annual FIT deduction must be computed separately. Cash basis nonresidents may compute the FIT deduction on the cash basis or may elect to compute it on the accrual basis. The election, once made, must be consistently applied from year to year unless prior written approval for a change is obtained from the Department. (3) CHANGE IN METHOD USED TO COMPUTE/ALLOCATE FIT DEDUCTION: (a) Any other change in methods must be effective with the first day of a tax year. (b) Any tax year in which a change of methods occurs is a transition year. (c) There are two ways the method can be changed: 1. Taxpayer request. (i) Taxpayer's request must be in writing and must include the reason(s) for requesting the change. (ii) The taxpayer will receive written approval if the request is granted. (iii) A copy of the written request for a change in method and the Department's written approval must be submitted with the return. Revenue Rule 810-3-15-.20 15-.20-3

(iv) Once a change in computation and/or allocation methods is approved, it must be consistently applied from the year of change forward. 2. Change in method required by the Department of Revenue. (i) Effective with any tax year beginning after December 31, 1998, the Department may select the method (cash or accrual basis) used to compute the federal income tax deduction on resident and non- resident returns. Taxpayers filing a return for a year in which the Department changes the method will be considered to have been granted approval to change methods. (ii) Pursuant to the Department's authority to select the method to be used, the Department chooses the accrual basis. (4) TRANSITION YEAR RULES: (a) Year of change from cash basis to accrual basis: Any FIT refund received must be reported as income and additional FIT paid must be deducted. (b) Year of change from accrual basis to cash basis: Any FIT refund received during the transition year for previous tax years shall not be reported as income. Any additional tax paid during the transition year for previous tax years may not be deducted. (c) After a change from cash to accrual method in non- transition years, refunds of previously deducted accrued taxes must be reported as income and payments of taxes for an accrual basis year, not previously deducted, may be deducted. (5) FOR RESIDENTS AND NONRESIDENTS USING THE ACCRUAL METHOD: 1. Uncontested FIT is deducted in the year for which it is imposed. 2. Contested FIT is deducted in the year in which the liability becomes fixed and certain, but in no case later than the year in which the tax was actually paid. ”Contested FIT” may include FIT amounts that have been changed under an amendment to or an audit of the taxpayer’s federal income tax return, unless the change is properly reflected on an amended Alabama income tax return within the statutorily prescribed time for petitioning for refund. Rule 810-3-15-.20 Revenue 15-.20-4

3. Refunded FIT is reported in the year received but only if the taxpayer received a prior-year tax benefit from deduction of the FIT refunded. 4. EXAMPLE 1: A taxpayer using the accrual basis had $1,200 withheld from his earnings during 20X8 for federal income taxes. In March 20X8, he paid $100 additional tax on his 20X7 liability and $200 on his declaration of estimated tax for 20X8. He paid an additional assessment of $300 on his 20X5 income in September 20X8, thereby settling a disputed liability for 20X5. The taxpayer determined early in 20X9 that his federal income tax liability for 20X8 would be $1,700. He had previously paid $1,400 and, therefore, would have to pay an additional $300. He may deduct $1,700 accrued for 20X8 plus $300 accrued during 20X8 on his contested 20X5 liability, for a total of $2,000. He may not deduct $100 paid in 20X8 on his 20X7 liability, since this amount accrued in 20X7 and should have been deducted in that year. 5. EXAMPLE 2: Using the same facts as in the above example, a taxpayer using the accrual basis made the same payments as listed above, except that he received a $300 refund of 20X5 taxes, for which he received a tax benefit, in September, 20X8, thereby settling the disputed 20X5 liability. The taxpayer determined early in 20X9 that his federal income tax liability for 20X8 would be $1,700 and that he had paid $1,400 and would have to pay an additional $300. He may deduct the $1,700 accrued for 20X8. He may not deduct the $100 paid in 20X8 on his 20X7 liability, since this amount accrued in 20X7 and should have been deducted in that year. The $300 refund accrued during 20X8 on his contested 20X5 tax liability should be reported as income on his 20X8 return. 6. EXAMPLE 3: A nonresident taxpayer had adjusted gross income in 20X9 from sources within Alabama of $10,000 and adjusted gross income from sources within and without Alabama of $25,000. Data regarding his federal income tax is: Federal income tax liability for 20X9 $5,500 Withheld in 20X9 $3,600 Paid in 20X9 on 20X9 federal estimate $ 800 20X8 federal tax paid in 20X9 (on estimate, final return, or otherwise) $ 300 For the 20X9 tax year, the ratio of adjusted gross income from sources within Alabama to adjusted gross income from sources within and without Alabama is 40% ($10,000 divided by $25,000). Assuming the taxpayer had consistently used the accrual method, the FIT deduction for 20X9 would be $2,200.00 Revenue Rule 810-3-15-.20 15-.20-5

($5,500.00 x 40%). He may not deduct the $300 paid in 20X9 on his 20X8 liability, since this amount accrued in 20X8 and should have been deducted in that year. (6) MARRIED TAXPAYERS: For spouses who file a joint federal income tax return but separate Alabama income tax returns for the same year, the FIT deduction of each is based on the ratio of federal adjusted gross income of each to the total federal adjusted gross income of both. 1. EXAMPLE 4: Proration Based on Federal Adjusted Gross Income Husband Wife Total Income - Salaries, wages, etc. $7,000 $4,000 $11,000 Income - Other $500 $500 $1,000 Totals $7,500 $4,500 $12,000 Ratio of income for each spouse 62.5% 37.5% 100% Total federal income tax $ 2,400 Husband: $2,400 x 62.5% $ 1,500 Wife: $2,400 x 37.5% $ 900 The husband deducts $1,500 on his state return and the wife deducts $900 on her state return for federal income tax. Total federal income tax deducted on both state returns is $2,400, the amount to be prorated. Author: Richard H. Henninger, Jr., Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted September 30, 1982. Amended: February 8, 1989; filed March 20, 1989. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed December 14, 1999; effective January 18, 2000. Amended: Filed April 14, 2010; effective May 19, 2010. Rule 810-3-15-.20 Revenue 15-.20-6

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.21 Deductions For Nonresidents. (1) A nonresident is an individual who is a legal resident of another state. (2) The phrase "adjusted gross income from all sources" is comprised of income which would be included in gross income if received by a resident of the State of Alabama in accordance with §40-18-14, Code of Ala. 1975, less the deductions described in §40-18-14.2. (3) Effective for all taxable years beginning after December 31, 1997: (a) Business-related Expenses. The following business-related expenses are deductible in computing Alabama adjusted gross income for a nonresident only to the extent that they are paid or incurred in a trade or business within the State of Alabama: 1. Ordinary and necessary business expenses in accordance with §40-18-15(a)(1), 2. Interest expense in accordance with §40-18-15(a)(2), 3. Taxes in accordance with §40-18-15(a)(3), 4. Losses in accordance with §§40-18-15(a)(4) and (5), 5. Losses from debts ascertained to be worthless in accordance with §40-18-15(a)(7), 6. Depreciation and amortization in accordance with §40-18-15(a)(8), 7. Depletion in accordance with §40-18-15(a)(9), 8. Retirement savings contributions and expenses for qualified pension plans, profit sharing plans, stock bonus plans, and annuity plans in accordance with §§40-18-15(a)(11) and (12), 9. Expenses incurred in removing barriers to handicapped persons in accordance with §40-18-15(a)(19), Revenue Rule 810-3-15-.21 15-.21-1

10. Section 179 expenses in accordance with §40-18-15(a) (21), 11. Unreimbursed employee business expenses and expenses described at 26 U.S.C. §212 in accordance with §40-18-15(a)(23), and 12. Assistance provided to the State Industrial Development Authority in accordance with §40-18-15(a) (25). (b) Net Operating Losses. The deduction allowed by §40-18-15.2 for net operating losses shall be deductible only to the extent that a loss arose from a trade or business carried on in Alabama. See §40-18-15.2. (c) Property Located in Alabama - Income Subject to Alabama Tax. The following expenses are deductible in computing Alabama adjusted gross income for a nonresident only to the extent arising from property located in Alabama or transactions producing income that is subject to tax in the State of Alabama: 1. Interest expense in accordance with §40-18-15(a)(2), 2. Taxes in accordance with §40-18-15(a)(3), 3. Losses in accordance with §40-18-15(a)(5), 4. Depreciation and amortization in accordance with §40-18-15(a)(8), 5. Depletion in accordance with §40-18-15(a)(9), 6. Ordinary and necessary business expenses in accordance with §40-18-15(a)(14) and 26 U.S.C §212, and 7. Expenses incurred in removing barriers to handicapped persons in accordance with §40-18-15(a)(19). (d) Casualty and Theft Losses. The deductible amount of casualty and theft losses allowed by §40-18-15(a)(6), which references 26 U.S.C. §165, shall be allowed only for losses arising from property located within the State of Alabama. The limitations in 26 U.S.C. §165 shall be applied only with regard to the taxpayer's Alabama adjusted gross income. (e) Alabama Percentage of Adjusted Total Income. Nonresidents must divide the amount of their Alabama adjusted total income by the amount of their adjusted total income from all sources in order to determine the ratio of Alabama income to income from all sources. This percentage, the Alabama percentage of adjusted total income, is used to determine the deductible Rule 810-3-15-.21 Revenue 15-.21-2

amount of certain expenses taken below the adjusted total income line. Alimony paid and adoption expenses are not considered in the computation of the Alabama percentage of adjusted total income - the amounts are not subtracted from either the numerator or the denominator of the fraction. See §40-18-14.2. 1. Personal Exemption and Dependent Exemption. A nonresident must prorate the personal exemption by multiplying the amount of the personal exemption by the Alabama percentage of adjusted total income. If Alabama total income exceeds the prorated amount, a Form 40NR must be filed. Dependent exemptions must be prorated in the same manner using the Alabama percentage of adjusted total income. See §40-18-19. 2. Federal Income Tax Deduction. The federal income tax deduction must also be prorated using the Alabama percentage of adjusted total income. See Rule 810-3-15-. 20. (i) If the taxpayer is filing separately on the Alabama return, but jointly on the federal return, an intermediate computation is performed before the federal income tax deduction is prorated, and the Alabama percentage of adjusted total income is not used to prorate the federal income tax deduction. (I) The taxpayer’s Alabama adjusted total income is divided by the sum of the spouse’s federal adjusted gross income and the taxpayer’s adjusted total income from all sources. (II) The percentage computed in subparagraph (I) is then applied to the amount of the federal income tax liability as shown on the current federal income tax return. The result of the computation is the allowable federal income tax deduction. 3. Optional Standard Deduction. If a nonresident taxpayer elects to claim the optional standard deduction in lieu of claiming itemized deductions, the optional standard deduction must be prorated by multiplying the amount of the optional standard deduction by the Alabama percentage of adjusted total income. See Rule 810-3-15-.19. 4. Other Adjustments and Itemized Deductions. The amount allowed for the following deductions shall be limited to the amount determined by multiplying the total amount of the deduction by the Alabama percentage of adjusted total income. Revenue Rule 810-3-15-.21 15-.21-3

(i) Interest expense in accordance with §40-18-15(a) (2), (ii) Taxes (other than federal income tax)in accordance with §40-18-15(a)(3), (iii) Casualty and theft losses in accordance with §40-18-15(a)(6), (iv) Charitable contributions in accordance with §40-18-15(a)(10), (v) Medical and dental expenses in accordance with §40-18-15(a)(13), (vi) Expenses relating to the construction of a radioactive fallout shelter in accordance with §40-18-15(a)(15), (vii) The cost of conversion to wood as the primary energy source in accordance with §40-18-15(a)(16), (viii) Alimony in accordance with §40-18-15(a)(17), (ix) Expenses relating to the removal of barriers to handicapped persons in accordance with §40-18-15(a) (19), (x) Adoption expenses in accordance with §40-18-15(a) (24), and (xi) Qualified long-term care coverage in accordance with §40-18-15(a)(26). (4) Prior to January 1, 1998. Effective for taxable years beginning before January 1, 1998, the provisions of subparagraphs (3)(a) through (3)(e) of this rule were the same except: (a) The deductions for alimony, retirement contributions, and early withdrawal of savings penalties were not deductible from Alabama income; (b) Qualified long-term care coverage was deducted as an adjustment to income - after January 1, 1998, only the percentage applicable to Alabama income is deductible from Alabama income; and (c) Adoption expenses were not allowable as a deduction for a nonresident - after January 1, 1998, adoption expenses are deductible according to the Alabama percentage of adjusted total income. Rule 810-3-15-.21 Revenue 15-.21-4

Author: Roger Frost, Sharon Norman, Hugh Kirkland, James Lucy, Lee Johnson, Betty Knowles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: Adopted: September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed and New Rule: Filed July 26, 1999; effective August 30, 1999. Revenue Rule 810-3-15-.21 15-.21-5

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.22 Net Operating Loss Carryback Or Carryover (Repealed 1/18/00). (Repealed) Author: Mary Gifford, Ann Winborne, Income Tax Division. Statutory Authority: Code of Ala. 1975, §40-18-57. History: Adopted September 30, 1982. Amended: June 17, 1988. Amended: February 8, 1989; filed March 20, 1989. Filed May 21, 1992; August 17, 1992. Amended: Filed October 4, 1993; effective November 8, 1993. Repealed: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.22 15-.22-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.23 Amortization Of Start-Up Expenditures (Repealed 1/18/00). (Repealed) Author: Mary L. Gifford, Income Tax Division Statutory Authority: Code of Ala. 1975, §40-18-15, Act 90-583. History: Filed July 22, 1992; October 30, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Repealed: Filed December 14, 1999; effective January 18, 2000. Revenue Rule 810-3-15-.23 15-.23-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.24 Adoption Expenses. (1) For tax years beginning on or after January 1, 1991, resident individual taxpayers may include as an adjustment to income, reasonable medical and legal expenses paid or incurred by the taxpayer in connection with the adoption of a minor. (2) "Medical expenses" shall include any medical and hospital expenses of the adoptee and the adoptee's biological mother which are incidental to the adoptee's birth and subsequent medical care which, in the case of the adoptee, are paid or incurred before the petition for adoption is granted. (3) Expenses associated with the adoption of a minor that are not properly classified as medical or legal expenses as stipulated in paragraphs (1) and (2) above are not to be considered in computing the adjustment to income. (4) In cases of adoption petitions which are not granted, no deduction for medical and legal expenses will be allowed. Author: Anne Simms, Roy Wiggins Statutory Authority: Act 90-583. History: Filed July 22, 1992; August 20, 1992; October 30, 1992. Amended: Filed September 18, 1996; effective October 23, 1996. Revenue Rule 810-3-15-.24 15-.24-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.25 Contributions To State Industrial Development Authority. (1) In computing adjusted gross income under §40-18-15, Code of Ala. 1975, the following shall be allowed as a deduction: (a) The amount of aid of assistance, whether in the form of property, services or monies, provided to the State Industrial Development Authority pursuant to §41-10-44.8(d), Code of Ala. 1975. 1. The amount of aid or assistance provided shall be deducted in the year contributed. 2. The deduction for property or services shall be the fair and reasonable value of the property or services as determined by the Authority. 3. Any portion of aid or assistance returned pursuant to §41-10-44.8(d), Code of Ala. 1975, shall be included in income in the year in which the refund of the aid or assistance is made. Author: Tina M. Melancon, Income Tax Division Statutory Authority: Code of Ala. 1975, §40-18-15(a)(26); Act 93-852. History: New Rule: Filed August 26, 1994; effective September 30, 1994. Amended: Filed September 18, 1996; effective October 23, 1996. Revenue Rule 810-3-15-.25 15-.25-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.26 Qualified Long-Term Care Coverage. (1) Effective for taxable years beginning after December 31, 1997, the amount of premiums paid for qualified long-term care insurance coverage is deductible as an itemized deduction. (2) For tax years beginning on or after January 1, 1995, and ending December 31, 1997, individual taxpayers may include as an adjustment to income the amount paid for premiums for qualifying long-term care coverage pursuant to Section 40-18-15. (3) "Qualified long-term care services" shall include any care for necessary diagnostic, preventive, therapeutic, and rehabilitative services and maintenance or personal care services which are required by a chronically ill individual in a qualified facility or services which are pursuant to a plan of care prescribed by a licensed health care practitioner. (4) Premiums paid for long-term care insurance contracts are deductible if the contract meets the following requirements: (a) Offers coverage only for qualified long-term care services and benefits incidental to the coverage. (b) Guaranteed renewal. (c) No cash surrender value. (d) All refunds of premiums and all policyholder dividends or similar amounts under the contract are to be applied as a reduction in future premiums or to increase future benefits, except for a refund of premiums on surrender or cancellation of the policy. (5) A long-term care insurance contract shall be treated as an accident or health insurance contract. The amount of coverage under the long-term care insurance contract shall be equal to or greater than Medicaid coverage for a period of at least three years. (6) An insurance contract shall not fail to be treated as a long- term care contract by reason of the payments being made on a per diem or other periodic basis without regard to the expenses incurred during the period to which the payments relate. Revenue Rule 810-3-15-.26 15-.26-1

(7) A long-term care insurance contract may cover Medicare reimbursable expenses where Medicare is a secondary payor. (8) In the case of long-term care insurance coverage provided by a rider on a life insurance contract, this regulation shall apply as if the portion of the contract providing long-term care coverage was a separate contract. (9) The deduction is available only to the person or entity who pays the premiums. Author: Roger Frost, James Lucy Statutory Authority: Code of Ala. 1975, §§27-47-2, 40-2A-7(a)(5), 40-18-15. History: New Rule: Filed May 6, 1996, effective June 11, 1996. Amended: Filed December 15, 1999; effective January 19, 2000. Rule 810-3-15-.26 Revenue 15-.26-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-15 DEDUCTIONS FOR INDIVIDUALS GENERALLY 810-3-15-.27 Deductions For Contributions To Alabama College Education Plans. (1) Definitions: (a) Qualifying Plans. Alabama college education plans as defined in Chapter 33C of Title 16, to include: 1. The Alabama Prepaid Affordable College Tuition Program (PACT), or 2. the Alabama College Education Savings Program. (b) Nonqualified Withdrawal. A nonqualified withdrawal for purposes of this rule will have the same meaning as defined by Section 529 of the Internal Revenue Code (26 U.S.C. 529). (2) Procedures – for tax years beginning after December 31, 2007: (a) A deduction, not to exceed $5,000 per taxpayer, is allowed as an adjustment to income on the Alabama income tax return for contributions made to a qualifying plan. 1. The deduction may equal an amount up to $10,000 for married taxpayers filing a joint return where both taxpayers are making such contributions into qualifying plans. 2. The deduction may include amounts contributed to a qualifying plan where the contribution amount has been rolled over from another plan which is not included as a qualifying plan under this rule. 3. The deduction may be claimed by any taxpayer making such contribution to a qualifying plan on behalf of another individual. Contributions made to qualifying plans are deductible on the tax return of the contributing taxpayer for the tax year during which the contributions are made. (c) In the event of a nonqualified withdrawal from the plan, an amount must be added back to the income of the contributing taxpayer. Revenue Rule 810-3-15-.27 15-.27-1

1. The amount to be added back will be the amount of the nonqualified withdrawal plus 10 percent of the amount withdrawn. 2. The amount added back must be included in the income of the contributing taxpayer in the tax year that the nonqualified withdrawal was distributed. Author: Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-15. History: New Rule: Filed February 1, 2001; effective March 8, 2001. Repealed: Filed February 5, 2009; effective March 12, 2009. New Rule: Filed June 12, 2009; effective July 17, 2009. Rule 810-3-15-.27 Revenue 15-.27-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-16 BASIS FOR DEPRECIATION AND DEPLETION 810-3-16-.01 Basis For Depreciation And Depletion. (1) The basis upon which depreciation and depletion shall be computed is the adjusted basis for determining gain on the sale or disposition of the property (including any taxes required to be capitalized in connection with the acquisition of a capital asset), as determined under § 40-18-6, except that at the option of the taxpayer: (a) In the case of mines, or oil and gas wells, depletion may be computed based on discovery value, if the conditions of Code § 40-18-16(b)(2) are met. (see Reg. 810-3-15-.06(6)). (b) In the case of oil and gas wells only, for taxable years beginning on or after January 1, 1953, a taxpayer may deduct for depletion an amount equal to 27 1/2% of the gross income from the property during the taxable year, computed on the same basis and subject to the same limitations as provided in the Federal Income Tax Act in effect on September 17, 1953, the effective date of Act No. 719-1953 General Acts of Alabama. These limitations on the amount of percentage depletion which may be deducted are: 1. the amount may not be more than fifty percent of the net income from the property before the deduction for depletion, and 2. the amount may not be less than the depletion computed under the cost method. (2) An election once exercised to claim depletion on the discovery basis or on the percentage basis is irrevocable, and the depletion allowance in respect to each property will for all succeeding tax years be computed in accordance with the election so made. The election to use percentage depletion may be made only with respect to oil and gas wells. (3) Depreciation and depletion must be charged off on the taxpayer's books, or suitable subsidiary records must be kept to show the basis of the depletable property together with capital additions and all other adjustments. After depreciation or depletion to the extent of 100 percent of the cost or other income tax basis of the depreciable or depletable assets has been allowed, no further deduction will be permitted, except with Revenue Rule 810-3-16-.01 16-.01-1

respect to depletion when the percentage method is used. Land is not subject to a deduction for depreciation. Author: George E. Mingledorff, III. Statutory Authority: Code of Ala. 1975, § 40-18-16. History: Adopted September 30, 1982. Amended February 8, 1989; filed March 20, 1989. Rule 810-3-16-.01 Revenue 16-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-16 BASIS FOR DEPRECIATION AND DEPLETION 810-3-16-.02 Allowable Capital Additions, Mines And Oil And Gas Wells. (1) All expenditure in excess of net receipts from minerals sold shall be charged to capital account recoverable through depletion while the mine is in the development stage. The mine will be considered to have passed from a development to a producing status when the major portion of the mineral production is obtained from workings other than those opened for the purpose of development, or when the principal activity of the mine becomes the production of developed ore rather than the development of additional ores for mining. (2) Expenditures for plant and equipment and for replacements not including expenditures for maintenance and for ordinary and necessary repairs, shall ordinarily be charged to capital account recoverable through depreciation. Expenditures for equipment (including its installation and housing) and for replacements thereof, which are necessary to maintain the normal output solely because of the recession of the working faces of the mine, and which (a) do not increase the value of the mine, or (b) do not decrease the cost of production of mineral units, or (c) do not represent an amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made, shall be deducted as ordinary and necessary business expenses. (3) Intangible drilling and development cost, such as wages, fuel, repairs, supplies, etc., incident to and necessary for the drilling of wells and the preparation of wells for the production of oil or gas, may, at the option of the operator, be deducted from gross income as an expense or charged to capital account. If the taxpayer charges such expenditures as fall within the option to capital account, the amounts so capitalized and not deducted as a loss are returnable through depletion insofar as they are not represented by physical property, and if represented by physical property through depreciation. Expenditures for clearing ground, draining, road making, surveying, geological work, excavation, grading, and the drilling, shooting and cleaning of wells are not considered to be represented by physical property; but Revenue Rule 810-3-16-.02 16-.02-1

expenditures incurred in the installation of casing and equipment and in the construction on the property of derricks and other physical structures are represented by physical property. (a) If the operator has elected to capitalize intangible drilling and development costs, such costs incurred in drilling a nonproductive well may be deducted as a loss at the election of the taxpayer; but such election must be consistently followed. (b) The option with respect to intangible drilling and development costs does not apply to expenditures by which the taxpayer acquires property ordinarily considered as having a salvage value. The option does not apply to any expenditure for wages, fuel, repairs, hauling, supplies, etc., in connection with equipment, facilities, or structures, not incident to or necessary for the drilling of wells, such as structures for storing or treating oil or gas. These are capital items and are returnable through depreciation. Expenditures in connection with the operation of the wells and of other facilities on the property for the production of oil or gas must be charged off as expense. Author: Statutory Authority: Code of Ala. 1975, § 40-18-57. History: Rule 810-3-16-.02 Revenue 16-.02-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-17 ITEMS NOT DEDUCTIBLE 810-3-17-.01 Items Not Deductible. (1) Costs and expenses which are not deductible for income tax purposes include, but are not limited to: (a) Personal, living, and family expenses such as: 1. Premiums paid for life insurance by the insured. 2. Cost of insuring a dwelling owned and occupied by the taxpayer as a personal residence. 3. Expenses of maintaining a household, including amounts paid for rent, water, utilities, domestic services, home repair or improvements, etc. 4. Expenses incurred for care of dependent children including child support, even if both spouses work. 5. Losses sustained by the taxpayer upon the sale or other disposition of property held for personal, living, and family purposes. 6. Travel expenses or automobile expenses not deductible under Section 40-18-15. 7. Cost of wearing apparel unless such wearing apparel is required as a condition of employment and is not suitable for street wear. 8. Amounts paid as damages, attorneys' fees and other costs of suit to recover such damages. However, damages in settlement of a suit, claim or judgement arising out of a trade or business or transactions entered into for profit are deductible. 9. Attorneys' fees paid in a suit for separation or divorce. 10. Losses sustained and expenses incurred in illegal transactions. 11. Dues to fraternal and social organizations, etc. 12. Gambling losses in excess of gains. Revenue Rule 810-3-17-.01 17-.01-1

13. Adoption expenses - for tax years prior to January 1, 1991 are not deductible. For tax years subsequent to December 31, 1990, see Rule 810-3-15-.24. (b) Capital expenditures. No deduction shall be allowed for: 1. Any amount paid for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, or 2. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made in the form of a deduction for depreciation, amortization, or depletion. (c) Premiums paid on life insurance. Premiums paid on a life insurance policy covering the life of any officer or employee of the taxpayer, or any person (including the taxpayer) who is financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary of the policy. (d) Organization and financing expenses. 1. For tax years beginning before January 1, 1985, expenses in connection with the organization or reorganization of a business enterprise, such as fees for incorporating, attorneys, accountants, appraisers, and commissions or other expenses in the issuance or sale of capital stock are properly capitalized when incurred or paid. Such expenses are not deductible from gross income until the business for which the expenses were incurred is abandoned and the business organization itself, or, in the case of a reorganization, the successor to the business organization, has been dissolved, or has completely wound up its affairs, whichever is later. 2. For tax years beginning after December 31, 1984, organizational expenditures incurred by a corporation may be amortized over a period of not less than 60 months. See Rule 810-3-35-.01(7). 3. For tax years beginning after December 31, 1989, certain start-up costs may, if the taxpayer so elects, be amortized over a period of not less than 60 months even if the costs do not qualify for amortization as organization fees. See Rule 810-3-15-.23. (e) Amortization of bond premiums. Premiums paid on bonds purchased by individuals are part of the cost of such bonds, and no portion of such premiums will be allowed as a deduction from gross income until the bonds are sold or redeemed. An exception to this general rule occurs in the case of estates Rule 810-3-17-.01 Revenue 17-.01-2

and trusts where the trustee has no alternative other than to protect the corpus of the estate or the trust. In such cases the Department will permit the premium to be amortized over the life of the bond. (f) Fines and penalties. 1. Fines imposed for violations of law, or penalties imposed for legal infractions, misconduct or failure to adequately or timely comply with laws or regulations are not deductible. Such nondeductible items include: (i) penalties for late payment or nonpayment of taxes. (ii) punitive damages imposed by a court for violations of civil or criminal laws (including overweight or speeding fines or penalties). 2. "Penalties" imposed by contract as liquidated damages are deductible. Such items include: (i) penalties for early withdrawal of savings certificates. (ii) penalties for failure to complete a construction contract within a specified time. Author: Mary L. Gifford, Yeteva Johnson, Kathy Alabi Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-17. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Filed July 22, 1992; filed October 30, 1992. Amended: Filed November 29, 2017, effective January 13, 2018. Revenue Rule 810-3-17-.01 17-.01-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-19 EXEMPTIONS - GENERALLY 810-3-19-.01 Exempt Retirement Allowances. (1) Income received from retirement systems that is totally exempt from Alabama income tax is as follows: (a) Retirement allowances, pensions, annuities, or optional allowances paid by the Alabama Teachers' Retirement System, the Alabama Judicial Retirement System, and the Alabama Employees' Retirement System; and (b) retirement annuities paid under the United States Retirement System to civil service employees from the United States government civil service retirement and disability fund including income received from the Tennessee Valley Authority's pension system, income received as annuities under the United States foreign service retirement and disability fund or income received from any other United States government retirement and disability fund. (c) amounts received under the Federal Social Security Acts. (d) retirement annuities paid under the provisions of the Federal Railroad Retirement Act of 1935, 1937, and 1974. 1. The exclusion for Railroad Retirement Act benefits includes both tier one and tier two benefits. (e) military retirement (see §40-18-20). (f) For tax years beginning after December 31, 1990, any retirement compensation, retirement allowances, pensions and annuities, or optional allowances received by any eligible peace officer, as defined in §36-21-60(10), or his/her designated beneficiary, from any police retirement system established in the State of Alabama, but only if such retirement compensation, retirement allowances, pensions and annuities, or optional allowances are awarded as a result of police services rendered. 1. An eligible peace officer as defined in §36-21-60(10) is: "A person duly sworn as a peace officer of the State of Alabama possessing powers of arrest and employed by the state, any political subdivision thereof or any municipal Revenue Rule 810-3-19-.01 19-.01-1

corporation therein who is required by the terms of his employment, whether such employment exists by virtue of election or appointment, to give his full time to the preservation of public order and the protection of life or property or the detection of crime in the state. Such terms shall include enforcement officers for conservation laws and full-time coroners, but shall not include any pardon, parole or probation officer, district attorney, assistant district attorney, assistant attorney general, commissioner, deputy commissioner or any municipal inspector, county inspector or state inspector." (g) For tax years beginning after December 31, 1990, any retirement compensation, retirement allowances, pensions and annuities, or optional allowances received by any eligible firefighter (as defined in §§36-32-1 and 36-32-2), or his/her designated beneficiary, from any firefighting agency established in the State of Alabama, but only if such retirement compensation, retirement allowances, pensions and annuities, or optional allowances are awarded as a result of fire protection services rendered. (2) Income from retirement systems that is partially exempt from Alabama income tax is as follows: (a) For tax years beginning after December 31, 1983, and before January 1, 1991, the first $8,000.00 of retirement compensation, retirement allowances, pensions and annuities, or optional allowances received by any eligible peace officer, or his/her designated beneficiary, from any police retirement system established in the State of Alabama, but only if such retirement income was awarded as the result of police services as defined in §§36-21-60(10) and 40-18-19 and Regulation 810-3-19-.01(1)(f). (b) For tax years beginning after December 31, 1986, and before January 1, 1991, the first $8,000.00 of retirementcompensation, allowances, pensions and annuities, or optional allowances received by an eligible firefighter (as defined in §§36-32-1 and 36-32-2), or his/her designated beneficiary, from any firefighting agency established in this state, but only if such amounts are awarded as a result of fire protection services rendered. (3) Retirement pay annuities received by a retired employee from any retirement system not listed in the preceding paragraphs are subject to tax after recovery of the taxpayer's investment in the system. The taxpayer's investment in the system is the taxpayer's contributions, excluding those allowed as a deduction in determination of Alabama taxable income. Computations, for Alabama purposes, of taxable amount and the recovery of the taxpayer's investments will be determined in the same manner as used for Rule 810-3-19-.01 Revenue 19-.01-2

determining these amounts for federal purposes. Alabama totals will be substituted for federal totals. Author: Mary L. Gifford, Ann F. Winborne, Roy Wiggins Statutory Authority: Code of Ala. 1975, § 40-18-19. History: Adopted September 30, 1982. Amended: June 17, 1988; Filed July 27, 1988; May 15, 1992. Revenue Rule 810-3-19-.01 19-.01-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-19 EXEMPTIONS - GENERALLY 810-3-19-.02 Personal Exemptions And Credit For Dependents. (1)(a) General Rule - Resident or Part-year Resident Taxpayers. A single person, or a married person not filing a tax return with their spouse, is entitled to a personal exemption of fifteen hundred dollars ($1,500.00). A head of a family or a married couple filing a joint return is entitled to a personal exemption of three thousand dollars ($3,000.00). If a married couple file separate returns, each must claim a personal exemption of fifteen hundred dollars ($1,500.00). 1. A common law marriage is recognized in Alabama for income tax purposes. 2. Head of Family - years ending before January 1, 1990: (i) An individual is a head of family within the meaning of §40-18-19 only if he actually supports or maintains in his household one or more dependents (as defined in subparagraph (b)l. below). All of the six factors described below are essential to qualify as head of family: (I) Taxpayer must be unmarried, and (II) Taxpayer must provide over fifty percent (50%) of the actual support of the dependent and be entitled to claim the exemption for such dependent on his income tax return, and (III) The dependent(s) must reside in a household maintained by the taxpayer, and (IV) The taxpayer must have the right to exercise family control over the dependent(s), and (V) The taxpayer must be related to the dependent(s) as defined in subpart (b) below and must have a legal or moral obligation to support the dependent(s), and (VI) The dependent must not have independent means and must be actually dependent upon the taxpayer for support. Revenue Rule 810-3-19-.02 19-.02-1

(ii) Head of family - years beginning after December 31, 1989. The term "head of family" has the same meaning as "head of household" as described in 26 U.S.C. §2(b) for federal income tax purposes. The judicial and administrative decisions and interpretations of 26 U.S.C. §2(b) will be given due weight in interpreting § 40-18-19 as it relates to head of family status. (I) To be head of family, the taxpayer must be unmarried, or considered unmarried, at the close of the taxable year and not be entitled to claim married filing joint return, as in the year of a spouse's death. The taxpayer is considered not married under 26 U.S.C. §2(b) if - (A) the taxpayer has been legally separated from his spouse under a decree of divorce or of separate maintenance, or (B) at any time during the taxable year the taxpayer's spouse was a nonresident alien as recognized for federal income tax purposes. (II) The taxpayer must maintain as his home a household which also serves as the principal place of abode for any of the following persons - (A) a son, stepson, daughter, or stepdaughter of the taxpayer, or a descendent of a son or daughter, but only if the son, daughter, stepson, stepdaughter, or descendent is unmarried at the end of the taxable year, except when the taxpayer is entitled to a deduction for the taxable year for the exemption of such son, daughter, stepson, stepdaughter, or descendent, or would be so entitled except that the right to claim such dependent exemption had been relinquished by reason of a signedagreement or court's declaration which provides that the noncustodial parent may claim any deduction allowable for the dependent exemption; or (B) any other person who is a dependent of the taxpayer, as described in subpart (b), below, if the taxpayer is entitled to a deduction for the taxable year for a dependent exemption for that person, but (C) if the dependent described in the above provisions would not be a dependent but for - Rule 810-3-19-.02 Revenue 19-.02-2

I. The person has as his principal place of abode the home of the taxpayer and is a member of the taxpayer's household, or II. The person may be claimed as a dependent under a multiple support agreement as described in 26 U.S.C. § 152(c): then the taxpayer is not entitled to claim the status of head of family. (III) The father or mother of the taxpayer may qualify the taxpayer as head of family, but only if the taxpayer is entitled to the dependent exemption for the father or mother. The taxpayer must maintain a household which constitutes the principal place of abode of the taxpayer's dependent father or mother, or both, and provide more than one-half of the support of the father or mother. It is not necessary for the taxpayer to reside in the same place of abode as the parent, as is required for other dependents, for the taxpayer to qualify as head of family. (IV) Maintaining a household for another person is defined as providing more than one-half of the cost of maintaining the home for that person. (V) Under no circumstances shall the same person be used to qualify more than one taxpayer as the head of family for the same taxable year. (VI) If, at any time during the taxable year, the taxpayer is a nonresident alien as recognized for federal income tax purposes, the head of family status will not be allowed. 4. Unless otherwise provided (see subparagraph(a)(ii) above), the status of a taxpayer as single, married or head of family will be determined on the last day of the Alabama tax year. (b) Every taxpayer is entitled to an exemption of three hundred dollars for each person, other than a spouse, who is a dependent of the taxpayer and who received over half of his support from the taxpayer during the calendar year during which the taxpayer's taxable year begins. There is no maximum age limit for a qualifying dependent. 1. A "dependent" as used in the preceding paragraph is limited to persons having the following relationship to the taxpayer: Revenue Rule 810-3-19-.02 19-.02-3

(i) son or daughter, or descendant of a son or daughter; or (ii) stepson or stepdaughter; or (iii) brother, sister, stepbrother, or stepsister; or (iv) father or mother or ancestor of either; or (v) stepfather or stepmother; or (vi) son or daughter of taxpayer's brother or sister (nephew or niece); or (vii) a brother or sister of the taxpayer's father or mother (aunt or uncle); or (viii) son-in-1aw, daughter-in-1aw, father-in-1aw, mother-in-1aw, brother-in-1aw, or sister-in-1aw. 2. The terms "brother" and "sister" include a brother or sister by the half blood. A legally adopted child of a person shall be considered a child of such person by blood. 3. In the case of the birth or death of a dependent, a full dependency exemption is allowed for the year. (2) Nonresident Taxpayers, (a) A nonresident must prorate the personal exemption for dependents listed in paragraph (1) above by the ratio of adjusted gross income from sources within this state to total adjusted gross income from all sources. In such cases, a schedule must be submitted with the return explaining the computation of the personal exemption and the exemption for dependents. See Reg. 810-3-14-.05 for the computation of "total adjusted gross income from all sources." (b) Married nonresident taxpayers may file a joint return, even if only one had income from Alabama sources. The election to file joint or separate returns is irrevocable after the due date for filing the return. If separate returns are filed each taxpayer must claim his or her own personal exemption. 1. EXAMPLE: Taxpayer is a nonresident having adjusted gross income from sources within the State of Alabama of $5,000.00, and total adjusted gross income (including that from within Alabama) of $30,000.00. He is single and has no dependents. He is entitled to deduct as a personal exemption $250.00 ($1,500.00 x $5,000.00/$30,000.00 = $250.00). Rule 810-3-19-.02 Revenue 19-.02-4

2. EXAMPLE: Taxpayer and spouse are nonresidents. Taxpayer has income from sources within Alabama of $5,000.00 and total adjusted gross income (including that from within Alabama) of $30,000.00. His spouse has no income. He has two dependents (note that a spouse may not be a dependent). (i) If a joint return is filed, taxpayer is entitled to a personal exemption of $500.00 ($3,000.00 x $5,000.00/ $30,000.00 = $500.00) and exemption for dependents of $100.00 ($600.00 x $5,000.00/$30,000.00 = $100.00). (ii) If a separate return is filed, taxpayer is entitled to a personal exemption of $250.00 ($1,500.00 x $5,000.00/$30,000 = $250.00) and exemption for dependents of $100.00 ($600.00 x $5,000.00/$30,000.00 = $100.00). 3. EXAMPLE: Taxpayer and spouse are nonresidents. Taxpayer has $5,000.00 adjusted gross income within Alabama and total adjusted gross income of $30,000.00. Spouse has adjusted gross income within Alabama of $10,000.00 and total adjusted gross income of $20,000.00. They have two dependents who must be claimed by the taxpayer if the separate returns are filed, since he had the greater income. (i) If a joint return is filed, the personal exemption will be $900.00 ($3,000.00 x $15,000.00/$50,000.00 = $900.00). The exemption for dependents will be $180.00 ($600.00 x $15,000.00/$50,000.00 = $180.00). (ii) If a separate return is filed, (I) The taxpayer's personal exemption will be $250.00 ($1,500.00 x $5,000.00/$30,000.00 = $250.00). Exemption for dependents will be $100.00 ($600.00 x $5,000.00/$30,000.00 = $100.00). (II) Spouse's personal exemption will be $750.00 ($1,500.00 x $10,000.00/$20,000.00 = $750.00). 4. EXAMPLE: Taxpayer and spouse are nonresidents. Taxpayer has $5,000.00 adjusted gross income within Alabama, and total adjusted gross income of $30,000.00. Spouse has no adjusted gross income in Alabama and total adjusted gross income of $10,000.00. They have one dependent who is claimed by the taxpayer if he files a separate return. Revenue Rule 810-3-19-.02 19-.02-5

(i) If a joint return is filed the personal exemption will be $375.00 ($3,000.00 x $5,000.00/$40,000.00 = $375.00). Exemption for dependents will be $37.50 ($300.00 x $5,000.00/$40,000.00 = $37.50). (ii) If a separate return is filed the personal exemption will be $250.00 ($1,500.00 x $5,000.00/$30,000.00). Exemption for dependents will be $50.00 ($300.00 x $5,000.00/$30,000.00 = $50.00). (3) Special Rules. (a) If a taxpayer is a resident for part of the tax year, and also a nonresident for part of the tax year, the personal exemption and/or exemption for dependents will be allowed in full on the return as a part-year resident. In such cases, no deduction will be allowed for the personal exemption and/or exemption for dependents on the nonresident return. (b)1. In the event a taxpayer makes a change in the tax year (from calendar year to fiscal year, from fiscal year to calendar year, or from one fiscal year to another fiscal year) as provided in §40-18-30, the deduction for the personal exemption and/or for dependents must be prorated for each year that is less than twelve months by the ratio of the number of months in the tax year divided by twelve. No proration is required if the change in the tax year is caused by the death of the taxpayer. 2. For example, if a taxpayer changes from a calendar year to a fiscal year ending June 30th, the maximum allowable deduction for the personal exemption would be $750.00 for a single person (6/12 x $1,500.00 = $750.00) or $1,500.00 for a married couple or head of family (6/12 x $3,000.00 = $1,500.00), for the 6-month short-period following the change. (c) In no event may any combination of status as a resident or nonresident, or as single, married, or head of family, result in a deduction for personal exemption of more than $1,500.00 for one individual, $3,000.00 for a married couple, or$3,000.00 for a head of family in any one tax year; nor more than $300.00 for each individual dependent for any one tax year. (d) The terms "dependent exemption" and "exemption for dependent" as used in this and other regulations, as well as the forms used for filing Alabama income tax returns, shall mean that deduction referred to as "credit for dependents" in §40-18-19(b), Code of Ala. 1975. Author: Anne Simms, Ann F. Winborne Statutory Authority: Code of Ala. 1975, §40-18-19. Rule 810-3-19-.02 Revenue 19-.02-6

History: Adopted September 30, 1982. Amended: filed May 15, 1992. Revenue Rule 810-3-19-.02 19-.02-7

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-19 EXEMPTIONS - GENERALLY 810-3-19-.03 Income Realized From A Financial Business. (1) Income realized in conducting a business subject to the excise tax on financial institutions imposed by §40-16-1, et seq., and where such excise tax is paid, is excluded from gross income under the provisions of Chapter 18 of Title 40. (2) Salaries paid by businesses subject to the financial institution excise tax, allowed as deductions to such businesses under §40-16-1(2)(a) are included in gross income of the recipient for income tax purposes under Chapter 18. Author: Rebecca S. Whisenant, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-19. History: Adopted September 30, 1982. Amended: June 17, 1988; Filed July 27, 1988; May 15, 1992. Revenue Rule 810-3-19-.03 19-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-19 EXEMPTIONS - GENERALLY 810-3-19-.04 Defined Benefit Plans. (1) Payments made to a retiree or his designated beneficiary under a "defined benefit plan," as defined by IRC §414(j), as amended from time to time, are exempt from Alabama income tax for an individual resident taxpayer, to the extent such payment would be taxable for federal income tax purposes. (2) A "defined benefit plan" is any plan that is not a "defined contribution plan." A "defined contribution plan" is a plan that provides an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and for income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participants' accounts. This includes plans such as profit sharing, stock bonus, and money purchase pension plans. These plans "could" be Keogh, SEP, orIRA plans. In a "defined contribution plan" such as a money purchase plan, contributions will be specified (not based on profits) and the benefits are whatever these contributions will provide. "Defined benefit plans" may include pension and annuity plans, but all such plans are not necessarily "defined benefit plans." A "defined benefit plan" is one in which the contributions are based on a computation of what contributions are needed to provide definitely determinable benefits to plan participants. That is, contributions are dependent on promised benefits. Contributions to the plan are actuarially calculated to provide the promised benefits. (3)(a) A lump-sum distribution from a defined benefit plan, which is rolled over into another type of retirement plan or account is not taxable and is considered as basis in the new account. (b) Distributions rolled into an individual retirement account (IRA) are not deductible as an adjustment to income. (c) Any earnings or income produced by the amount invested in another plan or account represents taxable income. The taxable portion of distributions from the account is computed pro rata, similar to nontaxable IRA distributions. (4) Benefits received from defined benefit plans including benefits received from nonqualified defined benefit plans such as excess benefit plans or supplemental executive retirement income plans (SERP's) are exempt from Alabama income tax to the extent that the benefits are taxable for federal income tax purposes. Revenue Rule 810-3-19-.04 19-.04-1

Payments under excess benefit plans which provide benefits which exceed the limits set by the Internal Revenue Code and payments under SERP’s where such plans are defined benefit plans are tax exempt benefits for Alabama income tax purposes if the benefits are taxable on the federal income tax return. (5) Where a combination of plans exists requiring the benefits from a defined benefit plan to be reduced, distributions in excess of the amount distributed from the defined benefit plan are taxable. Even though the recipient could have received more from the plan had a combination of plans not existed, only the amount actually distributed from the defined benefit plan is exempt from tax. Author: Ann Simms, Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-19. History: Adopted September 30, 1982. Amended: Filed July 27, 1988; May 15, 1992. Amended: November 3, 2008; effective December 8, 2008. Rule 810-3-19-.04 Revenue 19-.04-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-20 MILITARY RETIREMENT BENEFITS 810-3-20-.01 Military Retirement (Repealed). (Repealed) Author: Rebecca S. Whisenant Statutory Authority: Code of Ala. 1975, §40-18-20. History: Adopted September 30, 1982. Amended: filed June 17, 1988; filed July 27, 1988;May 15, 1992. Repealed: Filed September 15, 1998; effective October 20, 1998. Rule 810-3-20-.01 20-.01-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-21 CREDIT FOR TAXES PAID ON INCOME FROM SOURCES OUTSIDE THE STATE 810-3-21-.01 Credit For Taxes Paid To Another State Or Territory. (1) For all taxable years beginning after the Multistate Tax Compact became effective in 1977, and taxable years beginning before January 1, 1997, resident taxpayers, including individuals, engaged in multistate business in such a manner as a to subject their income to allocation and apportionment provided by the Multistate Tax Compact were not allowed a credit for taxes paid to other states or territories. For tax years beginning after December 31, 1996, resident individuals are not required to allocate and apportion income and the credit for taxes paid to other states and territories, as provided in this section, is allowable for all individuals. (2) See Reg. 810-3-162-.01 for credit allowed to shareholders of an Alabama S corporation for taxes paid by the shareholders to other states on S corporation earnings. (3) For all individuals with taxable years beginning after December 31, 1996: (a) Any Alabama resident individual with income from sources outside Alabama which is includable in Alabama gross income and also in another state or a territory of the United States, is entitled to a credit against the income tax due to Alabama, as described below. 1. The amount of credit will be the lesser of the amount of income tax actually paid to another state on the same income, or the tax computed on the same taxable income in the other state using Alabama tax rates. (i) When income tax is paid to more than one other state, the tax credit must be computed separately for each state. (ii) When a state allows credits against its tax in lieu of exemptions, the taxable income in that state will be determined after a deduction computed by converting the credit at the lowest rates applicable in that state. (I) EXAMPLE: Taxpayer, a resident of Alabama, has taxable income in Alabama, in State X and in Revenue Rule 810-3-21-.01 21-.01-1

State Y. Taxpayer is filling a joint return with his spouse. Taxable Income Tax on Taxable Income Tax on Taxable Income at Alabama Rates Credit Allowable State X $ 9,000.00 $500.00 $ 373.00 $373.00 State Y 4,000.00 60.00 142.00 60.00 Alabama $23,000.00 1,073.00 $560.00 Total Credit Allowable 433.00 Total Alabama income tax 1,073.00 Less credit for tax paid to other states 433.00 Tax due Alabama $ 640.00 (II) EXAMPLE: Taxpayer, a single individual and a resident of Alabama, has gross gambling income of $50,000 and $50,000 gambling losses in State A. State A only allows a deduction for a percentage of gambling losses ($30,000 in this example) but Alabama allows a deduction for gambling losses up to the amount of gambling income ($50,000 in this example). Taxpayer pays tax to State A on $20,000 net gambling income but does not pay tax to Alabama on any gambling income. In this situation, there is no credit for tax paid to State A because the new income from gambling on the Alabama return is zero and, therefore, there is no double taxation. (III) EXAMPLE: Same situation as (II) above, except gambling losses are $40,000, with a net taxable income from gambling of $10,000 on the Alabama return and $20,000 in State A. In this instance, the credit allowed will be the lesser of tax at the Alabama rate on $10,000 or tax in Rule 810-3-21-.01 Revenue 21-.01-2

State A on $10,000. Credit is allowed for tax on $10,000 only because this is the amount of income that otherwise would be subject to double taxation without the credit. (2) Credit for taxes paid other states will be administratively applied as if payment were made on the due date of the applicable return against any liability due Alabama. The amount of any estimated taxes due under §40-18-82 will be reduced by the amount of any credit allowed under this regulation. (b) A resident claiming the credit for taxes paid to another state must attach to his Alabama income tax return a copy of each nonresident return filed showing the amount of the tax payment claimed as credit. The Department may require a certified copy of the return or a certificate showing the amount of tax paid. (c) The credit is allowed to a taxpayer who reports on the cash basis even though the tax due to another state was not actually paid during the year for which the credit is claimed, as long as the tax is actually paid to the other state. The credit is allowed only on the return for the year in which the income is taxable by the other state. For instance, a credit will be deducted on a 1997 return for tax due on 1997 income which is payable in 1998. (d) If a resident individual is included in a joint return in another state, the credit allowable for taxes paid the other state must be apportioned to each individual. The allowable share will be a fraction, the numerator of which is the tax the individual would have paid the other state on his separate income, and the denominator of which is the total amount that each would have paid the other state; applied to the tax liability due the other state. If either individual has a negative or zero tax liability, no credit will be allowed that individual. The allowable credit in any instance will not be more than the amount due at Alabama rates. (e) Taxable income of a nonresident includes only income derived from sources within the state, and therefore, no credit is allowable for taxes paid to other states. Author: Rebecca S. Whisenant Statutory Authority: Code of Ala. 1975, §40-18-21. History: Adopted September 30, 1982. Amended September 7, 1988; filed October 26, 1988. Amended: Filed March 26, 1998; effective April 30, 1998. Amended: Filed April 28, 1999; effective June 2, 1999. Revenue Rule 810-3-21-.01 21-.01-3

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-21 CREDIT FOR TAXES PAID ON INCOME FROM SOURCES OUTSIDE THE STATE 810-3-21-.02 Credits For Job Development Fees. (1) Any taxpayers who is subject to the personal income tax imposed by Section 40-18-2 and has had a Job Development Fee withheld from the taxpayer's wages by an Approved Company pursuant to Section 41-10-44.8(b) is allowed a credit against the taxpayer's state personal income tax liability for the year in which the Job Development Fee has been withheld. The credit is allowed to the taxpayer in an amount equal to the Job Development Fee withheld from the taxpayer's wages by the Approved Company during such year. (a) The Job Development Fee credit allowed pursuant to paragraph (1) above shall be included in computing the taxpayer's total withholding tax liability pursuant to Section 40-18-71. (b) In the event that the Job Development Fee withheld from a taxpayer's wages during the year by an Approved Company exceeds the taxpayer's state personal income tax liability for such year, the taxpayers shall be entitled to a refund. Such refund shall be issued to the taxpayer by the Department in an amount equal to the difference between the taxpayer's state personal income tax liability and the Job Development Fee withheld from the taxpayer's wages by the Approved Company. Author: Tina M. Melancon, Ann F. Winborne, Income Tax Division Statutory Authority: Code of Ala. 1975, §40-18-21; Act 93-852. History: New Rule: Filed August 26, 1994; effective September 30, 1994. Revenue Rule 810-3-21-.02 21-.02-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-21 CREDIT FOR TAXES PAID ON INCOME FROM SOURCES OUTSIDE THE STATE 810-3-21-.03 Maximum Credit For Tax Paid Other Jurisdictions. (1) The credit for tax paid or incurred to other jurisdictions shall not be used to offset that portion of a taxpayer’s income tax liability which is attributable to Alabama sources. The credit for tax paid or incurred to other jurisdictions shall only be utilized against that portion of the taxpayer’s income tax liability which is attributable to income from other jurisdictions. (2) As a general rule, that portion of a taxpayer’s income tax liability which is attributable to non-Alabama sources shall be determined by multiplying the taxpayer’s Alabama income tax liability before consideration of any credit described in Code of Ala. 1975, §40-18-21 by a fraction, the numerator of which is total non-Alabama source adjusted gross income and the denominator of which is total Alabama adjusted gross income. (a) Example. Taxpayer reports $120,000 of adjusted gross income on his Alabama income tax return, of which $80,000 is attributable to another jurisdiction; his Alabama income tax liability before credits is $4,000. Taxpayer paid the other jurisdiction $4,000 of income tax on the $80,000 of income from the other jurisdiction. Because one-third ($1,333) of Taxpayer’s liability is attributable to Alabama sources, it is not subject to the credit for tax paid to other jurisdictions. The maximum credit that Taxpayer may utilize is $2,667, which is the portion of his liability attributable to other jurisdictions. (b) Example. Taxpayer reports $120,000 of adjusted gross income on his Alabama income tax return, of which $80,000 is from non-Alabama sources. Of this $80,000 non-Alabama source income, $40,000 is attributable to State A and $40,000 is attributable to State B. Taxpayer’s Alabama income tax liability before credit is $4,000. Taxpayer paid State A $2,000 of income tax on the $40,000 of income from State A; Taxpayer paid State B no income tax on the $40,000 of income from State B. Because one-third ($1,333) of Taxpayer’s liability is attributable to Alabama sources, it is not subject to the credit for tax paid to other jurisdictions; Taxpayer’s remaining income tax liability of $2,667 is creditable. Revenue Rule 810-3-21-.03 21-.03-1

However, because the total of income tax paid by Taxpayer to both States A and B ($2,000) is less than the creditable portion of Taxpayer’s income tax liability ($2,667), the maximum credit for tax paid to other jurisdictions does not limit Taxpayer’s use of the credit. (3) As an exception to the general rule described in (2), taxpayers with foreign (non U.S.) source income and federal foreign tax credits may use the following alternative methodology to determine the portion of the Alabama income tax liability attributable to Alabama and non-Alabama sources. The taxpayer may multiply Alabama source income by his or her effective Alabama income tax rate to determine the portion of his or her liability attributable to Alabama and therefore not creditable. For purposes of this calculation: the taxpayer’s effective Alabama income tax rate equals the statutory rate of five percent (5%) multiplied by one (1) minus the taxpayer’s effective federal income tax rate; the taxpayer’s effective federal income tax rate equals the taxpayer’s federal income tax liability before foreign tax credit divided by his or her federal taxable income; and Alabama source income equals total Alabama adjusted gross income less income attributable to non-Alabama sources. (a) Example. Taxpayer reports $200,000 of adjusted gross income on his Alabama income tax return, of which $30,000 is attributable to a foreign (non-U.S.) jurisdiction; his Alabama income tax liability before credit is $8,500. Taxpayer’s federal taxable income is also $200,000; his federal income tax liability before subtracting any foreign tax credit is $40,000. Taxpayer paid the foreign jurisdiction $10,000 of income tax. In determining the overall limit on the credit available for taxes paid to other jurisdictions, Taxpayer multiplies his Alabama source income of $170,000 by his effective Alabama income tax rate. Taxpayer determines the effective Alabama income tax rate by multiplying the five percent (5%) statutory Alabama income tax rate by one minus his or her effective federal income tax rate. His effective federal income tax rate before foreign tax credit is twenty percent (20%) or ($40,000 / $200,000) and his Alabama effective tax rate is four percent (4%) or (5% x (1-20%) or 80%). Taxpayer then multiplies his Alabama source income ($170,000) by his effective Alabama income tax rate (4%), which equals $6,800. The credit for tax paid to other jurisdictions cannot be used to reduce Taxpayer’s liability below $6,800. Taxpayer’s credit for tax paid to other jurisdictions cannot exceed $1,700 ($8,500 - $6,800). (4) In addition to the methodologies described above, the taxpayer may use an alternative methodology by obtaining written approval from the Department before the original due date of the taxpayer’s income tax return. Rule 810-3-21-.03 Revenue 21-.03-2

(5) This rule is applicable to tax years beginning on or after January 1, 2013. Author: Brandee B. Tickle, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-21. History: New Rule: Filed November 28, 2012, effective January 2, 2013. Revenue Rule 810-3-21-.03 21-.03-3

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-21 CREDIT FOR TAXES PAID ON INCOME FROM SOURCES OUTSIDE THE STATE 810-3-21-.04 Rebated Allowed For Qualified Production Companies. Purpose. This rule sets forth guidelines and procedures to be used by the department in the administration of rebates allowed for qualified production companies. (1) Definitions. For purposes of this rule, the term “Notice of Rebate Available” means the written notice from the Alabama Entertainment Office certifying the amount of rebate determined to be available to a qualified production company. All other terms used in this rule have the same meaning provided in Alabama Entertainment Office Rule 281-3-1-.02. (2) A qualified production company that satisfies the provisions of Article 3, Chapter 7A of Title 41 of the Code of Ala. 1975, and produces a state-certified production is entitled to claim a rebate, in an amount not to exceed the amount set forth in the Notice of Rebate Available on its Alabama Income Tax Return for the tax year during which production activities in Alabama on the state-certified production were completed. (3) The rebate may be used to offset the Alabama Income Tax liability of the qualified production company for the tax year during which production activities in Alabama on the state- certified production were completed. The amount by which the rebate exceeds the qualified production company’s Alabama Income Tax liability shall be refunded to the qualified production company. If production activities in Alabama on the state-certified production took place in more than one tax year, the qualified production company must be current in its income tax filings for all tax years during which production activities on the state-certified production took place in Alabama before a rebate can be claimed. (4) The qualified production company’s tax year must be closed before it can file its Alabama income tax return claiming the rebate. (5) The Alabama Film Rebate must be pre-certified through the department’s online portal before the taxpayer can claim the rebate on the qualified production company’s Alabama income tax return. The qualified production company must upload the following items in their credit claim package: Revenue Rule 810-3-21-.04 21-.04-1

(a) Approval letter (first letter) from the Alabama Entertainment Office. (b) Notice of Rebate Available (second letter) from the Alabama Entertainment Office. (c) The Certificate of Compliance from the department. Author: Kelly Graham, Ann F. Winborne, CPA, Preeti Gratz, and Tawanna Small Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), Article 3, Chapter 7A of Title 41, Alabama Entertainment Office Rule 281-3-1-.02. History: New Rule: Filed January 27, 2014, effective March 3, 2014. Amended: Filed July 31, 2020; effective September 14, 2020. Amended: Published October 31, 2025; effective December 15, 2025. Rule 810-3-21-.04 Revenue 21-.04-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-24 TAXATION OF PARTNERSHIPS 810-3-24-.01 Taxability Of Partnership Income. (1)(a) A partnership is considered to be a "conduit" of income to each partner and not a taxable entity under Alabama income tax law. (b) The term "partnership" includes a limited partnership, a general partnership, and a syndicate, group, pool, or joint venture which is not a corporation, estate, trust or sole proprietorship within the meaning of the Alabama income tax law. (c) The term "partner" means any person who is a member of a partnership. (d) The term "person" as used in this rule includes an individual, corporation, fiduciary or another partnership. (2) A partnership, once established, continues until all business activities, financial operations, or ventures of the partnership carried on by any of its partners as the partnership cease. (3)(a) Each partner shall include in gross income from all sources, the distributive share of the income (or loss) of a partnership for any partnership year ending within the partner's taxable year. For an Alabama resident, this amount will also be included in Alabama gross income. (b) Each nonresident partner shall include in Alabama gross income the distributive share of partnership income (or loss) attributable to Alabama as provided in Rule 810-3-24-.02(2). For the purpose of apportioning deductions based on the ratio of Alabama adjusted gross income to total adjusted gross income, total adjusted gross income will include the nonresident partner's full share of the partnership income, and not just the portion attributable to Alabama. (4) The Internal Revenue Code contains provisions similar to those in §40-18-24. The department will consider administrative rulings and judicial decisions in respect to the similar provisions of federal law and regulations in interpreting this rule. Author: Christina Hall, Ecta Spicer, Roy Wiggins, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-24. Revenue Rule 810-3-24-.01 24-.01-1

History: Adopted September 30, 1982. Amended: February 8, 1989; filed March 20, 1989. Amended: Filed November 16, 2018; effective December 31, 2018. Rule 810-3-24-.01 Revenue 24-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-24 TAXATION OF PARTNERSHIPS 810-3-24-.02 Computation Of Partnership Income (Or Loss). (1) The net income of a partnership is computed in the same manner as that of an individual, except: (a) no deduction is allowed for a personal exemption or credit for dependents as provided in §40-18-19, and (b) no deduction is allowed for charitable contributions or gift made in accordance with §40-18-15(a)(10), and (c) no deduction is allowed for a net operating loss carryback or carryforward as provided in §40-18-15(a)(16), and (d) no deduction is allowed for the additional itemized deductions provided for individuals in §40-18-15, and (e) no deduction is allowed for the optional standard deduction provided in §40-18-15(b). (2) A partnership doing business in Alabama and at least one other state must compute income attributable to Alabama in the manner provided in Rule 810-27-1-.02. Author: Christina Hall, Chris Sherlock, Ecta Spicer, Roy Wiggins, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-24. History: Adopted June 17, 1988; filed July 27, 1988. Amended: Filed November 16, 2018; effective December 31, 2018. Revenue Rule 810-3-24-.02 24-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-24 TAXATION OF PARTNERSHIPS 810-3-24-.03 Partner's Distributive Share Of Partnership_Income (Or Loss). (1) A partner's distributive share of partnership income, gains, losses and deductions shall be determined in accordance with the partner's interest in the partnership (taking into account all facts and circumstances) unless - (a) the partnership agreement provides otherwise, and (b) the allocation to a partner in accordance with the partnership agreement is not substantially for the purpose of avoiding or evading taxation under this regulation. (2) The character of any item of income, gain, loss or deduction included in the partner's distributive share of partnership net income (or loss) shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership. (3)(a) A partner's distributive share of partnership net income (or loss) includes any "Guaranteed Payments to Partner" as defined in Reg. 810-3-24-.04. The distributive share is included in gross income of the partner as provided in Regs. 810-3-14-.01 (for residents) and 810-3-14-.05 (for nonresidents) or 810-3-34-.01 (for corporations). (b) A partner is also entitled to a proportionate share of any contributions made by the partnership which would be deductible under 40-18-15(a)(10). See Reg. 810-3-15-.17. (4) A partner's distributive share of partnership loss shall be allowed only to the extent of the adjusted basis (before reduction by the current year loss) of such partner's interest in the partnership at the end of the partnership taxable year in which such loss occurred. If a partner's distributive loss exceeds the adjusted basis in the partnership interest - (a) the amount of the loss that exceeds the partner's adjusted basis will not be allowed as a deduction for that year, and (b) any loss disallowed in subparagraph (a) above shall be allowed as a deduction at the end of the first succeeding partnership taxable year and subsequent partnership taxable Revenue Rule 810-3-24-.03 24-.03-1

years to the extent that the partner's adjusted basis in his partnership interest at the end of such year exceeds zero. (5) In any case where it is necessary to determine the gross income of a partner, such amount shall include his distributive share of the gross income of the partnership. Author: Ecta Spicer, Roy Wiggins, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-24. History: Adopted June 17, 1988; filed July 27, 1988. Rule 810-3-24-.03 Revenue 24-.03-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-24 TAXATION OF PARTNERSHIPS 810-3-24-.04 Transactions Between Partner And Partnership. (1) A partner who engages in a transaction with a partnership other than in his capacity as a partner shall be treated as if he were not a member of the partnership with respect to such transaction. In all cases the substance of the transaction will govern and not its form. The relationship between a partner not acting in his capacity as a partner and the partnership may include, but is not limited to that of creditor-debtor, vendor- vendee and employee-employer. (2) To the extent determined without regard to the income of the partnership, payments to a partner for services or for the use of capital shall be considered as made to one who is not a member of the partnership. Such guaranteed payments to partners shall be treated as a deductible business expense in the computation of the partnership net income. (3)(a) Gain or loss will be recognized by a partner on a contribution of property to a partnership in exchange for an interest in the partnership to the extent provided in §40-18-8. (b)1. Gain or loss will be recognized by a partnership on a distribution of property to a partner to the extent provided in §40-18-8. 2. Gain or loss will be recognized by a partner on a distribution of property from a partnership to the extent provided in §40-18-8. Author: Ecta Spicer, Roy Wiggins, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-24. History: Adopted June 17, 1988; filed July 27, 1988. Revenue Rule 810-3-24-.04 24-.04-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-24 TAXATION OF PARTNERSHIPS 810-3-24-.05 Partner's Basis In Partnership Interest. (1) A partnership interest is personal property hold for the production of income. A gain or loss from the sale or other disposition of a partnership interest must be recognized to the extent provided in §40-18-8. (2) The adjusted basis of a partner's interest in a partnership shall be the amount of property, including money, contributed to the partnership: (a) increased by the sum of his distributive share (not including any "Guaranteed Payments to Partners") for the taxable year and prior taxable years of: 1. the taxable income of the partnership, 2. the income of the partnership exempt from tax, and 3. the excess of the deductions for depletion over the basis of the property subject to depletion, (b) decreased (but not below zero) by distributions by the partnership and the sum of his distributive share for the taxable year and prior taxable years of - 1. losses of the partnership, and 2. expenditures of the partnership not deductible in computing its taxable income and not property chargeable to the capital account. (3)(a) Any increase in a partner's share of the liabilities of a partnership, or any increase in a partner's individual liabilities by reason of the assumption by such partner of partnership liabilities shall be considered as a contribution of money by such partner to the partnership. (b) Any decrease in a partner's share of the liabilities of a partnership, or any decrease in a partner's individual liabilities by reason of the assumption by the partnership of such individual liabilities, shall be considered as a distribution of money to the partner by the partnership. Revenue Rule 810-3-24-.05 24-.05-1

(4)(a) If a partner makes a contribution of property subject to a liability to a partnership, and the partnership assumes the liability, the amount of the liability (not exceeding the fair market value of the property at the time of the contribution) will be considered a contribution to the partnership in the amount of the liability that is not allocated to the other members of the partnership. (b) If property subject to an indebtedness is distributed by a partnership to a partner, and the liability is assumed by the distributee, the amount of the liability, (not exceeding the fair market value of the property at the time of the distribution) will be considered to be a contribution to the partnership in the amount of the liability that had been allocated to the other members of the partnership. Author: Ecta Spicer, Roy Wiggins, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-24. History: Adopted June 17, 1988; filed July 27, 1988. Rule 810-3-24-.05 Revenue 24-.05-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.01 Taxable Income Of Estates And Trusts, For Taxable Years Beginning Prior To January 1, 2005. (1) The tax imposed by Chapter 18, Title 40, Code of Ala. 1975, shall apply to the income of estates or of any kind of property held in trust, including: (a) Income received by estates of deceased persons during the period of administration or settlement of the estate; (b) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests; (c) Income accumulated or held for future distribution under the terms of the will or trust; and, (d) Income which is to be distributed to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct. (2) The net income, or taxable income, of an estate or trust is computed in the same manner as that of an individual, with the exception that the deduction for amounts paid or permanently put aside for a charitable purpose shall be allowed to the extent specified in 26 U.S.C. §642(c). For interpretation of federal statutes adopted by the Alabama legislature, see Rule 810-3-1.1-. 01, Operating Rules. (a) Gross income is computed as provided in §40-18-14. (b) Deductions (including net operating loss carrybacks or carryforwards) are allowed as provided in §§40-18-15 and 40-18-15.2. 1. Federal estate taxes are an allowable deduction on the fiduciary return of an estate. (c) Taxable income is reduced by any income properly paid to the beneficiary of the estate of a deceased person which is taxable to the beneficiary. (d) Taxable income is also reduced by the amount of income identified in paragraph (1)(d), above. Revenue Rule 810-3-25-.01 25-.01-1

(e) The estate or trust is allowed the same exemption as is allowed a single person under §40-18-19. (f) In the case of a trust created by a nonresident or the estate of a nonresident, gross income of such trust or estate includes only amounts which would be included in the gross income of a nonresident individual as provided in §40-18-14(4). (3) The Subchapter J and Business Trust Conformity Act, Act 2006-114, was passed by the Alabama Legislature effective for taxable years beginning after December 31, 2004 – please refer to the regulations promulgated to implement the new act. Author: Ron Bedsole, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-25. History: Adopted September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed July 26, 1999; effective August 30, 1999. Amended: Filed December 27, 2006; effective January 31, 2007. Rule 810-3-25-.01 Revenue 25-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.02 Estate And Trust Charitable Contributions (Repealed 5/5/00). (Repealed) Author: Roy Wiggins, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-25. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Repealed: Filed March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-25-.02 25-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.03 Estate And Trust Taxable Income (Repealed 5/5/00). (Repealed) Author: Roy Wiggins, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-25. History: Adopted September 30, 1982. Amended September 7, 1988; filed October 26, 1988. Repealed: Filed March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-25-.03 25-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.04 Estates And Trusts Tax Computation, For Taxable Years Beginning Prior To January 1, 2005. (1) Estates and trusts are taxed at the same rate as a single individual – see §40-18-5(1), Code of Ala. 1975. Those rates are two percent of the first $500.00 of taxable income, four percent of the taxable income in excess of $500.00 and not in excess of $3,000.00, and five percent of taxable income in excess of $3,000.00. (2) A resident estate or trust that has gross income taxable in Alabama and another state will be allowed a credit for net income taxes paid the other state on such income as provided in §40-18-21. See Rule 810-3-21-.01. (3) The Subchapter J and Business Trust Conformity Act, Act 2006-114, was passed by the Alabama Legislature effective for taxable years beginning after December 31, 2004 – please refer to the regulations promulgated to implement the new act. Author: Ron Bedsole, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-25. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Amended: Filed March 31, 2000; effective May 5, 2000. Amended: Filed December 27, 2006; effective January 31, 2007. Revenue Rule 810-3-25-.04 25-.04-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.05 Estates And Trusts Beneficiary Taxable Income, For Taxable Years Beginning Prior To January 1, 2005. (1)(a) Each beneficiary of a trust or estate shall include in gross income the distributive share, whether distributed or not, of the net income of the trust or estate; except that portion of the estate or trust net, or taxable, income which was taxed as provided in Rule 810-3-25-.01. Income which would be exempt if received directly by the beneficiary shall be exempt if received through a fiduciary. (b) Each nonresident beneficiary of an estate or trust shall include in Alabama gross income the distributive share, whether distributed or not, of the net income of the trust or estate which is attributable to Alabama sources; except that portion of such trust or estate income which was taxed as provided in Rule 810-3-25-.01. (2) The amounts distributed to an individual from those trusts described in Rule 810-3-25-.06 subparagraphs (1)(a), (1)(b), (1) (c), and (1)(d) shall be taxable to the distributee in accordance with 26 U.S.C. §72 in the year in which distributed as if it were an annuity the consideration for which is the amount contributed by the employee. (a) The individual's cost basis, "the amount contributed by the employee", shall include: 1. Amounts contributed before January 1, 1982, by an individual and/or his spouse to an individual retirement account, bond, or annuity for which no deduction was allowed under §40-18-15, Code of Ala. 1975. 2. Amounts contributed before January 1, 1982, by a taxpayer to a trust described in §40-15-25(e) for which no deduction was allowed under §40-18-15. 3. Amounts contributed before January 1, 1985 to an annuity plan qualifying under 26 U.S.C. §§401(k)(2) and 403(b), for which no deduction was allowed under §40-18-15. Revenue Rule 810-3-25-.05 25-.05-1

4. The amount included in prior years income by the individual or the trust due to failure to qualify for exempt status. 5. The amount included in the individual's gross income because of a prior distribution that failed to qualify for the "rollover provision" or was included in gross income pursuant to 26 U.S.C. §408(m) (acquisition of works of art, etc., treated as a distribution). (b) The cost of the annuity to the recipient is the amount contributed by him or her, and not previously deducted. 1. For annuities which started before January 1, 1985, annuity proceeds are first considered to be a recovery of contributions to the extent of such contributions before being included in gross income of the recipient. 2. For annuities which started after December 31, 1984, but before January 1, 1986, annuity proceeds will be included in gross income in the ratio of expected return in excess of contributions to total expected return; provided however, that recipients of an employee annuity as defined in 26 U.S.C. §72(d) (as in effect before January 1, 1986) will continue to recover all costs first as provided in subparagraph 1., above. 3. For annuities which started after December 31, 1985, annuity proceeds will be included in gross income in the ratio of expected return in excess of contributions to total expected return in the same manner as described in 26 U.S.C. §72 (as in effect after December 31, 1985). (c)1. Lump sum distributions will be included in gross income in the year received. There is no provision in Alabama law for the forward averaging of such distributions. 2. No part of a distribution may be excluded from gross income as a capital gain. (d) Alabama law, unlike the provisions of 26 U.S.C. §72, does not impose an additional tax on certain early distributions from trusts described §40-18-25(e). (3) Recipients of distributions from charitable remainder unitrusts and charitable remainder annuity trusts shall include in gross income the amounts specified in 26 U.S.C. §§664 (b)(1) and (2). (4) Distributions from or rollovers to individual retirement accounts described in 26 U.S.C. §§408A and 530, shall be taxed to the distributee according to 26 U.S.C. §§408A and 530. See also Rule 810-3-25-.05 Revenue 25-.05-2

Rule 810-3-25-.09, Reporting to Roth IRA Conversions for Part-Year Residents. (5) Distributions from a trust that are not included in gross income of the individual for federal purposes due to the "rollover provisions" of 26 U.S.C. §§402, 403, 408, and 409 are excluded from Alabama gross income of the individual. These are: (a) Qualified stock bonus, pension, or profit sharing plans as described in 26 U.S.C. §401(a), which are exempt under 26 U.S.C. §501(a), and meet the rollover requirements of 26 U.S.C. §402, (b) Employee annuities which meet the requirements of 26 U.S.C. §404(a)(2), and the rollover requirements of 26 U.S.C. §403, (c) Individual retirement accounts that qualify under and meet the "rollover provisions" of 26 U.S.C. §408, and (d) Retirement bonds that qualify under 26 U.S.C. §§409 or 219 and meet the "rollover provisions" of 26 U.S.C. §409. (6) If an employer makes a contribution to a nonexempt trust for an employee and the contribution is nonforfeitable to the employee, it shall be included in the gross income of the employee at the time of the contribution. (7) if contributions in the preceding paragraph are not nonforfeitable when made but later become nonforfeitable, their fair market value shall be included in the gross income of the employee when they become nonforfeitable. (8) The income from a revocable trust is taxable income to the grantor unless the trust is irrevocable as to the income, then the income is taxable to the trust or the beneficiary as directed in §40-18-25. (a) A loss on the final return of a revocable trust is allowed to pass on to the grantor unless the trust is irrevocable as to income, then the loss is allowed to pass on to the beneficiary. (b) A loss on an irrevocable trust cannot be passed on to the grantor or the beneficiary. (9) See also §40-18-14 for inclusion of trust or estate distributions in gross income. (10) For interpretation of federal statutes adopted by the Alabama legislature, see Rule 810-3-1.1-.01, Operating Rules. Revenue Rule 810-3-25-.05 25-.05-3

(11) The Subchapter J and Business Trust Conformity Act, Act 2006-114, was passed by the Alabama Legislature effective for taxable years beginning after December 31, 2004 – please refer to the regulations promulgated to implement the new act. Author: Ron Bedsole, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-25. History: Adopted September 30, 1982. Amended September 7, 1988; filed October 26, 1988. Amended: Filed March 31, 2000; effective May 5, 2000. Amended: Filed December 27, 2006; effective January 31, 2007. Rule 810-3-25-.05 Revenue 25-.05-4

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.06 Trusts Exempt From Taxation, For Taxable Years Beginning Prior To January 1, 2005. (1) Except as provided in paragraphs (2), (3) and (4) below, the following trusts are exempt from taxation under §40-18-25, Code of Ala. 1975: (a) Any qualified trust defined in 26 U.S.C. §401(a) relating to qualified pension, profit sharing, or stock bonus plans. (b) A custodial account, an annuity contract, or a contract issued by an insurance company that qualifies under 26 U.S.C. §401(f). (c) An individual retirement account, an individual retirement annuity, or any custodial account that qualifies under 26 U.S.C. §408(e), 26 U.S.C. §408A, or 26 U.S.C. §530. (d) A retirement bond that qualifies under 26 U.S.C. §409. (e) Corporations, as described in 26 U.S.C. §501(c)(2), organized for the exclusive purpose of holding title to property, collecting income therefrom, and remitting the proceeds, less expenses, to an organization which is exempt under §40-18-25. (f) Voluntary employees' beneficiary associations as described in 26 U.S.C. §501(c)(9). (g) Local teachers' retirement fund associations as described in 26 U.S.C. §501(c)(11). (h) A trust or trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits as described in 26 U.S.C. §501(c)(17). (i) An organization or trust created exclusively to form part of a qualified group legal services plan or plans, as described in 26 U.S.C. §501(c)(20). (j) A trust created exclusively to pay liability insurance premiums for, pay administrative and other expenses of, and pay claims for liability for disability or death due to pneumoconiosis (black lung), as described in 26 U.S.C. §501(c) (21). Revenue Rule 810-3-25-.06 25-.06-1

(k) A charitable remainder annuity trust or a charitable remainder unitrust, as those terms are defined in 26 U.S.C. §664, relating to charitable remainder trusts, to the extent provided in 26 U.S.C. §664. (l) Corporations and any organization as described in 26 U.S.C. §501(c)(3). (2) Feeder organizations, as described by 26 U.S.C. §502, are not exempt from taxation under §40-18-25, Code of Ala. 1975. (3) Organizations not exempt from federal income tax due to the requirements of 26 U.S.C. §503, relating to requirements for exemption, are not exempt from taxation under §40-18-25, Code of Ala. 1975. (4) The unrelated business income of an exempt organization, as defined in 26 U.S.C. §512, is not exempt from taxation under §40-18-25, Code of Ala. 1975. See Reg. 810-3-32-.03. (5) For interpretation of federal statutes adopted by the Alabama Legislature, see Rule 810-3-1.1-.01, Operating Rules. (6) The Subchapter J and Business Trust Conformity Act, Act 2006-114, was passed by the Alabama Legislature effective for taxable years beginning after December 31, 2004 – please refer to the regulations promulgated to implement the new act. Author: J. Ron Bedsole, Nancy Butler, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-25. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Amended: Filed March 31, 2000; effective May 5, 2000. Amended: Filed December 27, 2006; effective January 31, 2007. Rule 810-3-25-.06 Revenue 25-.06-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.07 Estates And Trusts, Miscellaneous Information. (1) Estates and trusts are required to file Alabama Form 41, Fiduciary Income Tax Return, on the date the taxpayer’s federal return is due or would be due if the federal return was required. (a) The entity will be granted an extension of time for filing the fiduciary return in the same manner as allowed by federal law. (2)(a) The fiduciary is required to make and file the return and pay the tax on the taxable income of an estate or trust. An extension of time granted to file the fiduciary return pursuant to this section is not an extension of time for payment of tax. The amount of tax due must be paid on or before the due date of the return without regard to the extension to file the return. Payment of the tax must be made via the paper Payment Voucher or by Electronic Funds Transfer (EFT) in accordance with Rules 810-13-1-.01 and 810-13-1-.03. (b) If a fiduciary receives income which is to be distributed to a nonresident beneficiary, the fiduciary must file with his or her return a schedule showing the amount of income distributed to each such beneficiary and the portion thereof which is exempt and the portion which is subject to Alabama tax. (3)(a) For rules on recognition of gain or loss on transfer of property to or from an estate, trust, or beneficiary, see §40-18-8, Code of Ala. 1975. (b) For rules on basis of property transferred to or from an estate, trust, or beneficiary, see §40-18-6, Code of Ala. 1975. (4) The Internal Revenue Code contains provisions similar to those of §40-18-25, Code of Ala. 1975. Decisions and interpretations of the federal courts and agencies will be given due weight in interpreting this section. Author: Chris Sherlock, Christina Hall, Nancy Butler, Ron Bedsole, Ann F. Winborne, CPA, Richard H. Henninger, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-25. Revenue Rule 810-3-25-.07 25-.07-1

History: Adopted September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed March 31, 2000; effective May 5, 2000. Amended: Filed December 27, 2006; effective January 31, 2007. Amended: Filed November 26, 2008; effective December 31, 2008. Amended: Filed April 14, 2017; effective May 29, 2017. Amended: Filed November 16, 2018; effective December 31, 2018. Rule 810-3-25-.07 Revenue 25-.07-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.08 Trusts And Estates Net Operating Loss, For Taxable Years Beginning Prior To January 1, 2005 (REPEALED). (REPEALED) Author: Ron Bedsole, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§§40-2A-7, 40-18-25. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Amended: Filed March 31, 2000; effective May 5, 2000. Amended: Filed December 27, 2006; effective January 31, 2007. Repealed: Published September 30, 2022; effective November 14, 2022. Revenue Rule 810-3-25-.08 25-.08-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.09 Reporting Of Roth IRA Conversions For Part-Year Residents. (1) Taxpayers are allowed to convert an IRA to a Roth IRA in accordance with 26 U.S.C. §408A. Any amount required to be included in gross income as a result of the conversion will be ratably included in gross income over a 4-taxable year period beginning with the taxable year in which the conversion is made. (2) Part-year residents, reporting in years 1998, 1999, 2000 and 2001, will use the original date of rollover to determine whether the allocated amount will be included as Alabama income. (a) If an individual becomes an Alabama resident on or before the date of rollover or the anniversary date of the rollover, the allocation for that year will be taxable to Alabama. (b) If an individual ceases to be an Alabama resident after the date of rollover or the anniversary date of the rollover, the allocation for that year will be taxable to Alabama. Author: Nancy Butler, Ronnie Bedsole, Ed Cutter, CPA Individual and Corporate Tax Division Statutory Authority: Code of Ala., 1975, §§40-2A-7(a)(5), 40-18-25. History: New Rule: Filed: March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-25-.09 25-.09-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.10 Computation Of Alabama Taxable Income For An Estate Or Trust For Taxable Years Beginning After December 31, 2004. (1) For tax years beginning after December 31, 2004, the computation of Alabama taxable income for an estate or trust shall be determined in accordance with Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code, 26 U.S.C. §§641 through 692, relating to estates, trusts, beneficiaries, and decedents, with certain exceptions, as specified below: (a) The income and deductions of the estates and trusts shall be increased by any items that are includable or deductible by an individual in computing Alabama income tax but are not includable or not deductible by an individual in computing federal income tax. The income and deductions of the estates and trusts shall be decreased by any items that are not includable or not deductible by an individual in computing Alabama income tax but are includable or deductible by an individual in computing federal income tax. 1. The differences referred to in this paragraph are numerous, and can change with the passage of federal or Alabama tax legislation. This regulation does not intend to include a complete list of such differences. 2. Deduction for Federal Income Taxes Paid. One example of the differences is the treatment of payments for federal income tax. Federal income tax paid is allowed as a deduction to individuals in accordance with §40-18-15, Code of Ala. 1975, but is not allowed as a deduction for federal income tax purposes. Refunds of federal income tax paid in a prior tax year is includable as income in computing the Alabama taxable income for an individual taxpayer. 3. Depletion Deduction. The depletion deduction allowed individuals in computing Alabama taxable income is specified in §40-18-15, Code of Ala. 1975, but may differ from the depletion deduction allowed for federal income tax purposes. 4. Payments for State Income Taxes. State income taxes paid to a state other than Alabama may be deductible for federal income tax purposes, but is not deductible by an Revenue Rule 810-3-25-.10 25-.10-1

individual in computing Alabama taxable income - see §40-18-15, Code of Ala. 1975. 5. Tax Exempt Income. Tax exempt interest income for Alabama income tax purposes can differ from tax exempt interest income for federal purposes. Interest income from obligations of the United States or its possessions is taxable for federal income tax purposes and is exempt for Alabama income tax purposes - see §40-18-14, Code of Ala. 1975. Interest income from the obligations of the State of Alabama and the obligations of Alabama local political subdivisions is exempt for federal income tax purposes, and is exempt for Alabama income tax purposes - see §40-18-14, Code of Ala. 1975. Interest income from non-Alabama state and local government obligations is exempt for federal income tax purposes, but not for Alabama income tax purposes - see §40-18-14, Code of Ala. 1975. 6. Federal Passive Activity Loss Restrictions. Estates and trusts are subject to certain federal passive activity losses restrictions, which are not applicable in computing Alabama taxable income. 7. Capital Gains and Losses. While federal income tax law may limit the amount of capital losses that may be claimed by a taxpayer in a tax year, in computing Alabama taxable income estates and trusts shall report gains and losses in accordance with §40-18-8, Code of Ala. 1975. 8. Charitable Contribution Deduction. In computing Alabama taxable income an estate or trust is entitled to the charitable contribution deduction provided for individual taxpayers in §40-18-15, Code of Ala. 1975, or the unlimited charitable contribution deduction allowed by 26 U.S.C. §642(c). 9. Net Operating Loss Deduction. In computing Alabama taxable income an estate or trust is only entitled to the net operating loss deduction provided for individual taxpayers in §40-18-15.2, Code of Ala. 1975, not the federal net operating loss deduction allowed by 26 U.S.C. §172. In addition to the NOL deduction allowed by §40-18-15.2, Code of Ala. 1975, certain trusts are allowed a Special NOL Deduction by Section 4 of Act 2006-114. 10. Personal Exemption. The personal exemption amount allowed as a deduction to estates and trusts in computing Alabama taxable income is $1,500 – the same amount allowed a single individual under §40-18-19, Code of Ala. 1975. Rule 810-3-25-.10 Revenue 25-.10-2

11 Nonresident Estate and Trust Income and Deductions. Nonresident estates and trusts must report Alabama source income in accordance with §40-18-14, Code of Ala. 1975, and are allowed deductions in computing Alabama taxable income in accordance with §40-18-15, Code of Ala. 1975. 12. Deductions not Claimed on the Federal Return in Order to Take a Federal Employment Tax Credit. Certain federal employment tax credits require the wages to be reduced in the amount of the credit taken – the amount the wages were reduced would be allowed as a deduction for Alabama income tax purposes. 13. Deduction for Foreign Income Taxes Paid. In some cases a taxpayer may deduct foreign income taxes paid or accrued for federal income tax purposes. An estate or trust is prohibited by §40-18-15, Code of Ala. 1975, from claiming a deduction for foreign income taxes paid or accrued in computing Alabama taxable income. 14. Federal Estate Tax. 1. An estate or trust in computing Alabama taxable ,income is prohibited by §40-18-25(f), Code of Ala. 1975 from claiming the deduction otherwise allowable under 26 U.S.C. §691(c)(1)(A), the federal deduction for a portion of the estate tax paid when income in respect of a decedent is reported. 2. Federal estate taxes paid are allowed as a deduction to individuals in computing Alabama taxable income - in accordance with §40-18-15, Code of Ala. 1975. (b) The Alabama income distribution deduction is computed in accordance with 26 U.S.C. §§651 and 661, including any limitations, using amounts determined in accordance with Title 40, Chapter 18, Code of Ala. 1975. (c) An estate or trust in computing Alabama taxable income cannot claim a deduction for any item more than once. Author: Voncile Catledge, Joe Garrett, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §40-2A-7(a)(5). History: New Rule: Filed December 27, 2006, effective January 31, 2007. Revenue Rule 810-3-25-.10 25-.10-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.11 Computation Of Alabama Taxable Income For Beneficiaries And Owners For Taxable Years Beginning After December 31, 2004. (1) For tax years beginning after December 31, 2004, the computation of Alabama taxable income for a beneficiary of an estate or trust and for persons treated as owners of any portion of a trust shall be determined in accordance with Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code, 26 U.S.C. §§641 through 692, relating to estates, trusts, beneficiaries, and decedents, with certain exceptions - as specified below: (a) Resident beneficiaries and owners must report as Alabama income the beneficiary or owner’s share of the amount paid or deemed to have been paid by the estate or trust to the beneficiary or owner and claimed as an income distribution deduction, in accordance with 26 U.S.C. §§651 or 661, by the estate or trust in the computation of its own Alabama taxable income. 1. Nonresident beneficiaries and owners must report as Alabama income the beneficiary or owner’s share of the amount paid or deemed to have been paid by the estate or trust to the beneficiary or owner and claimed as an income distribution deduction, in accordance with 26 U.S.C. §§651 or 661, by the estate or trust in the computation of its own Alabama taxable income. The income reported by nonresident beneficiaries and owners is limited in accordance with §40-18-14, Code of Ala. 1975, and the deductions allowed in computing Alabama taxable income are limited in accordance with §40-18-15, Code of Ala. 1975. (b) The character of any income required to be reported by the beneficiary or owner as a result of receiving the distribution from the estate or trust shall be the same character of income as if the item of income was received directly from the source of income. (c) The character of any deduction allowed to be claimed by the beneficiary or owner as a result of receiving the distribution from the estate or trust shall be the same character of deduction as if the deduction was incurred directly by the beneficiary or owner. Revenue Rule 810-3-25-.11 25-.11-1

(d) Federal Estate Tax. 1. A beneficiary in computing Alabama taxable income is prohibited by §40-18-25(f), Code of Ala. 1975, from claiming the deduction otherwise allowable under 26 U.S.C. §691(c)(1)(A), the federal deduction for a portion of the estate tax paid when income in respect of a decedent is reported. 2. Federal estate taxes paid are allowed as a deduction to individuals in computing Alabama taxable income - in accordance with §40-18-15, Code of Ala. 1975. (e) A beneficiary or owner in computing Alabama taxable income cannot claim a deduction for any item more than once. (f) The provisions of 26 U.S.C. §642(h), concerning unused net operating loss carryovers or excess deductions of the estate or trust, shall not apply in the computation of Alabama taxable income for the beneficiary or owner. Author: Voncile Catledge, Joe Garrett, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §40-2A-7(a)(5). History: New Rule: Filed December 27, 2006, effective January 31, 2007. Rule 810-3-25-.11 Revenue 25-.11-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.12 Computation Of Alabama Distributable Net Income (DNI) For Tax Years Beginning After December 31, 2004. (1) For tax years beginning after December 31, 2004, the computation of Alabama Distributable Net Income (DNI) shall be determined in accordance with 26 U.S.C. §643(a); in accordance with §40-18-1.1, Code of Ala. 1975, concerning the adoption of federal Internal Revenue Code sections in Alabama income tax law; and, in accordance with Title 40, Chapter 18, Code of Ala. 1975, Income Taxes. (2) Purpose of Alabama DNI. Alabama DNI serves the same purpose as the federal DNI. (a) Alabama DNI, adjusted for items not included in the gross income of the estate or trust in accordance with 26 U.S.C. §§651 and 661, limits the amount of deduction an estate or trust may claim for distributions to beneficiaries. (b) Alabama DNI may also limit the amount of Alabama income a beneficiary or trust owner must report. (3) Computation of Alabama DNI. Alabama DNI is computed in a similar manner as federal DNI. In computing Alabama DNI for an estate or trust the Alabama taxable income of the estate or trust is modified as follows: (a) The amount of the deductions for distributions to beneficiaries allowed by 26 U.S.C. §§651 and 661, but adjusted to comply with Title 40, Chapter 18, Code of Ala. 1975, are added to the Alabama taxable income. (b) The amount of the personal exemption deducted in computing Alabama taxable income is added to the Alabama taxable income. (c) Gains from the sale of capital assets are subtracted from the Alabama taxable income if the gains are allocated to corpus and are: 1. not paid, credited, or required to be distributed to any beneficiary during the taxable year, or 2. not paid, permanently set aside, or to be used for the purposes specified in 26 U.S.C. §642(c). Revenue Rule 810-3-25-.12 25-.12-1

(d) Losses from the sale of capital assets are added to the Alabama taxable income if the losses are allocated to corpus and are not considered in the determination of the amount to be paid, credited, or required to be distributed to any beneficiary during the taxable year. (e) The amount of income specified in 26 U.S.C. §§643(a)(4), but adjusted to comply with Title 40, Chapter 18, Code of Ala. 1975, is subtracted from the Alabama taxable income. (f) The amount of tax exempt interest income excluded in accordance with Title 40, Chapter 18, Code of Ala. 1975, is added to the Alabama taxable income. (g) The amount of adjustment required by 26 U.S.C. §§643(a) (6), concerning foreign trusts, but adjusted to comply with Title 40, Chapter 18, Code of Ala. 1975, is added to the Alabama taxable income. Author: Voncile Catledge, Joe Garrett, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §40-2A-7(a)(5). History: New Rule: Filed December 27, 2006, effective January 31, 2007. Rule 810-3-25-.12 Revenue 25-.12-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.13 Applicability Of The Subchapter J And Business Trust Conformity Act To Business Trusts. (1) For tax years beginning after December 31, 2004, the classification of a business trust for the purposes of determining the Alabama income tax due shall be in the same manner as the business trust is classified for federal income tax purposes. (2) Generally, the Internal Revenue Code classifies a business trust or a commercial trust as a corporation or a partnership, even if the organization is technically cast in the trust form – see U.S. Treasury Department Regulation §301.7701-4. Author: Voncile Catledge, Joe Garrett, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §40-2A-7(a)(5). History: New Rule: Filed December 27, 2006, effective January 31, 2007. Revenue Rule 810-3-25-.13 25-.13-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.14 Alabama Grantor Trust Reporting Requirements. (1) For tax years beginning after December 31, 2004, grantor trusts, as described in 26 U.S.C. §671, have an Alabama return filing requirement specified by §§40-18-25 (g) and 40-18-29, Code of Ala. 1975. (2) Grantor trusts, as described in 26 U.S.C. §671, required to comply with U.S. Treasury Department Regulation §1.671-4(a) must file returns as prescribed by the Alabama Department of Revenue in accordance with §40-18-29, Code of Ala. 1975. (a) The information return for a grantor trust will require: the sources and amounts of income for the trust; the types and amounts of deductions for the trust; an identification of the beneficiaries or owners with the applicable social security numbers or federal employer identification numbers; the amount of income reportable on the federal income tax return for the same tax year for each beneficiary or owner; and, the amount of deductions to be claimed on the federal income tax return for the same tax year for each beneficiary or owner (3) Grantor trusts, as described in 26 U.S.C. §671, allowed to use the simplified filing methods specified in U.S. Treasury Department Regulation §1.671-4(b) and which comply with the simplified filing methods of the regulation, are deemed to have complied with the filing requirements of §§40-18-25(g) and 40-18-29, Code of Ala. 1975. (a) The grantor or other person treated as the owner of the grantor trust must report the income and the deductions of the grantor trust on its Alabama income tax return, in accordance with Title 40, Chapter 18, Code of Ala. 1975. (b) The grantor or other person treated as the owner of the grantor trust must disclose on its Alabama income tax return: 1. The name of the grantor trust; 2. The total income from the grantor trust that was reported on the federal income tax return of the grantor or owner for the same tax year as the Alabama return; and, Revenue Rule 810-3-25-.14 25-.14-1

3. The total deductions from the grantor trust that were claimed on the federal income tax return of the grantor or owner for the same tax year as the Alabama return. Author: Voncile Catledge, Joe Garrett, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §40-2A-7(a)(5). History: New Rule: Filed December 27, 2006, effective January 31, 2007. Rule 810-3-25-.14 Revenue 25-.14-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.15 Computation Of Alabama Taxable Income For A Foreign Trust, For Tax Years Beginning After December 31, 2004. (1) The term “foreign trust” will have the same meaning for Alabama income tax purposes, as is used in with Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code, 26 U.S.C. §§641 through 692. (2) Determination of Foreign Trust. The determination as to whether a trust is a foreign trust or a United States trust will be made for Alabama income tax purposes in the same manner the determination is made for federal income tax purposes. (3) Computation of Alabama Taxable Income. The Alabama taxable income of a foreign trust will be computed in the same manner as the Alabama taxable income of a nonresident trust is computed. (4) Withholding Requirement. Any withholding applicable to a foreign trust for federal income tax purposes applies equally to Alabama income tax. The rate of Alabama income tax withholding would be equal to the maximum tax rate the owner or grantor is subject to under Alabama income tax law. (5) Required Reporting. Any foreign trust; foreign trust owner; grantor of a foreign trust; beneficiary of a foreign trust; transferor or property to a foreign trust; or, distributor of property from a foreign trust to a United States person; subject to special reporting by Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code, 26 U.S.C. §§641 through 692, will have similar special reporting requirements under Alabama income tax law. Author: Voncile Catledge, Joe Garrett, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §40-2A-7(a)(5). History: New Rule: Filed December 27, 2006, effective January 31, 2007. Revenue Rule 810-3-25-.15 25-.15-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-25 ESTATES AND TRUSTS 810-3-25-.16 Credit For Income Taxes Paid To Another State Or Territory By A Resident Estate Or Trust. (1) For tax years beginning after December 31, 2004, if a resident estate or trust conducts a trade or business both in Alabama and in one or more other states or territories, the resident estate or trust is entitled to a credit to be applied to the Alabama income tax for the amount of income tax actually paid to another state or territory on income earned from the conduct of the trade or business in the other states or territories. (2) The credit for income taxes paid to another state or territory shall be computed in accordance with §40-18-21, Code of Ala. 1975. Author: Voncile Catledge, Joe Garrett, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §40-2A-7(a)(5). History: New Rule: Filed December 27, 2006, effective January 31, 2007. Revenue Rule 810-3-25-.16 25-.16-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-26 INFORMATION FROM SOURCE OF INCOME 810-3-26-.01 Information Returns. (1) All resident payers engaged in a trade or business and making nonwage payments of fifteen hundred dollars ($1,500) or more within a calendar year to any person (whether a resident or nonresident) are required to issue an information return (Federal Form 1099) to the payee and file a copy of such return with the Department. Payments which are required to be reported include all nonwage payments exceeding $1,500 which must be included in the gross income of the recipient under Title 40, Code of Ala. 1975. (2) Information to be reported. Each Form 1099 must include the following information: (a) The payer's name, address and taxpayer identification (federal employers identification number or social security number), (b) The payee's name, address and taxpayer identification number, (c) The amount of payments made during the calendar year, and (d) The type of payment made during the year. (3) Combined Federal/State Information Return Reporting Program. Under the Combined Federal/State Information Return Reporting Program a single filing containing the required payee information us submitted electronically to the I.R.S. by the payer. A separate filing is not required to be sent to the Department by the payer. The I.R.S. will then forward the information to the appropriate state’s Revenue Department. Departmental approval to participate in the program is not required Payer’s should contact the I.R.S. for the appropriate approval and instructions. (a) Payers who have elected to voluntarily withhold income tax from payments referred to in this section may not participate in the Combined Federal/State Information Return Reporting Program. See Rule 810-3-75-.04 and 810-3-26-.02 for filing requirements for payers who have voluntarily withheld Alabama income tax. (4) Filing Dates. Revenue Rule 810-3-26-.01 26-.01-1

(a) Statement to Payee. On or before January 31 of the year following a nonwage payment, payers shall provide to each payee a completed Form 1099 as described above. (b) Duplicate to Department. A copy of each Form 1099 Form 1096 (Annual Information Return - Summary Reports of Income Payments of $1,500 or More) must be filed with the Department on or before March 15th of the year following the year in which the payments were made. (5) Miscellaneous Provisions. (a) Noncash payments. If payment is made in a form other than cash, the fair market value of the noncash payment is the amount to be reported. (b) Voluntary withholding. Withholding of Alabama income tax from payments described in this section is not mandatory. Voluntary withholding, however, is permitted. For reporting and remitting amounts voluntarily withheld, see §§40-18-74, 40-18-76, 40-18-77, 40-18-78, and Rules 810-3-75-.04 and 810-3-26-.02. (6) Penalties. (a) Any person who fails to comply with the requirements of this section shall be subject to the penalties provided for in §40-2A-11, Code of Ala. 1975. (b) In addition to the penalties provided for in §40-2A-11, the $50 civil penalty provided for in §40-29-74, Code of Ala. 1975, shall apply. Author: Neal Hearn Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-26. History: Adopted September 30, 1982. Amended September 7, 1988; Amended September 8, 1988; filed October 26, 1988; Amended February 8, 1989; filed March 20, 1989. Amended filed October 4, 1993; effective November 8, 1993. Amended: Filed March 31, 2000; effective May 5, 2000. Amended: Filed February 12, 2016; effective March 28, 2016. Rule 810-3-26-.01 Revenue 26-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-26 INFORMATION FROM SOURCE OF INCOME 810-3-26-.02 Voluntary Withholding Of Alabama Income Tax From Nonwage Payments. (1) Alabama income tax is not required to be withheld from distributions from a retirement or pension plan, interest payments or other nonwage payments. However, voluntary withholding of Alabama income tax is permissible. If a payer of nonwage payments voluntarily withholds Alabama income tax, the following procedures must be followed: (a) Payments of amounts withheld must be remitted to the Department in the same manner and at the same time as described in §40-18-74, Code of Ala. 1975. (b) On or before January 31 of the year following a nonwage payment from which Alabama income tax was withheld, the payer shall issue the recipient a statement showing the following information: 1. Year of payment. 2. Amount of payment. 3. Amount of Alabama income tax withheld. 4. Amount of federal income tax withheld. 5. Name and address of recipient. 6. Social security number of recipient. 7. Payer's name, address, and Alabama withholding tax account number. 8. Payer's federal employer identification number. (2) See Rule 810-3-26-.01 for form requirements. (3) On or before the last day of January of the year following a nonwage payment from which Alabama income tax was withheld, the payer shall file with the Department a copy of the statement described in the above paragraph (1)(b). Such statement must be accompanied by Form A-3, Annual Reconciliation of Alabama Income Tax Withheld. This statement must be filed in the same manner as described in §40-18-75. Revenue Rule 810-3-26-.02 26-.02-1

Author: Neal Hearn Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-26, 40-18-75. History: New Rule: Filed August 26, 1999; effective August 30, 1999. Amended: Filed February 12, 2016; effective March 28, 2016. Rule 810-3-26-.02 Revenue 26-.02-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-26 INFORMATION FROM SOURCE OF INCOME 810-3-26-.03 Reporting Requirements Of Payment Settlement Entities (PSE). (1) Payment settlement entities, third party settlement organizations, electronic payment facilitators or other third parties acting on behalf of a payment settlement entity, all as defined in IRC Section 6050W who are required to file 1099-K information returns with the IRS relating to payments made in settlement of payment card and third-party network transactions must also file a duplicate of such returns with the Department. (2) Such returns must be filed electronically with the Department and shall include one of the following in their electronic submission: (a) a duplicate of all 1099-K information returns filed with the IRS, or (b) a duplicate of all 1099-K information returns related to Alabama taxpayers or participating payees with an Alabama address. (3) A copy of each Form 1099-K must be filed electronically with the Department on or before 30 days after the due date prescribed by IRC Section 6050W and regulations promulgated thereunder each year following the year in which the payments were made. If an extension has been granted by the IRS to the reporting entity, the extension will automatically apply for Alabama purposes. If a due date falls on a federal or state observed holiday, or the weekend, the next business day will be considered as timely filed. (4) The duplicate 1099-K information returns received by the Department shall be restricted for use only to those taxes administered by the Department. (5) Penalties for non-compliance. (a) The first violation for any reporting entity failing to timely file the required duplicate 1099-K information with the Department shall result in a written warning advising the entity of their non-compliance, the penalty for future non- compliance, and will provide a 30-day period in which to file the information. Revenue Rule 810-3-26-.03 26-.03-1

(b) Subsequent violations or non-compliance shall result in a penalty of $1000 for each month or fraction of a month during which non-compliance continues. (c) The Department has the authority to waive all or a portion of a penalty if it is shown that the failure to file was due to reasonable cause and not willful neglect. Author: Neal Hearn, Cameran Clark Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-2A-11(2)(a), 40-23-261. History: New Rule: Filed January 5, 2018; effective February 19, 2018. Rule 810-3-26-.03 Revenue 26-.03-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.01 When An Individual Return Is Required. (1)(a) Each resident shall file a return for each tax year if single or married but not living with husband or wife, and having for the year a net income (as defined in §40-18-12) of $1,500 or more; or if married and living with husband or wife and having a net income of $3,000 or more for the tax year. (b)1. A husband and wife, each having income for the tax year, may file separate returns reporting the income and deductions of each, or they may elect to file a joint return reporting their combined income and deductions. A joint return may only be filed when - (i) both spouses have the same tax year (except when one spouse dies during the tax year), and (ii) both spouses were residents of Alabama for the tax year. 2. A joint return must be signed by both husband and wife. 3. The election to file a joint return is irrevocable after the due date of the return for any tax year. 4.(i) If a husband and wife file a joint return, they shall be jointly and severally liable for the tax shown by said return, or as may be determined by the Department to be due by them. (ii) Innocent Spouse Rule. (I) General Rule. For tax years beginning after August 10, 1987, if a joint return was made for such tax year and - I. on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse, and II. the other spouse (innocent spouse) establishes that in signing the return such innocent spouse did not know, and had no reason to know, that there was a substantial understatement, and Revenue Rule 810-3-27-.01 27-.01-1

III. taking into account all the facts and circumstances, it is inequitable to hold such innocent spouse liable for the deficiency in tax for such tax year attributable to such substantial understatement by the other spouse, then the innocent spouse shall be relieved of liability for tax (including interest, penalties and other amounts) for such tax year to the extent such liability is attributable to such substantial understatement. (II) Definitions. For purposes of this subsection (ii): I. the term "grossly erroneous items" means, with respect to any spouse - A. any item of gross income attributable to such spouse which is omitted from gross income, and B. any claim of a deduction, credit, or basis by such spouse in an amount for which there is no basis in fact or law. II. the term "substantial understatement" of tax means any understatement which exceeds $500. (If the understatement of tax is not more than $500, the innocent spouse is not relieved of joint liability.) III. the term "understatement" means the excess of the amount of tax required to be shown on the return for the tax year (reduced by any credits allowed by §40-18-21) over the amount shown on the return as filed by the taxpayer (reduced by any credits allowed by §40-18-21). IV. the term "preadjustment year" means the most recent tax year of the innocent spouse ending before the date an assessment is issued pursuant to §40-18-40. (If the assessment is not issued in the first year following the year of the understatement, the "preadjustment year" will be a year which occurs after the year of the understatement.) V. the term "inequitable" means the innocent spouse received no benefit, directly or indirectly, from the understatement by the other spouse. Rule 810-3-27-.01 Revenue 27-.01-2

(III) Limitations And Exceptions. I. This subsection (ii) shall apply only (the innocent spouse will be relieved of joint liability for the understatement by the other spouse) if - A. the adjusted gross income of the innocent spouse for the preadjustment year is more than $5,000 but not more than $20,000, and the understatement is greater than ten percent (10%) of such adjusted gross income, or B. the adjusted gross income of the innocent spouse for the preadjustment year is greater than $20,000 and the understatement is greater than twenty- five percent (25%) of such adjusted gross income. (A) If the innocent spouse is married to another spouse at the close of the preadjustment year, the innocent spouse's adjusted gross income shall include the income of the new spouse, whether or not they file a joint return. II. The limitation in subsentence I. above shall not apply to any liability attributable to the omission of an item from gross income. (The relief from joint liability for an innocent spouse may be available, regardless of the ratio of the understatement to the innocent spouse's adjusted gross income in the preadjustment year if the understatement resulted from the omission of an item of gross income by the other spouse.) (c) If the taxable period is less than twelve months a return is required if the net income is more than the exemption computed for the fractional part of the year. See Reg. 810-3-19-.02(3) for proration of exemptions. (d) If the taxpayer is unable to make a return, his duly authorized agent or guardian is required to file the return. (2)(a) Every nonresident individual, receiving income from property owned or business transacted within Alabama, which is more than his prorated Alabama personal exemption is required to file a return. For income from property owned or business transacted in the state, see Reg. 810-3-14-.05. For deductions Revenue Rule 810-3-27-.01 27-.01-3

allowable to nonresidents, see Reg. 810-3-15-.21. For proration of the exemptions of a nonresident, see Reg. 810-3-19-.02(4). In order to receive the deductions authorized by §40-18-15, a nonresident shall make a complete return of his gross income both from within and from without Alabama. (b)1. A nonresident individual may file a joint return with his spouse as provided in subparagraph (1)(b) above, even if only one spouse has income from sources within Alabama. 2. If both spouses have income from sources within Alabama, each may file a separate return reporting their separate income and deductions, or they may file a joint return if (i) both spouses have the same tax year and (ii) both were nonresidents of Alabama for the entire tax year. 3. The provisions of section (1)(b)4. above (innocent spouse rule) are applicable to joint returns filed by nonresidents. Author: Mary L. Gifford, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-27. History: Adopted: September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Rule 810-3-27-.01 Revenue 27-.01-4

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.02 Preparation And Filing Of Individual Taxpayer's Return. (1) Every resident individual taxpayer required to file a return should do so using Form 40 or Form 40A, copies of which may be obtained from the Department. Nonresidents should file using Form 40NR. For use of Form 40A, see Rule 810-3-81-.01. (a) Alabama individual income tax returns can also be filed electronically. See the Electronic Tax Return Filing Act, §§40-30-1 through 40-30-6, Code of Ala. 1975. See also Rules 810-3-27-.04 through 810-3-27-.08. (2) Every person who prepares a tax return for another shall show his name, address, and social security number. However, this information may be provided pursuant to the provisions of IRS Notice 2004-54. (3) The return must be signed or otherwise validated under penalty of perjury by the taxpayer and the person who prepares the return. A joint return must be signed or otherwise validated by both spouses. Each spouse included in a joint return will be jointly and severally liable for any tax due on such return, or as may be determined to be due by the Department. (4)(a) Returns of income must be filed on or before the fifteenth day of the fourth month following the close of the taxable year. In the case of a final return of a decedent for a fractional part of a year, the return must be filed on or before the fifteenth day of the fourth month following the close of the twelve-month period which began with the first day of such fractional part of the year. (b) Any return which is postmarked on or before the due date will be deemed timely filed. See Rule 810-1-5-.01. Author: Richard Henninger, Patricia L. Wilborne, CPA, Ann F. Winborne, CPA, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-27. History: Adopted: September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed July 26, 1999; effective August 30, 1999. Amended: Filed January 19, 2006; effective February 23, 2006. Revenue Rule 810-3-27-.02 27-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.03 Extension Of Time For Filing Of Individual Taxpayer's Return. (1) An individual will be granted an automatic six-month extension of time for filing an individual income tax return. (2) Except in the case of taxpayers who are outside the United States, extensions will not be granted for more than six months. (3) An individual who fails to file the required return by the extended due date may not be granted an automatic extension the following (ensuing) year, but may be required to request the extension in writing. If a written request is required, the request must be made to the Commissioner of Revenue or to his designee, and must explain the reason for the request and the reason for failing to timely file the return in the previous year. The request also must state that the individual has no outstanding debts owed to the Department. (4) An extension of time granted pursuant to this section is not an extension of time for payment of tax. The amount of tax due must be paid on or before the due date of the return without regard to the extension to file the return. (a) Payment of the tax shall be made via the paper Payment Voucher or by Electronic Funds Transfer (EFT). (b) However, payment must be made via EFT if the payment exceeds $25,000. Please refer to Regulations 810-13-1-.01 and 810-13-1-.02. (c) Underpayment of tax penalties plus any applicable interest will be imposed as provided by law without regard to any extension granted under this section. Author: Richard H. Henninger, Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-27. History: Adopted: September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed May 3, 2000; effective June 7, 2000. Repealed: Filed October 12, 2001; effective November 16, 2001. Amended: Filed November 7, 2005; effective December 12, 2005. Amended: Filed November 26, 2008; effective December 31, 2008. Revenue Rule 810-3-27-.03 27-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.04 Election To Participate In The Federal/State Electronic Filing Program. (1) The Department will participate with the Internal Revenue Service in the Federal/State Electronic Filing Program for the joint electronic filing of individual income tax returns, effective for tax year(s) 1997 and after. Author: Ed Cutter, Tavares Matthews Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-4. History: New Rule: Filed April 23, 1998; effective May 28, 1998. Amended: Filed April 9, 2018; effective May 24, 2018. Revenue Rule 810-3-27-.04 27-.04-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.05 Requirements For The Alabama Electronic Individual Income Tax Return. (1) SCOPE - This regulation explains the requirements for an electronic Individual Income Tax Return to be complete and timely filed. Terms are defined to clarify when an electronic return is considered to be timely filed for accepted and rejected returns. (2) Definitions: (a) XML Schema – A single file or collection of files that describe the structure of an XML instance document along with rules for data content and semantics such as what fields an element can contain, which sub elements it can contain, and how many items can be present. It can also describe the type and values that can be placed into each element or attribute. (b) XML instance document – The actual return data defined by the XML Schema. This document is validated against the XML schema to ensure the contents and structures are correct. (c) Business Rules – A document that defines the criteria that needs to be met for an electronic return to be accepted based on the filing instructions and system requirements for a specific tax return. (d) Individual Income Tax – The tax levied by Sections 40-18-2, Code of Ala. 1975. (e) Software Developer - An Authorized IRS e-file Provider that develops software for the purposes of (a) formatting the electronic portions of returns according to Publication 4164 or Department specifications and/or(b) transmitting the electronic portion of returns directly to the IRS. A Software Developer may also sell its software. (f) Electronic Return Originator (ERO) – A firm, organization, or individual who is an authorized IRS e-file provider that originates the electronic submission of returns. Because the electronic filing process is a joint program between the IRS and the Department, an ERO must be approved by the Internal Revenue Service to qualify for this program. (g) AL8453 - A document used to satisfy signature requirements for electronically filed Individual Income Tax Returns Revenue Rule 810-3-27-.05 27-.05-1

submitted to the State of Alabama by an Electronic Return Originator (ERO). (h) AL8453OL - A document used to satisfy signature requirements for electronically filed Individual Income Tax Returns submitted to the State of Alabama by an Online Filer. (i) Accepted return – An Alabama Individual Electronic Income Tax Return that has successfully completed the schema and business rules validation process and the Department has sent an acknowledgement with an Acceptance Status of “Accepted” for MeF (Modernized e-File) returns. (j) Rejected Return – An Alabama Individual Electronic Income Tax Return that was received, but failed to complete the schema and or business rule validation process and the Department has sent an acknowledgement with an Acceptance Status of “Rejected” for MeF returns. (k) Transmission Perfection Period – A ten (10) calendar day period from the date of the first transmission of an Individual MeF (Modernized E-file) Income Tax Return that a taxpayer has to correct and resubmit a rejected electronically transmitted Individual MeF Income Tax Return that was originally timely filed. (l) Electronic Postmark – A record of the date and time (in a particular time zone) that an authorized electronic return transmitter receives the transmission of a taxpayer’s electronically filed document on its host system. However, if the taxpayer and the electronic return transmitter are located in different time zones, it is the taxpayer’s time zone that controls the timeliness of the electronically filed document. (m) Timely Filed Return – An electronic return that is received and accepted by the due date or within the six-month automatic extension period. It also includes a timely filed rejected return that is resubmitted and accepted during the transmission perfection period. (n) Electronic Return Transmitter – An authorized IRS e-file Provider that transmits the electronic portion of a return directly to the IRS or the Department. An entity that provides a “bump up” service is also a Transmitter. A bump up service provider increases the transmission rate or line speed of formatted or reformatted information that it is sending to the IRS. (o) Standard Letter of Intent (LOI) – A form which must be completed to request approval from the Department to provide tax preparation software for electronic forms submissions. By completing this form, the software developer agrees to comply with all national security summit standards and requirements Rule 810-3-27-.05 Revenue 27-.05-2

in addition to the specific Alabama requirements included in the LOI. (p) Acceptable Individual Income Tax Return – Any original Individual tax return that is authorized by the Department to be filed solely using electronic technology as defined in Section 40-30-3(2), Code of Ala. 1975. (q) Submission Error Rate – A Software Developer’s percentage of business rule rejections compared to the total amount of returns submitted. This will be calculated by taking the total amount of business rule rejections per form type for a particular form year divided by the total amount of returns transmitted for that same form type with regards to the form year in question. (r) Original Individual Income Tax Return – Any return that is required to be filed with respect to the tax imposed as defined by Section 40-18-2, Code of Ala. 1975. (s) Tax Preparation Software – Any computer software program intended for accounting, tax preparation, and or tax compliance. (t) Electronic Signature Pad – An electronic device with a touch sensitive LCD screen which allows users to acquire and register a signature or any other physical signature capture device that captures and converts a signature into an electronic format. (u) Suitability – A check conducted on all software developers including rebranded and white labeled products, when an application is initially processed and on a regular basis thereafter. The suitability check may include background and personal tax compliance checks conducted by the department to ensure the software developers are eligible for participation in the Department’s e-file program. (v) Acceptance or Assurance Testing (ATS) – Required testing for software developers that participate in the Department’s Individual e-file program. This testing is used to assess their software and transmission capability with the department prior to live processing. (2) Return Filing Requirements: (a) A complete Alabama Electronic Individual Income Tax Return will consist of XML data transmitted electronically and supporting binary documents (such as .pdf documents, if applicable) as required by the Alabama Individual Modernized Electronic Filing (MeF) schemas, business rules, and Handbook for Software Developers and Transmitters (Publication 4164). A complete Alabama electronic return must contain the same Revenue Rule 810-3-27-.05 27-.05-3

information as a comparable Alabama Individual Income Tax Return as if filed entirely on paper. (3) Timely Filed Information for Accepted and Rejected Returns: (a) The electronic postmark or IRS received date of an accepted Alabama Electronic Individual Income Tax Return will be used to determine timely filing of an electronic return in the same manner that the postmarked date is used to determine timely filing of a paper Alabama Individual Income Tax Return. (b) The electronic postmark (based on the taxpayer’s time zone) will be used as the received date of the electronic transmission if the electronic postmark is within three (3) days of the IRS received date. However, if there is no electronic postmark date or if the electronic postmark date is greater than three (3) days of the IRS received date, then the IRS received date will be used. (c) If a timely filed electronic return is rejected, the filer has the later of 10 calendar days from the date of the first transmission or the due date of the return (with extensions) to correct the errors and resubmit the return. In order for the Department to acknowledge the transmission date of the original return, the submission ID of the original return must be transmitted in each subsequent filing. If the return is resubmitted and accepted after the due date (with extensions) or the transmission perfection period, the received date will be the transmission date of the accepted resubmitted (perfected) return and not the date that the original rejected return was submitted. (d) Perfection of a return for electronic re-transmission is generally required when the original timely filed electronic return had errors in the XML format, or errors that caused the return to fail Alabama Individual Income tax MeF schema validation and/or business rules. Therefore, the transmission perfection period is not an extension of time to file; it is a period of time to correct errors in the electronic file. (e) If a filer is unable to correct a rejected Alabama Individual income tax electronic return to an accepted status, the filer must submit their paper return with a copy of the last rejection notification from the Department. To be considered timely filed, this paper return must be postmarked by the later of the due date of the return (including extensions) or 10 calendar days after the date that Alabama last gives notification that the return was rejected. If the return is received after the due date or the transmission perfection period, the received date will be the transmission date of the return. Author: Tavares Mathews Rule 810-3-27-.05 Revenue 27-.05-4

Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-5. History: New Rule: Filed April 23, 1998; effective May 28, 1998. Repealed and New Rule: Filed February 6, 2018; effective March 23, 2018. Revenue Rule 810-3-27-.05 27-.05-5

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.06 Requirements For The Individual Income Tax Declaration For Electronic Filing. (1) SCOPE – This rule defines the information required for the Individual Income Tax declaration for electronic filing which includes forms 40 and 40NR that are filed through the Alabama Individual Modernized E-File Program. (2) The Individual Income Tax Declaration for Electronic Filing requires the following information: (a) The taxpayer’s first name, middle initial and last name. (b) The taxpayer’s social security number. (c) If a joint return, the spouse’s first name, middle initial, last name and social security number. (d) The taxpayer’s address. (e) The Alabama taxable income reported by the electronic return. (f) The net tax liability reported by the electronic return, which is computed by adding the net tax due Alabama to the voluntary contributions to the Alabama Election Campaign Fund and the Neighbors Helping Neighbors Fund. (g) The total tax payments reported by the electronic return. (h) The amount of the refund reported by the electronic return. (i) The signature of the taxpayer and date of the signature. (j) If a joint return, the signature of the spouse and date of the signature. (k) The signature of the electronic return originator and date of the signature. (l) An indication whether the electronic return originator is self-employed. (m) The firm name of the electronic return originator. Revenue Rule 810-3-27-.06 27-.06-1

(n) The address, including the zip code, of the electronic return originator. (o) The federal employer identification number of the electronic return originator. (p) If the paid preparer is different from the electronic return originator, the following information is required: 1. The signature of the paid preparer and date of the signature. 2. An indication whether the paid preparer is self- employed. 3. The firm name of the paid preparer. 4. The address, including the zip code, of the paid preparer. (3) The signatures of the taxpayer(s), the electronic return originator, and the paid preparer (if the paid preparer is different from the electronic return originator) must be affixed to the Alabama Form AL8453 - Individual Income Tax Declaration for Electronic Filing before the return is electronically transmitted. (4) Consent to the disclosure of all information pertaining to the user of the computer system and software used to create the individual return and to the electronic transmission of the Individual Income Tax Return to the Department. (5) An Electronic Signature Pad may be used to sign the Individual Income Tax Declaration for Electronic Filing document. Author: Ed Cutter, Tavares Mathews Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-5. History: New Rule: Filed April 23, 1998; effective May 28, 1998. Amended: Filed February 6, 2018; effective March 23, 2018. Rule 810-3-27-.06 Revenue 27-.06-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.07 Acceptance, Monitoring, And Revocation Of Acceptance Into The Alabama Individual Modernized E-File Program For Software Developers – Individual Income Tax Returns. (1) SCOPE – This rule explains the requirements for software developers to obtain and sustain active approval to provide software that allows individual income tax returns to be electronically filed through the Alabama Individual Modernized E- File program. (2) Software developers must be approved on an annual basis and maintain good standing with the Department. The Department has the right to deny an applicant acceptance into the Alabama Individual Modernized E-File Program. To obtain approval software developers must adhere to the following guidelines: (a) Be accepted by and in good standing with the Internal Revenue Service (IRS) Electronic Filing Program. (b) Have satisfactorily completed the Department’s software developer suitability approval process. (c) Have an approved Letter of Intent, with original officer signature, on file with the Department. (d) Have satisfactorily completed the Individual Acceptance Testing System (ATS) with the Department. (3) XML Schemas (record layouts), specifications, and business rules for a complete Alabama electronic individual income tax return are issued annually by the Department. In addition, the Department annually releases the Alabama Individual Modernized E- file Program: Handbook for Software Developers and Transmitters (Publication AL4164), which provides supplemental information pertinent to electronic return development. (4) Software developer testing will occur in conjunction with IRS testing in accordance with Publication AL4162, Alabama Individual MeF Test Package. (5) Alabama electronic individual income tax returns received by the Department that are prepared by a software developer who has not completed the Department’s software developer testing and has not been approved by the Department will be rejected by the Revenue Rule 810-3-27-.07 27-.07-1

Department. Paper Alabama Individual Income Tax Returns must then be submitted by the taxpayer or the taxpayer may electronically file the tax return using an approved software from another software developer. (6) The Department will conduct random monitoring visits with software developers to verify that the requirements of the Alabama Electronic Filing Program are being met. (7) The Department reserves the right to request a copy of the most current copy of the software product that is utilized in production. (8) The Department reserves the right to revoke the acceptance of a software developer for cause. Failure to comply with the guidelines set forth in Alabama Individual Modernized E-file Program: Handbook for Software Developers and Transmitters (Publication AL4164) is considered cause. (9) Any of the following can result in the revocation of a software developer’s acceptance into the Alabama Individual Modernized E-File Program: (a) Conviction of a criminal offense under the revenue laws of any state or of any offense involving dishonesty or breach of trust. (b) Failure to file timely and accurate tax returns, both personal and business. (c) Failure to pay personal tax liabilities or business tax liabilities. (d) Failure or refusal to effect corrective action as required by the Department. (e) Other facts or conduct of a disreputable nature that would reflect adversely on the Alabama Individual Modernized E-File Program. (f) Unethical practices in return preparation. (g) Suspension by IRS. (h) Prior year submission error rate of 70% or greater. (i) Failure to comply with any of the items listed in section 2 of this rule. Author: Tavares Mathews Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-6. Rule 810-3-27-.07 Revenue 27-.07-2

History: New Rule: Filed April 23, 1998; effective May 28, 1998. Repealed and New Rule: Filed February 6, 2018; effective March 23, 2018. Revenue Rule 810-3-27-.07 27-.07-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.08 Acceptance, Monitoring, And Revocation Of Acceptance Into The Alabama Individual Modernized E-File Program For Electronic Return Originators And Transmitters. (1) SCOPE – This rule explains the requirements for electronic return originators and transmitters (not to include software developers and transmitters – See Rule 810-3-27-.07) to obtain and sustain active approval to serve as an Alabama Department of Revenue electronic filing agent in order to transmit returns through the Alabama Individual Modernized E-File Program. (2) Electronic return originators and transmitters accepted by and in good standing with the Internal Revenue Service (IRS) Electronic Filing Program are automatically accepted into the Alabama Electronic Filing Program. This does not include software developers. They must complete the approval process with the Alabama Department of Revenue (See Rule 810-3-27-.07). (3) Electronic return originators and transmitters accepted into the Alabama Electronic Filing Program serve as agents of the Alabama Department of Revenue, and must comply with the requirements of the program as stated in the Alabama Handbook for Modernized e-File (MeF) for Individual Preparers (Publication AL4163). (4) The Alabama Department of Revenue will conduct random monitoring visits with Electronic Return Originators and Transmitters to verify that the requirements of the Alabama Electronic Filing Program are being met. (5) The Alabama Department of Revenue reserves the right to revoke the acceptance of an electronic return originator or transmitter for cause. Failure to comply with the guidelines set forth in Alabama Handbook for Modernized e-File (MeF) for Individual Preparers (Publication AL4163) is considered cause. (6) Any of the following can result in the revocation of an electronic return originator’s or transmitter’s acceptance into the program: (a) Conviction of a criminal offense under the revenue laws of any state or of any offense involving dishonesty, or breach of trust. Revenue Rule 810-3-27-.08 27-.08-1

(b) Failure to file timely and accurate tax returns, both personal and business. (c) Failure to pay personal tax liabilities or business tax liabilities. (d) Failure or refusal to effect corrective action as required by the Alabama Department of Revenue. (e) Other facts or conduct of a disreputable nature that would reflect adversely on the Alabama Electronic Filing Program. (f) Unethical practices in return preparation. (g) Suspension by IRS. Author: Ed Cutter, Tavares Mathews Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-6. History: New Rule: Filed April 23, 1998; effective May 28, 1998. Amended: Filed February 13, 2018; Effective March 30, 2018. Rule 810-3-27-.08 Revenue 27-.08-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.09 Alabama Requirements For Mandatory E-File And Application Of Two-Dimensional (2-D) Barcode On Original Individual Income Tax Returns. (1)(a) If an income tax return preparer prepares 11 or more acceptable, original individual income tax returns using tax preparation software in a calendar year, then for that calendar year and for each subsequent calendar year thereafter, all acceptable individual income tax returns prepared by that income tax preparer must be filed using electronic technology, as defined in the “Electronic Tax Return Filing Act,” as codified in Chapter 30 of Title 40, Code of Ala. 1975. (b)1. If a paid, income tax return preparer prepares individual income tax returns using tax preparation software and is not required under subparagraph (a) to electronically file the returns, then the paper returns must include the technology commonly referred to as two-dimensional (2-D) barcode technology if such returns using this technology conform to the format prescribed by the Department. 2. If a paid, income tax return preparer prepares individual income tax returns using tax preparation software and is required under subparagraph (a) to electronically file the returns, but does not submit the returns electronically, then the paper returns must include a signed, election form to “opt out” of electronic filing in addition to including the 2-D barcode technology. (2) For purposes of this rule, the following definitions apply: (a) “Income tax preparer” means a person that meets both the following: 1. Any person that prepares an Alabama individual income tax return in exchange for compensation. 2. Or any person who employs another person to prepare, in exchange for compensation, any current year Alabama individual income tax return. (b) “Original individual income tax return” means any return that is required, to be filed with respect to the tax imposed as defined by Section 40-18-2, Code of Ala. 1975. For purposes Revenue Rule 810-3-27-.09 27-.09-1

of paragraph (1)(a) and (1)(b) above, a “timely” original individual tax return means any original individual tax return that is filed, without regard to extensions, during the calendar year for which that tax return is required to be filed. (c) “Acceptable individual income tax return” means, for the purposes of the mandatory individual income tax filing program, any original individual tax return that is authorized by the Department to be filed solely using electronic technology as defined in Section 40-30-3(2), Code of Ala. 1975. (d) “Tax preparation software” means any computer software program intended for accounting, tax return preparation, or tax compliance. (3)(a) Paragraph (1)(a) of this rule, applies to acceptable individual income tax returns required to be filed for taxable years beginning on and after January 1, 2004 and may not be interpreted to require electronic filing of acceptable individual income tax returns that are required to be filed on or before January 1, 2004. (b) Paragraph (1)(b) of this rule, applies to acceptable individual income tax returns required to be filed for taxable years beginning on and after January 1, 2009. Author: Veronica Jennings, Kathleen Campbell, Ann F. Winborne, CPA, Michael E. Mason, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-40, 40-30-1 through 6. History: New Rule: Filed June 4, 2004; effective July 9, 2004. Amended: Filed November 7, 2005; effective December 12, 2005. Amended: Filed November 26, 2008; effective December 31, 2008. Amended: Filed January 17, 2013; effective February 21, 2013. Rule 810-3-27-.09 Revenue 27-.09-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-27 INDIVIDUAL TAXPAYERS' RETURNS 810-3-27-.10 Alabama Requirements For Compliance With Administrative Rule 810-3-27-.09. (1) An income tax preparer may be subject to a random monitoring visit for not electronically filing returns or for submitting returns without a two-dimensional (2-D) barcode containing the tax return information in a standard format as prescribed by the Department. (2) If it is shown that failure to electronically file or print a 2-D barcode on an acceptable original individual income tax return is due to willful neglect and not due to reasonable cause, then that tax preparer’s acceptance in the Alabama e-file program shall be revoked, and that tax preparer shall be unable to electronically transmit individual income tax returns to the Department. (3) For purposes of this rule, reasonable cause includes, but is not limited to: (a) A taxpayer may elect not to electronically file an acceptable original individual income tax return by filing an election form to “opt out” of electronic filing. This form must be prescribed by the Department, and must be signed by the taxpayer, or taxpayers in the case of a joint return, and by the preparer. The form must be attached and filed with the paper, original individual income tax return. (b) Any electronically prepared original individual income tax return that cannot be filed or transmitted electronically by the tax preparer, or any original individual income tax return that cannot be accepted by the Department. (3) Any original individual income tax return prepared, including those not electronically filed due to “reasonable cause,” as indicated in subparagraphs (a) and (b) of this rule, will be included in the total mandate return count as defined in 810-3-27-.09. Author: Richard Henninger, Kathleen Campbell, Tavares Mathews, Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-40, 40-30-1 through 6. History: New Rule: Filed June 4, 2004, effective July 9, 2004. Amended: Filed March 13, 2007; effective April 17, 2007. Revenue Rule 810-3-27-.10 27-.10-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-28 PARTNERSHIP RETURNS 810-3-28-.01 Partnership Returns. (1)(a) All partnerships having “substantial nexus” from property owned or business conducted in this state shall file the Alabama Form 65 on or before the due date, including extension. All single member limited liability entities having “substantial nexus” from property owned or business conducted in this state shall file the appropriate Alabama income tax return. The appropriate income tax return will be determined based on the entity’s classification for federal purposes, found in IRC Section 7701. Returns for both partnerships and single member limited liability entities, whether filing as a separate entity or as a disregarded entity, as a division of its owner, are required to be filed on or before the date the taxpayer’s corresponding federal tax return is due. If no federal tax return is required, the due date is the date in which the taxpayer would be required to file if the federal return was required. (b) A business has “substantial nexus” in Alabama when factor presence thresholds are met or exceed the thresholds established pursuant to Section 40-18-31.2, Code of Alabama 1975, and rules promulgated thereunder. (c) Any extension of time to file an income tax return allowed for by federal income tax purposes will be recognized for Alabama purposes. 1. A taxpayer is not required to file a separate extension to extend the filing deadline in Alabama. 2. Taxpayers must meet all federal requirements for additional extensions. (d) An Alabama Schedule K-1 must be prepared for each person who held an interest in the subchapter K entity or single member limited liability company during the taxable year showing each partner's or member's name, address, social security or federal employers identification number, distributive share of the income (or loss) of the partnership, and distributive share of charitable contributions made by the partnership. 1. For an Alabama resident partner or member, the K-1 for tax years beginning after December 31, 1996 and before January 1, 2011 shall include: Revenue Rule 810-3-28-.01 28-.01-1

(i) For multi-state subchapter K entities doing business within and without the State of Alabama, only that income which is required to be allocated and apportioned to Alabama under the rules of Section 40-18-22. (If the multi-state subchapter K entity is not doing business in Alabama, no income is reportable to Alabama from that subchapter K entity.) (ii) For a subchapter K entity doing business in only one state, whether the state of Alabama or another state, the distributive share of the entire income from that subchapter K entity. 2. For a non-resident partner or member, the K-1 shall include: (i) For multi-state subchapter K entities doing business within and without the State of Alabama, only that income which is required to be allocated and apportioned to Alabama under the rules of Section 40-18-22. (ii) For a subchapter K entity doing business in Alabama exclusively, the distributive share of the entire income from that subchapter K entity. 3. For an Alabama resident partner or member, the K-1 for tax years beginning after December 31, 2010 shall include amounts determined in accordance with subchapter K of the Internal Revenue Code, 26 U.S.C. §§701-761, Sections 40-18-24 and 40-18-14, Code of Ala. 1975, and without regard to 1. above. Likewise, Alabama resident partners or members of sub-chapter K entities are entitled to a credit computed in accordance with Section 40-18-21(a), Code of Ala. 1975, for taxes paid by (or on e behalf of) the resident partner or member (including composite return and withholding payments) to other states where the sub-chapter K entity does business and is treated as a sub-chapter K entity. (2)(a) The computation of Alabama ordinary income is determined by combining the items necessary to arrive at federal ordinary business income (loss) and making adjustments for items which are treated differently under Alabama law than the treatment under federal law. These adjustments include, but are not limited to, the following: 1. Related members interest or intangible expenses and costs required to be added back if such expenses were deducted in calculating federal ordinary business income, pursuant to Section 40-18-25(b), Code of Ala. 1975. Rule 810-3-28-.01 Revenue 28-.01-2

2. Other reconciling items required to be added back to federal ordinary business income to arrive at Alabama ordinary income, like Federal depreciation that may be in excess of the allowable depreciation for Alabama purposes. Amounts like these would be required to be added back in determining Alabama ordinary income under Section 40-18-35, Code of Ala. 1975. 3. Expenses not deductible in computing federal ordinary business income due to a taxpayer’s election to claim a federal tax credit would be allowed as a deduction on the Alabama return in computing Alabama ordinary income. 4. Other reconciling items allowed to be deducted from federal ordinary business income to arrive at Alabama ordinary income. (b) Federal Form 1065 and accompanying schedules must be attached to Form 65 when filed. (c) The return must be signed by one partner or member and the person who prepared the return, and must contain a printed declaration that it is made under the penalties of perjury. Author: Nancy Butler, Angela Cumbie, Holly Coon, Ann F. Winborne, CPA, Individual Corporate Tax Division, Joe Garrett Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-28. History: Adopted September 30, 1982. Amended: February 8, 1989; filed March 20, 1989. Amended: Filed March 26, 1998; effective April 30, 1998. Amended: Filed November 26, 2008; effective December 31, 2008. Amended: Filed August 3, 2011; effective September 7, 2011. Amended: Filed December 3, 2016; effective January 21, 2017. Revenue Rule 810-3-28-.01 28-.01-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-28 PARTNERSHIP RETURNS 810-3-28-.02 Participation In The Federal/State Electronic Filing Program – Partnership/LLC Returns Of Income. (1) The Department will participate with the Internal Revenue Service in the Federal/State Electronic Filing Program for the joint electronic filing of partnership/LLC returns of income, effective for tax years beginning on or after January 1, 2006. Author: Kathleen F. Abrams, Melissa A. Giles Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); 40-30-4. History: New Rule: Filed January 22, 2007; effective February 26, 2007. Amended: Filed January 27, 2014; effective March 3, 2014. Amended: Filed February 13, 2018; effective March 30, 2018. Revenue Rule 810-3-28-.02 28-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-28 PARTNERSHIP RETURNS 810-3-28-.03 Terms And Definitions For The Alabama Electronic Partnership/LLC Return Of Income. (1) SCOPE – This rule defines certain terms used in connection with the Alabama Business Modernized E-File Program. (2) Definitions (a) XML Schema – A single file or collection of files that describe the structure of an XML instance document along with rules for data content and semantics such as what fields an element can contain, which sub elements it can contain and how many items can be present. It can also describe the type and values that can be placed into each element or attribute. (b) XML instance document – The actual return data defined by the XML Schema. This document is validated against the XML schema to ensure the contents and structures are correct. (c) Business Rules – A document that defines the criteria that needs to be met for an electronic return to be accepted based on the filing instructions and system requirements for a specific tax return. (d) Partnership Income Tax – The tax levied by Section 40-18-28, Code of Ala. 1975. (e) Software Developer - An authorized IRS Provider that develops software for the purposes of (a) formatting the electronic portions of returns according to IRS Publication 4164 or Alabama Department of Revenue specifications and/or (b) transmitting the electronic portion of returns directly to the IRS or the Alabama Department of Revenue. A Software Developer may also sell its software. (f) Electronic Return Originator (ERO) - A firm, organization or individual who is an authorized IRS e-file provider that originates the electronic submission of returns. Because the electronic filing process is a joint program between the IRS and the Alabama Department of Revenue, an ERO must be approved by the Internal Revenue Service to qualify for this program. (g) AL8453-PTE – A document used to satisfy signature requirements for electronically filed S-Corporation/ Revenue Rule 810-3-28-.03 28-.03-1

Partnership/LLC income tax returns submitted to the State of Alabama by an Electronic Return Originator (ERO). (h) Accepted return – An Alabama Partnership/LLC Return of Income declaration that has successfully completed the schema and business rules validation process and the Department has sent an acknowledgement with an Acceptance Status of “Accepted” for MeF (Modernized e-File) returns. (i) Rejected Return – An Alabama Partnership/LLC Return of Income declaration that was received but failed to complete the schema and or business rule validation process and the Department has sent an acknowledgement with an Acceptance Status of “Rejected” for MeF returns. (j) Transmission Perfection Period – A ten (10) calendar day period from the date of the first transmission of a Partnership/LLC MeF (Modernized E-file) return of income allowed to a taxpayer to correct and resubmit a rejected electronically transmitted a Partnership/LLC Return of Income declaration that was originally timely filed. (k) Electronic Postmark – A record of the date and time (in a particular time zone) that an authorized electronic return transmitter receives the transmission of a taxpayer’s electronically filed document on its host system. However, if the taxpayer and the electronic return transmitter are located in different time zones, it is the taxpayer’s time zone that controls the timeliness of the electronically filed document. (l) Timely Filed return – An electronic return that is received and accepted by the due date or within an extension of time for filing the partnership return according to the same manner as allowed by federal law. It also includes a timely filed rejected return that is resubmitted and accepted during the transmission perfection period. (m) Form PTEC – Composite Return and payment by nonresident owner of Subchapter K entity as defined in 810-3-24.1. (n) Electronic Return Transmitter – An authorized IRS e-file Provider that transmits the electronic portion of a return directly to the IRS or the Alabama Department of Revenue. An entity that provides a “bump up” service is also a Transmitter. A bump up service provider increases the transmission rate or line speed of formatted or reformatted information that it is sending to the IRS. (o) Standard Letter of Intent (LOI) – A form which must be completed to request approval from the Alabama Department of Revenue to provide tax preparation software for electronic forms submissions. By completing this form, the software developer agrees to comply with all national security summit Rule 810-3-28-.03 Revenue 28-.03-2

standards and requirements in addition to the specific Alabama requirements included in the LOI. (p) Submission Error Rate – A Software Developer’s percentage of business rule rejections compared to the total amount of returns submitted. This will be calculated by taking the total amount of business rule rejections per form type for a particular form year divided by the total amount of returns transmitted for that same form type with regards to the form year in question. (q) Original Corporate/Partnership Income Tax Return - Any return that is required, to be filed with respect to the tax imposed as defined by Section 40-18-2, Code of Ala. 1975. (r) Acceptable Corporate/Partnership Income Tax Return - Any original Corporate/Partnership Income Tax Return that is authorized by the Alabama Department of Revenue to be filed solely using electronic technology as defined in Section 40-30-3(2), Code of Ala. 1975. (s) Tax Preparation Software – Any computer software program intended for accounting, tax preparation and or tax compliance. (t) Electronic Signature Pad – An electronic device with a touch sensitive LCD screen which allows users to acquire and register a signature or any other physical signature capture device that captures and converts a signature into an electronic format. (u) Suitability – A check conducted on all software developers, including rebranded and white labeled products, when an application is initially processed and on a regular basis thereafter. The suitability check may include background and personal tax compliance checks conducted by the Department to ensure the software developers are eligible for participation in the Alabama Department of Revenue’s e-file program. (v) Business Acceptance or Assurance Testing (BATS) – Required testing for software developers that participate in the Alabama Department of Revenue’s Business e-file program. This testing is used to assess their software and transmission capability with the Department prior to live processing. Author: Kathleen F. Abrams, Veronica Jennings, Melissa A. Gillis Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); 40-30-5. History: New Rule: Filed January 22, 2007; effective February 26, 2007. Amended: Filed January 27, 2014; effective March 3, 2014. Amended: Filed February 22, 2018; effective April 9, 2018. Revenue Rule 810-3-28-.03 28-.03-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-28 PARTNERSHIP RETURNS 810-3-28-.04 Requirements For The Partnership/LLC Return Of Income Declaration For Electronic Filing. (1) SCOPE – This rule defines the information required for the Partnership/LLC Return of Income declaration for electronic filing which includes forms 65 and PTEC that are filed through the Alabama Business Modernized E-File Program. (2) The Partnership/LLC Income Return of Income Declaration for Electronic Filing requires the following information: (a) The partnership/LLC's name. (b) The partnership/LLC’s Federal Employer Identification Number. (d) The Partnership Phone Number. (c) The partnership/LLC’s address. (e) The non-separately stated income allocated and apportioned to Alabama as reported by the electronic return. (f) If applicable, authorization for the ADOR and its designated financial agent to initiate an electronic funds withdrawal (direct debit) entry to the financial institution account indicated in the tax preparation software for payment of the Partnership/LLC’s Alabama taxes owned (as reported on the form PTEC if applicable), and the financial institution to debit the entry to this account. (g) Authorization for the ADOR to discuss the return and attachments with the preparer. (h) Consent to the disclosure of all information pertaining to the user of the computer system and software used to create the business tax return and to the electronic transmission of the business tax return to the Department. (i) The signature of an officer/partner of the partnership/ LLC, their title and date of the signature. The Department will accept a signature made on a signature pad (defined in Rule 810-3-28-.03). Revenue Rule 810-3-28-.04 28-.04-1

(j) The signature of the electronic return originator and date of the signature. (k) An indication whether the electronic return originator is self-employed. (l) The firm name of the electronic return originator. (m) The address, including the zip code, of the electronic return originator. (n) The federal employer identification number of the electronic return originator. (o) If the paid preparer is different from the electronic return originator, the following information is required: 1. The signature of the paid preparer and date of the signature. 2. An indication whether the paid preparer is self- employed. 3. The firm name of the paid preparer. 4. The address, including the zip code, of the paid preparer. (3) The signatures of the officer/partner, the electronic return originator, and the paid preparer (if the paid preparer is different from the electronic return originator) must be affixed to the Alabama Form AL8453-PTE – S-Corporation/ Partnership Income Tax Declaration for Electronic Filing before the return is electronically transmitted. (a) Members of the firm or designated employees may sign for the electronic return originator. (b) If the taxpayer is unable to obtain the paid preparer’s signature on the Alabama Form AL8453-PTE, in lieu of the paid preparer’s signature the electronic return originator may attach to the Alabama Form AL8453-PTE a copy of the appropriate pages of the paper return with the paid preparer’s signature. (c) Electronic return originators and electronic return preparers are prohibited from allowing taxpayers to sign blank Alabama Forms AL8453-PTE. (4) The completed and signed Alabama Form AL8453-PTE will serve as the filing declaration for the electronic Alabama partnership/LLC return of income and the Subchapter K Entities/S Corporations Nonresident Composite Payment Return. Rule 810-3-28-.04 Revenue 28-.04-2

(5) The completed and signed Alabama Form AL8453-PTE must be retained by the electronic return originator for a period of three years from the due date of the return or three years from the date the return was filed, whichever is later. The electronic return originator will provide the Department with the original Alabama Form AL8453-PTE within five business days of receiving a written request for the documents from the Department. Author: Neal Hearn, Kathleen C. Abrams, Veronica Jennings, Melissa Gillis Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); 40-30-5. History: New Rule: Filed January 22, 2007; effective February 26, 2007. Amended: Filed January 28, 2010, effective March 4, 2010. Amended: Filed January 27, 2014; effective March 3, 2014. Amended: Filed January 27, 2015; effective March 3, 2015. Amended: Filed February 22, 2018; effective April 9, 2018. Revenue Rule 810-3-28-.04 28-.04-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-28 PARTNERSHIP RETURNS 810-3-28-.05 Acceptance, Monitoring, and Revocation of Acceptance Into The Alabama Business Modernized E-File Program For Software Developers – Partnership/LLC Returns. (1) SCOPE – This rule explains the requirements for software developers to obtain and sustain active approval to provide software that allows partnership/LLC returns to be electronically filed through the Alabama Business Modernized E-File program. (2) Software developers must be approved on an annual basis and maintain good standing with the Department. The Department has the right to deny an applicant acceptance into the Alabama Business Modernized E-File Program. To obtain approval software developers must adhere to the following guidelines: (a) Be accepted by and in good standing with the Internal Revenue Service (IRS) Electronic Filing Program. (b) Have satisfactorily completed the Department’s software developer suitability approval process. (c) Have an approved Letter of Intent, with original officer signature, on file with the Department. (d) Have satisfactorily completed the Business Acceptance Testing System (BATS) with the Department. (3) XML Schemas (record layouts), specifications, and business rules for a complete Alabama electronic partnership/LLC return are issued annually by the Department. In addition, the Department annually releases the Alabama Business Modernized E-file Program: Handbook for Software Developers and Transmitters (Publication AL4164), which provides supplemental information pertinent to electronic return development. (4) Software developer testing will occur in conjunction with IRS testing in accordance with Publication AL4162, Alabama Business MeF Test Package. (5) Alabama electronic partnership/LLC returns received by the Department that are prepared by a software developer who has not completed the Department’s software developer testing and has not been approved by the Department will be rejected by the Department. Paper Alabama partnership/LLC returns must then be Revenue Rule 810-3-28-.05 28-.05-1

submitted by the taxpayer, or the taxpayer may electronically file the tax return using an approved software from another software developer. (6) The Department will conduct random monitoring visits with software developers to verify that the requirements of the Alabama Electronic Filing Program are being met. (7) The Department reserves the right to request a copy of the most current copy of the software product that is utilized in production. (8) The Department reserves the right to revoke the acceptance of a software developer for cause. Failure to comply with the guidelines set forth in the Alabama Business Modernized E-file Program: Handbook for Software Developers and Transmitters (Publication AL4164) is considered cause. (9) Any of the following can result in the revocation of a software developer’s acceptance into the Alabama Business Modernized E-File Program: (a) Conviction of a criminal offense under the revenue laws of any state or of any offense involving dishonesty, or breach of trust. (b) Failure to file timely and accurate tax returns, both personal and business. (c) Failure to pay personal tax liabilities or business tax liabilities. (d) Failure or refusal to effect corrective action as required by the Department. (e) Other facts or conduct of a disreputable nature that would reflect adversely on the Alabama Business Modernized E-File Program. (g) Unethical practices in return preparation. (g) Suspension by IRS. (h) Prior year submission error rate of 70% or greater. (i) Failure to comply with any of the items listed in section 2 of this rule. Author: Melissa Gillis Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); 40-30-5. History: New Rule: Filed January 22, 2007; effective February 26, 2007. Amended: Filed January 17, 2013; effective February 21, 2013. Amended: Filed April 4, 2014; effective May 9, 2014. Rule 810-3-28-.05 Revenue 28-.05-2

Repealed and New Rule: Filed February 22, 2018; effective April 9, 2018. Revenue Rule 810-3-28-.05 28-.05-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-28 PARTNERSHIP RETURNS 810-3-28-.06 Acceptance, Monitoring, And Revocation Of Acceptance Into The Alabama Business Modernized E-File Program For Electronic Return Originators And Transmitters – Partnership/LLC Return Of Income Tax. (1) SCOPE – This rule explains the requirements for electronic return originators and transmitters (not to include software developers – See Rule 810-3-28-.05) to obtain and sustain active approval to serve as an Alabama Department of Revenue electronic filing agent in order to transmit returns through the Alabama Business Modernized E-File Program. (2) Electronic return originators and transmitters accepted by and in good standing with the Internal Revenue Service (IRS) Electronic Filing Program are automatically accepted into the Alabama Electronic Filing Program. This does not include software developers. They must complete the approval process with the Department (See Rule 810-3-28-.05). (3) Electronic return originators and transmitters accepted into the Alabama Electronic Filing Program serve as agents of the Department, and must comply with the requirements of the program as stated in the Alabama Business Modernized E-file Program: Alabama Business Modernized E-file Program: Software Developers and Transmitters Guidelines and Schemas (Publication AL4164). (4) The Department will conduct random monitoring visits with Electronic Return Originators and Transmitters to verify that the requirements of the Alabama Electronic Filing Program are being met. (5) The Department reserves the right to revoke the acceptance of an electronic return originator or transmitter for cause. Failure to comply with the guidelines set forth in the Alabama Business Modernized E-file Program: Alabama Business Modernized E-file Program: Software Developers and Transmitters Guidelines and Schemas (Publication AL4164) is considered cause. (6) Any of the following can result in the revocation of an electronic return originator’s or transmitter’s acceptance into the program: Revenue Rule 810-3-28-.06 28-.06-1

(a) Conviction of a criminal offense under the revenue laws of any state or of any offense involving dishonesty, or breach of trust. (b) Failure to file timely and accurate tax returns, both personal and business. (c) Failure to pay personal tax liabilities or business tax liabilities. (d) Failure or refusal to effect corrective action as required by the Department. (e) Other facts or conduct of a disreputable nature that would reflect adversely on the Alabama Electronic Filing Program. (f) Unethical practices in return preparation. (g) Suspension by IRS. Author: Kathleen F. Abrams, Melissa Gillis Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); 40-30-4. History: New Rule: Filed January 22, 2007; effective February 26, 2007. Amended: Filed January 17, 2013; effective February 21, 2013. Amended: Filed February 13, 2018; effective March 30, 2018. Rule 810-3-28-.06 Revenue 28-.06-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-28 PARTNERSHIP RETURNS 810-3-28-.07 Alabama Requirements For Mandatory E-File Of Original Partnership/Limited Liability Company Income Tax Returns. (1) Scope – This rule explains the electronic filing mandate requirements and exclusions for both an income tax return preparer and the Partnership/Limited Liability Company. (2) Definitions. (a) Income tax return preparer - a person, firm or company who meet one of the following: 1. Any person who prepares an Alabama corporate/ partnership income tax return in exchange for compensation. 2. Any person who employs another person to prepare, in exchange for compensation, any current year Alabama corporate/partnership income tax return. 3. Any accounting firm or company who employs a person or group of people who prepare, in exchange for compensation, any current year Alabama corporate/ partnership income tax return. (3) Income Tax Return Preparer Mandate. (a) If an income tax return preparer prepares 10 or more acceptable, original corporate/partnership income tax returns using tax preparation software in a calendar year, then for that calendar year and for each subsequent calendar year thereafter, all acceptable corporate/partnership income tax returns prepared by that income tax preparer must be filed using electronic technology, as defined in the “Electronic Tax Return Filing Act,” as codified in Chapter 30 of Title 40, Code of Ala. 1975. (b) Paragraph (3a) of this rule, applies to acceptable corporate/partnership income tax returns required to be filed for taxable years beginning on and after January 1, 2009. (c) Paragraph (3a) shall cease to apply to an income tax preparer if, during that calendar year and all subsequent Revenue Rule 810-3-28-.07 28-.07-1

years, the income tax preparer prepared no more than 5 original corporate/partnership income tax returns. (d) Paragraph (3a) of this rule, may not be interpreted to require electronic filing of acceptable corporate/partnership income tax returns that are required to be filed on or before January 1, 2009. (4) Partnership/Limited Liability Company Mandate. (a) Corporations with assets of $5 million or more, or partnerships with 50 or more partners at the end of the corporation/partnership’s taxable year are mandated to e-file Alabama corporate/partnership income tax returns, for that calendar year and all subsequent tax years. (5) Compliance with the E-File Mandate. (a) An income tax return preparer may be subject to a random monitoring visit for not electronically filing returns. (b) If it is shown that failure to electronically file corporate/partnership income tax returns is due to willful neglect and no prior approval from the Department has been obtained to paper file, then that tax preparer’s acceptance in the Alabama Business MeF Program shall be revoked. The tax preparer will be unable to electronically transmit corporate/ partnership income tax returns to the Department. (6) Exclusions from the E-file Mandate. (a) If an entity is exempt from filing the federal 1065 as stated in the IRS publication 4164 for the tax year of the Alabama return being filed, then they are exempt from the Alabama e-file mandate. (b) Opting to paper file the federal 1065 does not exclude an income tax preparer or partnership/limited liability company from the Alabama e-file mandate. To be in compliance with the Alabama e-file mandate, an accepted current tax year federal return must be transmitted electronically with the mandated electronic Alabama return. Author: Melissa Gillis, Veronica Jennings Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); 40-18-40, 40-30-1 through 6. History: New Rule: Filed January 28, 2010, effective March 4, 2010. Amended: Filed January 17, 2013; effective February 21, 2013. Repealed and New Rule: Filed November 10, 2015; effective December 15, 2015. Amended: Filed February 13, 2018; effective March 30, 2018. Amended: Published November 26, 2025; effective January 10, 2026. Rule 810-3-28-.07 Revenue 28-.07-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-28 PARTNERSHIP RETURNS 810-3-28-.08 Alabama Requirements For Compliance With Administrative Rule 810-3-28-.07 (Repealed 3/30/18). (REPEALED) Author: Jo Ann Ledbetter, Richard Henninger, Ann F. Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); 40-18-40, 40-30-1 through 6. History: New Rule: Filed January 28, 2010, effective March 4, 2010. Repealed: Filed February 13, 2018; effective March 30, 2018. Revenue Rule 810-3-28-.08 28-.08-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-28 PARTNERSHIP RETURNS 810-3-28-.09 Requirements For The Alabama Electronic Partnership/LLC Return Of Income. (1) SCOPE – To define the filing and payment requirements for an Alabama electronic partnership/LLC return of income filed through the Alabama Business Modernized E-File program. Terms are defined to clarify when an electronic return is considered to be timely filed for accepted and rejected returns. (2) Return Filing and Payment Requirements. (a) A complete Alabama electronic partnership/LLC return of income will consist of XML data transmitted electronically and supporting binary documents (such as .pdf documents) as required by the Alabama Corporate Modernized Electronic Filing (MeF) schemas, business rules, and Alabama Business MeF Software Developers and Transmitters Guidelines (Publication 4164). A complete Alabama electronic return must contain the same information as a comparable Alabama partnership/LLC return of income tax return as if filed entirely on paper. (b) Partnerships/LLCs that electronically file their Alabama Partnership/LLC return of income must also pay their tax liability electronically on the Form PTEC (Nonresident Composite Payment Return) if applicable. (3) Timely Filed Information for Accepted and Rejected Returns. (a) The electronic postmark or IRS received date of an accepted Alabama electronic partnership/LLC return of income will be used to determine timely filing of an electronic return in the same manner that the postmarked date is used to determine timely filing of a paper Alabama partnership/LLC return of income. (b) The electronic postmark date (based on the taxpayer’s time zone) will be used as the received date of the electronic transmission if the electronic postmark date is within three (3) days of the IRS received date. However, if there is no electronic postmark date or if the electronic postmark date is greater than three (3) days of the IRS received date then the IRS received date will be used. (c) If a timely filed electronic return is rejected, the filer has the later of 10 calendar days from the date of the first Revenue Rule 810-3-28-.09 28-.09-1

transmission or the due date of the return (with extensions) to correct the errors and resubmit the return. In order for the Department to acknowledge the transmission date of the original return, the submission ID of the original return must be transmitted in each subsequent filing. If the return is resubmitted and accepted after the due date (with extensions) or the transmission perfection period, the received date will be the transmission date of the accepted resubmitted (perfected) return and not the date that the original rejected return was submitted. (d) Perfection of a return for electronic re-transmission is generally required when the original timely filed electronic return had errors in the XML format, or errors that caused the return to fail Alabama partnership/LLC return of income MeF schema validation and/or business rules. Therefore, the transmission perfection period is not an extension of time to file; it is a period of time to correct errors in the electronic file. (e) If a filer is unable to correct a rejected Alabama partnership/LLC return of income electronic return to an accepted status, the filer must submit their paper return with a copy of the last rejection notification from the Department. To be considered timely filed, such paper return must be postmarked by the later of the due date of the return (including extensions) or 10 calendar days after the date that the Department last gives notification that the return was rejected. If the return is received after the due date or the transmission perfection period, the received date will be the transmission date of the return. Author: Michaelyn N. Adams; Melissa A. Gillis Statutory Authority: Code of Ala.1975, §§40-2A-7(a)(5), 40-30-5. History: New Rule: Filed February 22, 2018; effective April 8, 2018. Rule 810-3-28-.09 Revenue 28-.09-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-29 FIDUCIARY RETURNS 810-3-29-.01 Fiduciary Returns. (1) Every fiduciary, other than one appointed by authority of law in possession of only a part of the property of a taxpayer, shall file a return for the taxpayer for whom he acts if either of the following conditions are met: (a) the net income of the taxpayer is $1,500 or over if single or if married and not living with spouse, or combined net income is $3,000 or over if taxpayer is married and living with spouse, or (b) if the taxpayer is an estate or trust, if the net income thereof is $1,500 or over, or if any beneficiary is a taxpayer other than a resident of Alabama. (2) The required return should be on Form 41 "Fiduciary Return of Income," and should be made in accordance with the instructions thereto. The fiduciary shall certify that he has knowledge of the affairs of the individual, estate or trust sufficient to enable him to make the return, and that it is to the best of his knowledge and belief true and correct. Fiduciaries are generally subject to the same provisions of law as apply to other taxpayers. For specific treatment of income and deductions of estates and trusts, see § 40-18-25 and regulation thereunder. (3) A guardian, whether of an infant or other person, is a fiduciary and as such is required to make and file the return for his ward and pay the tax, unless the return is made and the tax is paid by the ward. The return for a ward should be filed on Form 40 "Individual Income Tax Return" rather than Form 41 generally used by fiduciaries. (4) Returns may be filed on a calendar year or fiscal year basis. Returns are due the fifteenth day of the fourth month following the close of the taxable year. Author: Statutory Authority: Code of Ala. 1975, §40-18-57. History: Revenue Rule 810-3-29-.01 29-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-29 FIDUCIARY RETURNS 810-3-29-.02 Election To Participate In The Federal/State Electronic Filing Program - Fiduciary Income Tax Returns. (1) The Department will participate with the Internal Revenue Service in the Federal/State Electronic Filing Program for the joint electronic filing of fiduciary income tax returns, effective for tax years beginning on or after January 1, 2014. Author: Melissa A. Gillis Statutory Authority: Code of Ala. 1975, §§40-2A-7(a) (5), 40-30-4. History: New Rule: Filed January 27, 2014; Effective March 3, 2014. Amended: Filed April 9, 2018; effective May 24, 2018. Revenue Rule 810-3-29-.02 29-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-29 FIDUCIARY RETURNS 810-3-29-.03 Terms And Definitions For Alabama Electronic Fiduciary Income Tax Return. (1) SCOPE – This rule defines certain terms used in connection with the Alabama Business Modernized E-File Program. (2) Definitions (a) XML Schema – A single file or collection of files that describe the structure of an XML instance document along with rules for data content and semantics such as what fields an element can contain, which sub elements it can contain and how many items can be present. It can also describe the type and values that can be placed into each element or attribute. (b) XML instance document – The actual return data defined by the XML Schema. This document is validated against the XML schema to ensure the contents and structures are correct. (c) Business Rules – A document that defines the criteria that needs to be met for an electronic return to be accepted based on the filing instructions and system requirements for a specific tax return. (d) Fiduciary Income Tax – The tax levied by Section 40-18-29, Code of Ala. 1975. (e) Software Developer - An authorized IRS Provider that develops software for the purposes of (a) formatting the electronic portions of returns according to IRS Publication 4164 or Alabama Department of Revenue specifications and/or (b) transmitting the electronic portion of returns directly to the IRS or the Alabama Department of Revenue. A Software Developer may also sell its software. (f) Electronic Return Originator (ERO) - A firm, organization or individual who is an authorized IRS e-file provider that originates the electronic submission of returns. Because the electronic filing process is a joint program between the IRS and the Alabama Department of Revenue, an ERO must be approved by the Internal Revenue Service to qualify for this program. (g) AL8453-FDT - A document used to satisfy signature requirements for electronically filed fiduciary income tax Revenue Rule 810-3-29-.03 29-.03-1

returns submitted to the State of Alabama by an Electronic Return Originator (ERO). (h) Accepted return – An Alabama Fiduciary electronic income tax return that has successfully completed the schema and business rules validation process and the Department has sent an acknowledgement with an Acceptance Status of “accepted” for MeF (Modernized e-File) returns. (i) Rejected Return – An Alabama Fiduciary electronic income tax return that was received but failed to complete the schema and or business rule validation process and the Department has sent an acknowledgement with an Acceptance Status of “Rejected” for MeF returns. (j) Transmission Perfection Period – A ten (10) calendar day period from the date of the first transmission of a Fiduciary MeF (Modernized E-file) income tax return that a taxpayer has to correct and resubmit a rejected electronically transmitted Fiduciary MeF income tax return that was originally timely filed. (k) Electronic Postmark – A record of the date and time (in a particular time zone) that an authorized electronic return transmitter receives the transmission of a taxpayer’s electronically filed document on its host system. However, if the taxpayer and the electronic return transmitter are located in different time zones, it is the taxpayer’s time zone that controls the timeliness of the electronically filed document. (l) Timely Filed return – An electronic return that is received and accepted by the due date or within an extension of time for filing the fiduciary return according to the same manner as allowed by federal law. It also includes a timely filed rejected return that is resubmitted and accepted during the transmission perfection period. (m) Electronic Return Transmitter – An authorized IRS e-file Provider that transmits the electronic portion of a return directly to the IRS or the Alabama Department of Revenue. An entity that provides a “bump up” service is also a Transmitter. A bump up service provider increases the transmission rate or line speed of formatted or reformatted information that it is sending to the IRS. (n) Standard Letter of Intent (LOI) – A form which must be completed to request approval from the Alabama Department of Revenue to provide tax preparation software for electronic forms submissions. By completing this form, the software developer agrees to comply with all national security summit standards and requirements in addition to the specific Alabama requirements included in the LOI. Rule 810-3-29-.03 Revenue 29-.03-2

(o) Submission Error Rate – A Software Developer’s percentage of business rule rejections compared to the total amount of returns submitted. This will be calculated by taking the total amount of business rule rejections per form type for a particular form year divided by the total amount of returns transmitted for that same form type with regards to the form year in question. (p) Original fiduciary income tax return - Any return that is required to be filed with respect to the tax imposed as defined by Section 40-18-2, Code of Alabama 1975. (q) Acceptable fiduciary income tax return - Any original fiduciary tax return that is authorized by the Alabama Department of Revenue to be filed solely using electronic technology as defined in Section 40-30-3(2), Code of Alabama 1975. (r) Tax Preparation Software – Any computer software program intended for accounting, tax preparation and or tax compliance. (s) Electronic Signature Pad – An electronic device with a touch sensitive LCD screen which allows users to acquire and register a signature or any other physical signature capture device that captures and converts a signature into an electronic format. (t) Suitability – A check conducted on all software developers including rebranded and white labeled products, when an application is initially processed and on a regular basis thereafter. The suitability check may include background and personal tax compliance checks conducted by the department to ensure the software developers are eligible for participation in the Alabama Department of Revenue’s e-file program. (u) Business Acceptance or Assurance Testing (BATS) – Required testing for software developers that participate in the Alabama Department of Revenue’s Business e-file program. This testing is used to assess their software and transmission capability with the department prior to live processing. Author: Melissa Gillis, Veronica Jennings Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-25, 40-18-29. History: New Rule: Filed January 27, 2015, effective March 3, 2015. Amended: Filed April 27, 2018, effective June 11, 2018. Revenue Rule 810-3-29-.03 29-.03-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-29 FIDUCIARY RETURNS 810-3-29-.04 Requirements For The Fiduciary Income Tax Declaration For Electronic Filing. (1) SCOPE – This rule defines the information required for the Fiduciary Income Tax declaration for electronic filing through the Alabama Business Modernized E-File Program. (2) The Fiduciary Income Tax Declaration for Electronic Filing requires the following information and authorizations: (a) The estate or trust name. (b) The estate or trust Employer Identification Number. (c) The name and title of fiduciary. (d) Fiduciary phone number. (e) The fiduciary address. (f) The Alabama taxable income reported by the electronic return. (g) The total tax liability reported by the electronic return. (h) The total credits reported by the electronic return. (i) The total reductions reported by the electronic return. (j) The refund amount reported by the electronic return. (k) The amount due reported by the electronic return. (l) The amount of payment remitted electronically. (m) If applicable, authorization for the Department and its designated financial agent to initiate an electronic funds withdrawal (direct debit) entry to the financial institution account indicated in the tax preparation software for payment of the estate/trust’s Alabama taxes owed on this return, and the financial institution to debit the entry to this account. (n) Authorization for the Department to discuss the return and attachments with the preparer. Revenue Rule 810-3-29-.04 29-.04-1

(o) Consent to the disclosure of all information pertaining to the user of the computer system and software used to create the business return and to the electronic transmission of the business tax return to the Department. (p) The signature of a fiduciary/officer of the estate or trust, their title and date of the signature. The Department will accept a signature made on a signature pad (defined in 810-3-29-.03) (q) The signature of the electronic return originator and date of the signature. (r) An indication whether the electronic return originator is self-employed. (s) The firm name of the electronic return originator. (t) The address, including the zip code, of the electronic return originator. (u) The federal employer identification number of the electronic return originator. (v) If the paid preparer is different from the electronic return originator, the following information is required: 1. The signature of the paid preparer and date of the signature. 2. An indication whether the paid preparer is self- employed. 3. The firm name of the paid preparer. 4. The address, including the zip code, of the paid preparer. (3) The signatures of the officer/partner, the electronic return originator, and the paid preparer (if the paid preparer is different from the electronic return originator) must be affixed to the Alabama Form AL8453-FDT – Fiduciary Income Tax Declaration for Electronic Filing before the return is electronically transmitted. (a) Members of the firm or designated employees may sign for the electronic return originator. (b) If the taxpayer is unable to obtain the paid preparer’s signature on the Alabama Form AL8453-FDT, in lieu of the paid preparer’s signature the electronic return originator may attach to the Alabama Form AL8453-FDT a copy of the Rule 810-3-29-.04 Revenue 29-.04-2

appropriate pages of the paper return with the paid preparer’s signature. (c) Electronic return originators and electronic return preparers are prohibited from allowing taxpayers to sign a blank Alabama Form AL8453-FDT. (4) The completed and signed Alabama Form AL8453-FDT will serve as the filing declaration for the electronic Fiduciary Income Tax Return. (5) The completed and signed Alabama Form AL8453-FDT must be retained by the electronic return originator for a period of three years from the due date of the return or three years from the date the return was filed, whichever is later. The electronic return originator will provide the Department with the original Alabama Form AL8453-FDT within five business days of receiving a written request for the documents from the Department. Author: Melissa Gillis, Veronica Jennings Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-29. History: New Rule: Filed January 27, 2014; effective March 3, 2014. Amended: Filed April 9, 2018; effective May 24, 2018. Revenue Rule 810-3-29-.04 29-.04-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-29 FIDUCIARY RETURNS 810-3-29-.05 Acceptance, Monitoring, And Revocation Of Acceptance Into The Alabama Business Modernized E-File Program For Software Developers – Fiduciary Income Tax. (1) SCOPE – This rule explains the requirements for software developers to obtain and sustain active approval to provide software that allows fiduciary income tax returns to be electronically filed through the Alabama Business Modernized E- File program. (2) Software developers must be approved on an annual basis and maintain good standing with the Alabama Department of Revenue. The Department has the right to deny any applicant acceptance into the Alabama Business Modernized E-File Program. To obtain approval software developers must adhere to the following guidelines: (a) Be accepted by and in good standing with the Internal Revenue Service (IRS) Electronic Filing Program. (b) Satisfactorily complete the Department’s software developer suitability approval process. (c) Submit a Letter of Intent approved by the Department, with original officer signature. (d) Satisfactorily complete the Business Acceptance Testing System (BATS) with the Department. (3) XML Schemas (record layouts), specifications, and business rules for a complete Alabama electronic fiduciary income tax return are issued annually by the Department. In addition, the Department annually releases the Alabama Business Modernized E- file Program: Software Developers and Transmitters Guidelines (Publication AL4164) which provides supplemental information pertinent to electronic return development. (4) Software developer testing will occur in conjunction with IRS testing in accordance with Publication AL4162, Alabama Business MeF Test Package. (5) Alabama electronic fiduciary income tax returns received by the Department that are prepared by a software developer who has not completed the Department’s software developer testing and has not been approved by the Department will be rejected by the Revenue Rule 810-3-29-.05 29-.05-1

Department. Paper Alabama fiduciary income tax returns must then be submitted by the taxpayers; however, the taxpayer may electronically file their tax return using an approved software from another software developer. (6) The Alabama Department of Revenue will conduct random monitoring visits with software developers to verify that the requirements of the Alabama Electronic Filing Program are being met. (7) The Alabama Department of Revenue reserves the right to request the most current copy of the software product that is utilized in production. (8) The Alabama Department of Revenue reserves the right to revoke the acceptance of a software developer for cause. Failure to comply with the guidelines set forth in the Alabama Business Modernized E-file Program: Software Developers and Transmitters Guidelines and Schemas (Publication AL4164) is considered cause. (9) Any of the following can result in the revocation of a software developer’s acceptance into the Alabama Business Modernized E-File Program: (a) Conviction of a criminal offense under the revenue laws of any state or of any offense involving dishonesty or breach of trust. (b) Failure to file timely and accurate tax returns, both personal and business. (c) Failure to pay personal tax liabilities or business tax liabilities. (d) Failure or refusal to effect corrective action as required by the Alabama Department of Revenue. (e) Other facts or conduct of a disreputable nature that would reflect adversely on the Alabama Business Modernized E-File Program. (f) Unethical practices in return preparation. (g) Suspension by IRS. (h) Prior year submission error rate of 70% or greater. (i) Failure to comply with any of the items listed in section 2 of this rule. Author: Melissa Gillis Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-6. Rule 810-3-29-.05 Revenue 29-.05-2

History: New Rule: Filed April 4, 2014; effective May 9, 2014. Repealed and New Rule: Filed May 4, 2018, effective June 18, 2018. Revenue Rule 810-3-29-.05 29-.05-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-29 FIDUCIARY RETURNS 810-3-29-.06 Acceptance, Monitoring, And Revocation Of Acceptance Into The Alabama Business Modernized E-File Program For Electronic Return Originators And Transmitters – Fiduciary Income Tax. (1) SCOPE – This rule explains the requirements for electronic return originators and transmitters (not to include software developers – See Rule 810-3-29-.05) to obtain and sustain active approval to serve as a Department electronic filing agent in order to transmit returns through the Alabama Business Modernized E-File Program. (2) Electronic return originators and transmitters accepted by and in good standing with the Internal Revenue Service (IRS) Electronic Filing Program are automatically accepted into the Alabama Electronic Filing Program. This does not include software developers. They must complete the approval process with the Department (See Rule 810-3-29-.05). (3) Electronic return originators and transmitters accepted into the Alabama Electronic Filing Program serve as agents of the Alabama Department of Revenue, and must comply with the requirements of the program as stated in the Alabama Business Modernized E-file Program: Handbook for Software Developers and Transmitters (Publication AL4164). (4) The Department will conduct random monitoring visits with Electronic Return Originators and Transmitters to verify that the requirements of the Alabama Electronic Filing Program are being met. (5) The Department reserves the right to revoke the acceptance of an electronic return originator or transmitter for cause. Failure to comply with the guidelines set forth in the Alabama Business Modernized E-file Program: Handbook for Software Developers and Transmitters (Publication AL4164) is considered just cause. (6) Any of the following can result in the revocation of an electronic return originator’s or transmitter’s acceptance into the program: (a) Conviction of a criminal offense under the revenue laws of any state or of any offense involving dishonesty, or breach of trust. Revenue Rule 810-3-29-.06 29-.06-1

(b) Failure to file timely and accurate tax returns, both personal and business. (c) Failure to pay personal tax liabilities or business tax liabilities. (d) Failure or refusal to effect corrective action as required by the Department. (e) Other facts or conduct of a disreputable nature that would reflect adversely on the Alabama Electronic Filing Program. (f) Unethical practices in return preparation. (g) Suspension by IRS. Author: Melissa Gillis, Veronica Jennings Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-6. History: New Rule: Filed January 27, 2014; Effective March 3, 2014. Amended: Filed April 9, 2018; effective May 24, 2018. Rule 810-3-29-.06 Revenue 29-.06-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-29 FIDUCIARY RETURNS 810-3-29-.07 Fiduciary Income Tax. (1) For purposes of the taxes imposed upon the income of estates and trusts and paid by the fiduciary thereof, estates and trusts are classified as either resident or nonresident. (2) Resident Estate or Trust (a) “Resident estate” means the estate of an Alabama resident decedent. (b) A “resident trust” means any trust created: (1) by the will of an Alabama resident decedent or (2) by a person who was an Alabama resident at the time such trust became irrevocable and that has a fiduciary or beneficiary that either resides in or is domiciled in Alabama for more than seven (7) months during the respective taxable year. (c) The fiduciary of a trust is domiciled in Alabama if the individual, or group of individuals, who carry out the fiduciary responsibilities of the trust are located in Alabama. If the trustee is a corporate fiduciary engaged in interstate trust administration, the fiduciary is treated as being domiciled in Alabama if the trustee conducts the major part of its administration of the trust in Alabama. (d) The fiduciary of a resident estate or trust must file a return: (1) if the estate or trust has net income over $1,500 for the taxable year or (2) if the estate or trust is claiming a qualifying net operating loss for the year. (e) Resident estates and trusts must report all income from all sources and are allowed a credit for taxes paid to other states. (3) Nonresident Estate or Trust (a) “Nonresident estate or trust” means any estate or trust that does not meet the criteria of a resident estate or trust. (b) The fiduciary of a nonresident estate or trust must file a return if the estate or trust generates income from Alabama sources. Revenue Rule 810-3-29-.07 29-.07-1

(c) Nonresident estates or trusts must report Alabama source income in accordance with Section 40-18-14, Code of Ala. 1975. Author: Dennice Hillard, CGFM, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-29. History: New Rule: Filed December 5, 2014, effective January 9, 2015. Rule 810-3-29-.07 Revenue 29-.07-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-29 FIDUCIARY RETURNS 810-3-29-.08 Alabama Requirements For Mandatory E-File Of Fiduciary Income Tax Returns. (1) Scope – This rule explains the electronic filing mandate requirements and exclusions for both an income tax return preparer and an Estate/Trust. (2) Definitions. (a) Income tax return preparer - a person, firm or company who meet one of the following: 1. Any person who prepares an Alabama fiduciary income tax return in exchange for compensation. 2. Any person who employs another person to prepare, in exchange for compensation, any current year Alabama fiduciary income tax return. 3. Any accounting firm or company who employs a person or group of people who prepare, in exchange for compensation, any current year Alabama Fiduciary Income Tax Return. (3) Income Tax Return Preparer Mandate. (a) If an income tax return preparer prepares 10 or more acceptable, original fiduciary income tax returns using tax preparation software in a calendar year, then for that calendar year and for each subsequent calendar year thereafter, all acceptable fiduciary income tax returns prepared by that income tax preparer must be filed using electronic technology, as defined in the “Electronic Tax Return Filing Act,” as codified in Chapter 30 of Title 40, Code of Ala. 1975. (b) Paragraph (3a) of this rule, applies to acceptable fiduciary income tax returns required to be filed for taxable years beginning on and after January 1, 2016. (c) Paragraph (3a) shall cease to apply to an income tax preparer if, during that calendar year and all subsequent years, the income tax preparer prepared no more than 5 original fiduciary income tax returns. Revenue Rule 810-3-29-.08 29-.08-1

(d) Paragraph (3a) of this rule, may not be interpreted to require electronic filing of acceptable fiduciary income tax returns that are required to be filed on or before January 1, 2016. (4) Estate/Trust Fiduciary Income Tax Mandate. (a) Estates/Trusts with 20 or more beneficiaries at the end of the Estate/Trust’s taxable year are mandated to e-file Alabama fiduciary income tax returns, for that calendar year and all subsequent tax years. (5) Compliance with the E-File Mandate. (a) An Income Tax Return preparer may be subject to a random monitoring visit for not electronically filing returns (b) If it is shown that failure to electronically file Fiduciary Income Tax Returns is due to willful neglect and no prior approval from the Department has been obtained to paper file, then that tax preparer’s acceptance in the Alabama Business MeF Program shall be revoked. The tax preparer will be unable to electronically transmit Fiduciary Income Tax Returns to the department. (6) Exclusions from the E-File Mandate. (a) If an entity is exempt from filing the federal 1041 as stated in the IRS publication 4164 for the tax year of the Alabama return being filed, then they are exempt from the Alabama e-file mandate. (b) Opting to paper file the federal 1041 does not exclude an income tax preparer or Estate/Trust from the Alabama e-file mandate. To be in compliance with the Alabama e-file mandate, an accepted current tax year federal return must be transmitted electronically with the mandated electronic Alabama return. Author: Melissa Gillis, Veronica Jennings Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-40, 40-30-1 through 6. History: New Rule: Filed November 10, 2015, effective December 15, 2015. Amended: Filed February 6, 2018, effective March 23, 2018. Amended: Published November 26, 2025; effective January 10, 2026. Rule 810-3-29-.08 Revenue 29-.08-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-29 FIDUCIARY RETURNS 810-3-29-.09 Requirements For The Alabama Electronic Fiduciary Income Tax Return. (1) SCOPE – To define the filing and payment requirements for an Alabama electronic fiduciary income tax return filed through the Alabama Business Modernized E-File program. Terms are defined to clarify when an electronic return is considered to be timely filed for accepted and rejected returns. (2) Return Filing and Payment Requirements (a) A complete Alabama electronic fiduciary income tax return will consist of XML data transmitted electronically and supporting binary documents (such as .pdf documents) as required by the Alabama Fiduciary Modernized Electronic Filing (MeF) schemas, business rules, and Handbook for Developers and Transmitters Guidelines (Publication 4164). A complete Alabama electronic return must contain the same information as a comparable Alabama fiduciary income tax return as if filed on paper. (b) Fiduciaries that electronically file their Alabama fiduciary income tax return must also pay their tax liability electronically. (3) Timely Filed Information for Accepted and Rejected Returns. (a) The electronic postmark or IRS received date of an accepted Alabama electronic fiduciary income tax return will be used to determine timely filing of an electronic return in the same manner that the postmarked date is used to determine timely filing of a paper Alabama fiduciary income tax return. (b) The electronic postmark (based on the taxpayer’s time zone) will be used as the received date of the electronic transmission if the electronic postmark is within three (3) days of the IRS received date. However, if there is no electronic postmark date or if the electronic postmark date is greater than three (3) days of the IRS received date, then the IRS received date will be used. (c) If a timely filed electronic return is rejected, the filer has the later of 10 calendar days from the date of the first transmission or the due date of the return (with extensions) to correct the errors and resubmit the return. In order for Revenue Rule 810-3-29-.09 29-.09-1

the Department to acknowledge the transmission date of the original return, the submission ID of the original return must be transmitted in each subsequent filing. If the return is resubmitted and accepted after the due date (with extensions) or the transmission perfection period, the received date will be the transmission date of the accepted resubmitted (perfected) return and not the date that the original rejected return was submitted. (d) Perfection of a return for electronic re-transmission is generally required when the original timely filed electronic return had errors in the XML format, or errors that caused the return to fail Alabama Fiduciary MeF schema validation and or business rules. Therefore, the transmission perfection period is not an extension of time to file; it is a period of time to correct errors in the electronic file. (e) If a filer is unable to correct a rejected Alabama electronic fiduciary income tax return to an accepted status, the filer must submit their paper return with a copy of the last rejection notification from the Department. To be considered timely filed, this paper return must be postmarked by the later of the due date of the return (including extensions) or ten (10) calendar days after the date that the Department last gives notification that the return was rejected. If the paper return is received after the due date or the transmission perfection period, the received date will be the postmark date of the paper return. Author: Michaelyn N. Adams, Melissa A. Gillis Statutory Authority: Code of Ala. 1975 §§40-2A-7(a)(5), 40-30-5. History: New Rule: Filed April 9, 2018; effective May 24, 2018. Rule 810-3-29-.09 Revenue 29-.09-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-30 RETURN WHEN ACCOUNTING PERIOD CHANGES 810-3-30-.01 Permission To Change Accounting Period. (1) The change in accounting period for single entity taxpayers will change whenever there is an approved federal accounting period change. (a) For corporations, filing Alabama returns on a separate entity basis, which become a member of a federal consolidated group, or cease to be a member of a consolidated group, or change from one federal group to another during the taxable year, no change in accounting period is required or permitted if the taxable year after the change in federal group membership will end at the same time as before the change. (2) The change in accounting period for a consolidated group will change whenever there is an approved federal accounting period change. Author: Anne Simms, Carmen Mills, Anne Glenn, Matt Tidwell Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57, 40-18-30. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Repealed and New Rule: Filed May 3, 2000; effective June 7, 2000. Amended: Filed July 13, 2018; effective August 27, 2018. Revenue Rule 810-3-30-.01 30-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-30 RETURN WHEN ACCOUNTING PERIOD CHANGES 810-3-30-.02 Returns On Change Of Accounting Period. (1) If a taxpayer changes his accounting period from a calendar year to a fiscal year or from a fiscal year to a calendar year or from one fiscal year to another fiscal year, such change necessitates the filing of a return for a period of less than twelve months. Under no conditions may the return cover a period of more than twelve months. The following examples will illustrate this point: (a) EXAMPLE: Taxpayer A has been filing returns for fiscal years ending June 30. The books have been closed for the fiscal year ending June 30, 1998. The return will be filed for this period, but it has been decided that it will be more advantageous to file for the calendar year in the future. In order to do this, a return must be filed for the six months beginning July 1, 1998 and ending December 31, 1998. Thereafter, the taxpayer must file a return each calendar year. (b) EXAMPLE: Taxpayer B desires to change the taxable year from the calendar year to a fiscal year ending July 31. The taxpayer filed a regular calendar year return for 1997 and desires to file the first fiscal year return in 1998. A return must be filed for the seven month period beginning January 1, 1998 and ending July 31, 1998. A return will be filed for the twelve months ending July 31 in 1999 and each subsequent year. (c) EXAMPLE: Taxpayer C has filed a return for the fiscal year ending September 30, 1997, but now desires to change to a fiscal year ending April 30 of each year. This can be accomplished by filing a seven month return for the period beginning October 1, 1997 and ending April 30, 1998. The taxpayer will file a return for the twelve months ending April 30 in 1999 and each subsequent year. (2) In all of the above cases the taxable income shall be computed for each period for which a separate return or a consolidated return (for years beginning after 12/31/98) is made, and the tax shall be paid thereon at the rate applicable to the calendar years in which such period is included. The exemptions allowed shall be one-twelfth of the full annual exemptions multiplied by the number of months in the short taxable period. Revenue Rule 810-3-30-.02 30-.02-1

(3) In general, the requirements with respect to the filing of returns and the payment of tax for a short period when the taxpayer has not been in existence for the entire taxable year are the same as for the filing of a return and the payment of tax for a taxable year of twelve months ending on the last day of the short period. This applies to a corporation or partnership that has gone out of business and to an individual who is a resident of the State of Alabama for the first part of the year only. Author: Anne Glenn Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57. History: Amended: Filed May 3, 2000; effective June 7, 2000. Rule 810-3-30-.02 Revenue 30-.02-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-31 IMPOSITION OF INCOME TAX ON CORPORATIONS 810-3-31-.01 Tax On Corporations (Repealed 5/24/18). (REPEALED) Author: Fred H. Pritchar, Chris Sherlock, Individual and Corporate Tax Division Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-31, 40-18-57. History: Adopted September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed May 3, 2000; effective June 7, 2000. Repealed: Filed April 9, 2018; effective May 24, 2018. Revenue Rule 810-3-31-.01 31-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-31 IMPOSITION OF INCOME TAX ON CORPORATIONS 810-3-31-.02 Determination Of Income From Multistate Operations. (1) Taxpayers having income from business activity which is taxable both within and without this state are required to allocate and apportion their taxable income pursuant to the provisions of the Multistate Tax Compact, Chapter 27, Title 40, Code of Ala. 1975. Author: Verlon R. Frost, Jeff Taylor, Chris Sherlock, Individual and Corporate Tax Division Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57. History: Adopted September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed October 18, 1996; effective November 22, 1996. Repealed and New Rule: Filed May 3, 2000; effective June 7, 2000. Revenue Rule 810-3-31-.02 31-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-32 EXEMPTION OF CERTAIN ORGANIZATIONS, ASSOCIATIONS, ETC. 810-3-32-.01 Exempt Organizations. (1) The following organizations are exempt from taxation as provided by §40-18-32: (a) Labor, agricultural or horticultural organizations. In order to be exempt, these organizations must have no net earnings inuring to the benefit of any member, and have as their object the betterment of the conditions of those engaged in such pursuits, the improvement of the grade of their products, and the development of a higher degree of efficiency in their respective organizations. These organizations, otherwise exempt, are taxable on their unrelated business taxable income. (b) Fraternal beneficiary societies, orders, or associations. A fraternal beneficiary society is exempt from tax only if operated under the "lodge system" or for the exclusive benefit of the members so operating. "Operating under the lodge system" means carrying on its activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. In order to be exempt it is also necessary that the society have an established system for the payment to its members or their dependents of life, sick, accident, or other benefits. 1. To be exempt a fraternal beneficiary society must be operated in furtherance of its fraternal purposes and may not engage in business activities of a kind carried on for profit, except that the carrying on of activities which raise revenues from members and their guests, will not deprive the society of its exemption. (c) Business league, chambers of commerce or boards of trade, not organized for profit, and no part of the net earnings of which inures to the benefit of any private stockholder or individual. A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus, its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance Revenue Rule 810-3-32-.01 32-.01-1

of particular services for individual persons. These organizations, otherwise exempt, are taxable upon their unrelated business taxable income. (d) A civic league or organization may be exempt as an organization if it is not organized or operated for profit, and it is operated exclusively for the promotion of social welfare. An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. 1. Clubs organized and operated exclusively for pleasure, recreation and other nonprofitable purposes, no part of the earnings of which inures to the benefit of any private stockholder or members. In general, this exemption extends to social and recreation clubs which are supported solely by membership fees, dues, and assessments. However, a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities. A club which engages in business, such as making its social and recreational facilities available to the general public or by selling real estate (other than an incidental sale of property), timber, or other products, is not exempt. (e) Farmers, and other mutual hail, cyclone or fire insurance companies, mutual ditch or irrigation companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues and fees collected from members for the sole purpose of meeting expenses. An organization of a purely local character is one whose business activities are confined to a particular community, place, or district, irrespective, however, of political subdivisions. If the activities of an organization are limited only by the borders of a state, it cannot be considered to be purely local in character. (f) Cooperative associations engaged in the marketing of farm products for farmers, fruit growers, livestock growers, dairymen, etc., and turning back to the producers the proceeds of the sales of their products less the necessary operating expenses, on the basis of either the quantity or the value of the products furnished by them, are exempt from income tax. If the proceeds of the business are distributed in any other way than on such a proportionate basis, the association does not meet the requirements of the Code and is not exempt. In order to show its cooperative nature and to establish compliance with the requirement of the Code that the proceeds of sales, less necessary expenses, be turned back to all producers on the basis of either the quantity or the value of the products furnished by then, it is necessary for such an association to Rule 810-3-32-.01 Revenue 32-.01-2

keep permanent records of the business done both with members and nonmembers. (g) Federal land banks and national farm loan associations as provided in §26 of the Act of Congress approved July 17, 1916, entitled "An act to provide for agricultural development, to create standard forms of investment based upon farm mortgages, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create government depositories and financial agent for the United States, and for other purposes." (h) All national banks and national banking associations and all corporations engaged in the business of banking and of conducting a financial business employing moneyed capital coming into competition with the business of national banks during and for the periods during which such national banks and corporations are subject to an excise tax imposed by this state on or with respect to their respective incomes. (i) Building and loan associations, substantially all the business of which is confined to making loans to members. (j) Insurance companies upon which the statutes of Alabama impose a tax upon their premium income. (k) Code §40-18-25 and regulations thereunder, provide that certain trusts are exempt from taxation under this chapter. Author: Fred H. Pritchard, John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-32. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Revenue Rule 810-3-32-.01 32-.01-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-32 EXEMPTION OF CERTAIN ORGANIZATIONS, ASSOCIATIONS, ETC. 810-3-32-.02 Proof Of Exemption. (1)(a) An organization is not exempt from tax merely because it is not organized and operated for profit. It must establish its exemption by filing an affidavit showing the character of the organization, the purpose for which it was organized, its actual activities, the sources of its income and the disposition of such income, whether or not any of its income is credited to surplus or may inure to the benefit of any private shareholder or individual, and in general all facts relating to its operations which affect its right to exemption. To the affidavit shall be attached a copy of the articles of incorporation, declaration of trust, or other instrument of similar import, setting forth the permitted powers or activities of the organization, the by-laws or other code or rules, and the latest financial statement showing the assets, liabilities, receipts, and disbursements of the organization. (b) In addition to the information specifically called for in the preceding subparagraph, the Department may require additional information necessary for a proper determination of entitlement to an exemption pursuant to Section 40-18-32, Code of Ala. 1975. (c) The status of a corporation claiming exemption under Section 40-18-32, Code of Ala. 1975, will be determined by the Department on the basis of the facts in each individual case, and the taxpayer will be notified of the findings of the Department. The exemption statute will be strictly construed, and an organization not qualifying under a specific subsection of Section 40-18-32, Code of Ala. 1975, will be held to be subject to tax. (d) If an organization is exempt under both federal and state law, approved federal forms establishing exemption for federal income tax purposes will be acceptable as proof of exemption for state income tax purposes. (2) Subject to revocation as a result of changes in the law, rules, or other good cause, an organization that has once established its exemption may rely upon this determination and need not re-establish its exemption so long as there are no substantial changes in the organization's character, purposes, or methods of operation. Revenue Rule 810-3-32-.02 32-.02-1

(3) This exemption does not extend to unrelated business taxable income of an exempt organization. (4) An organization is organized exclusively for one or more exempt purposes only if its articles of organization: (a) limit the purposes of such organization to one or more exempt purposes; and (b) do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes. (5) An organization will be regarded as "operated exclusively" for one or more exempt purpose only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in Section 40-18-32, Code of Ala. 1975; and no more than an insubstantial part of its activities is not in furtherance of an exempt purpose. (6) The Federal Internal Revenue Code contains provisions similar to those in Section 40-18-32, Code of Ala. 1975 and this rule. Decisions and interpretations of the federal courts and agencies will be given due weight in interpreting Section 40-18-32, Code of Ala. 1975 and this rule. Author: Fred H. Pritchard, John H. Burgess, Matt Tidwell, Holly Coon Statutory Authority: Code of Ala. 1975, §40-18-32. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Amended: Filed December 6, 2017; effective January 20, 2018. Rule 810-3-32-.02 Revenue 32-.02-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-32 EXEMPTION OF CERTAIN ORGANIZATIONS, ASSOCIATIONS, ETC. 810-3-32-.03 Unrelated Business Taxable Income (Repealed 1/20/18). (Repealed) Author: Fred H. Pritchard, John H. Burgess Statutory Authority: Code of Ala. 1975, §§40-18-32, 40-18-57. History: Adopted: June 17, 1988; filed July 27, 1988. Repealed: Filed December 6, 2017; effective January 20, 2018. Revenue Rule 810-3-32-.03 32-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-34 GROSS INCOME OF CORPORATIONS DEFINED (REPEALED 8/29/16) 810-3-34-.01 Gross Income Of Corporations (Repealed 8/29/16). (REPEALED) Author: Verlon R. Frost Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57. History: Adopted September 30, 1982. Amended September 7, 1986; filed October 26, 1988. Amended: Filed February 1, 2000; effective March 7, 2000. Repealed: Filed July 15, 2016; effective August 29, 2016. Revenue Rule 810-3-34-.01 34-.01-1

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-35 DEDUCTIONS ALLOWED CORPORATIONS GENERALLY 810-3-35-.01 Federal Income Tax Deduction. (1) Corporations may deduct federal income taxes (FIT) paid or accrued during the taxable year and attributable to their Alabama income. The amount and method of deduction to be allowed for state income tax purposes is determined by Alabama Department of Revenue rules. See Standard Oil Co. v. State, 55 Ala. App. 103, 313 So. 2d 532, cert. denied, 313 So. 2d 540 (1975). (a) The FIT attributable to Alabama may be deducted in the year paid or accrued and subsequently paid, according to the method of accounting used in computing taxable income. 1. For a cash basis taxpayer federal income tax should be deducted in the year paid. See Paragraph (4). 2. An accrual basis taxpayer should deduct federal income tax: (i) In the year for which the tax was imposed if the tax is not contested: that is, in the absence of some objective act of protest, affirmative evidence of protest, or affirmative evidence of denial of liability by the taxpayer, or (ii) If the tax is contested it shall be accrued and subsequently paid and deducted during the year in which the liability becomes fixed and certain, but in no case later than the date the tax was actually paid. (b) For purposes of this rule, FIT is the amount of federal income taxes paid or accrued and subsequently paid by the taxpayer for a tax period. This amount includes adjustments for refundable and nonrefundable credits, special deductions, net operating loss deduction, alternative minimum tax (and minimum tax credit) and similar adjustments. For taxpayers that file as part of a federal consolidated group, alternative minimum tax (AMT) and the minimum tax credit (MTC) are allocated using the method described in subparagraph (3)(e) and subparagraph (3)(f). (2) For an accrual basis taxpayer that does not file as a member of a federal consolidated income tax return and who apportions and/or allocates income within and outside of Alabama: The amount Revenue Rule 810-3-35-.01 35-.01-1

of FIT attributable to Alabama is determined by multiplying the FIT times a fraction, of which the numerator is the taxpayer’s income apportioned and/or allocated to Alabama, and the denominator is the taxpayer’s total income earned both within and outside Alabama, computed under applicable Alabama law. To the extent a net loss is allocated and/or apportioned to Alabama (the numerator of the fraction is negative), no FIT will be attributed to Alabama. Example: Company A is an Alabama taxpayer who apportions a percentage of its income within and outside of Alabama. Company A had Federal Taxable income of $200,000 and $40,000 in FIT for the tax year. Company A’s income apportioned to Alabama is $50,000. Company ‘A’ is apportioned 25% or $10,000 of the net federal income tax liability. ($50,000/$200,000 = 25% * $40,000 = $10,000). (3) For an accrual basis taxpayer that files as a member of a federal consolidated income tax return: The taxpayer shall apportion the consolidated FIT liability 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. (a) Example: Company A, Company B, and Company C file as part of a consolidated income tax return for federal income tax purposes. Company A is the only member of the affiliated group that files an income tax return in Alabama. The companies have Federal Taxable Incomes of $150,000, $50,000, and $100,000 (totaling $300,000), respectively. The affiliated group accrued and subsequently paid $60,000 in net federal income tax during this tax year. Company A is apportioned 50% or $30,000 of the federal income tax liability of the group. ($150,000/$300,000 = 50% * 60,000 = $30,000). (b) Example: Company A, Company B, and Company C file as part of a consolidated income tax return for federal income tax purposes. Company A is the only member of the affiliated group that files an income tax return in Alabama. The companies have Federal Taxable Incomes of $150,000, -$25,000, and $350,000 (positive entities totaling $500,000), respectively. The affiliated group accrued and subsequently paid $150,000 in federal income tax during this tax year. Company A is apportioned 30% or $45,000 of the federal income tax liability of the group. ($150,000/$500,000 = 30% * $150,000 = $45,000). (c) To the extent the consolidated FIT liability for tax period is zero or the federal consolidated group earned a net operating loss for the tax period, the Alabama taxpayer will be apportioned no FIT liability even if the AL taxpayer Rule 810-3-35-.01 Revenue 35-.01-2

separately computed positive federal taxable income for the tax period. Example: Company A, Company B, and Company C file as part of a consolidated income tax return for federal income tax purposes. Company A is the only member of the consolidated group that files an income tax return in Alabama. The companies have Federal Taxable Incomes of $150,000, -$25,000, and -$350,000, respectively. The consolidated group earned a - $225,000 net loss and paid $0 in FIT for this tax year. Even though Company A earned positive taxable income, no FIT was due on a consolidated basis to be apportioned to Company A and Company A will receive no FIT deduction for the tax period. (d) If the taxpayer allocates and/or apportions its income both within and outside of Alabama, the taxpayer shall compute the portion of FIT attributable to Alabama consistent with Paragraph (2). (e) Alternative Minimum Tax: For a taxpayer that files as a member of a federal consolidated group, the consolidated alternative minimum tax (AMT) liability shall be apportioned only among the members of the group that individually report positive alternative minimum taxable income (AMTI). The apportioned amount is determined by multiplying AMT, as accrued and subsequently paid by the federal consolidated group, times a fraction. The numerator of which is the taxpayer’s positive AMTI and the denominator is the aggregate amount of positive AMTI of the component members of such group. Example: Company A, Company B, and Company C filed a consolidated income tax return for federal income tax purposes. The following federal consolidated group paid no regular income tax during the tax year but paid $75,000 in AMT. Company A, Company B, and Company C computed AMTI of $150,000, $125,000 and $100,000 (totaling $375,000), respectively. Company A is apportioned 40% or $30,000 of the AMT liability of the group (150,000/375,000 = 40% * $75,000 = $30,000). (f) If a federal consolidated group is allowed to reduce its FIT liability by applying a Minimum Tax Credit (MTC), then the MTC must be attributed to the members of the group consistent with AMT previously allocated pursuant to subparagraph (e) above. In no case shall the cumulative MTC attributed to a taxpayer exceed the cumulative AMT attributed to a taxpayer. (4) For Cash basis taxpayers: To the extent the taxpayer does business within and without Alabama, follow the general provisions provided in Paragraph (2) to determine the portion of the taxpayer’s FIT that is attributed to Alabama. If the taxpayer files as part of a federal consolidated income tax return, follow Revenue Rule 810-3-35-.01 35-.01-3

the general provisions in Paragraph (3) to calculate the portion of consolidated FIT attributed to the taxpayer. The amount of consolidated FIT allocated to the taxpayer pursuant to Paragraph (3) and/or the amount attributed to Alabama pursuant to Paragraph (2) is based on the actual amount of federal income taxes paid during the tax period. The taxpayer is entitled to a federal income tax deduction, even if the taxpayer earned a net operating loss for the tax period, if actual federal income tax payments were made during the tax period. Author: Holly H. Coon Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-35. History: Adopted: September 30, 1982. Amended: February 8, 1989; filed March 20, 1989. Amended: filed May 15, 1992. Amended: Filed March 26, 1998; effective April 30, 1998. Repealed and New Rule: Filed July 15, 2016; effective August 29, 2016. Rule 810-3-35-.01 Revenue 35-.01-4

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-35 DEDUCTIONS ALLOWED CORPORATIONS GENERALLY 810-3-35-.02 Restrictions On The Deductibility Of Certain Intangible Expenses And Costs And Interest Expenses And Costs. (1) In accordance with the terms of §40-18-35(b)(1), Code of Ala. 1975, (hereafter “Ala. Code”) 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. (2) The corporation shall make the adjustments required in paragraph (1), unless: (a) The corporation establishes, to the Department’s satisfaction, in a writing attached to the corporation’s Alabama corporate income tax return, that the adjustments are unreasonable, (See (3)(h) below) (b) The corporation and the Commissioner of Revenue agree in writing to the application or use of alternative adjustments and computations, (See (3)(i) below) (c) The corporation establishes, to the Department’s satisfaction, in a writing attached to the corporation’s Alabama corporate income tax return, 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, (See (3)(b) and (c) below) or (d) The corporation establishes, to the Department’s satisfaction, in a writing attached to the corporation’s Alabama corporate income tax return, that the item of income corresponding to the taxpayer’s expense was in the same taxable year 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 a foreign nation which has in force an income tax treaty with the United States, if the recipient was Revenue Rule 810-3-35-.02 35-.02-1

a "resident" (as defined in the income tax treaty) of the foreign nation. (See (3) (e), (f) and (g) below). (e) The attachment(s) required by (2)(a), (c) and (d) above shall be in a format to be prescribed by the Department of Revenue. (3) Definitions and Operating Rules (a) “Specified Intangible Activities” means, for purposes of this regulation, the intangible related activities referred to in Ala. Code §40-18-35(b)(3) specifically including the acquisition, use, licensing, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property. (b) “Primarily Engaged” means that as a percentage of total receipts, receipts from the specified intangible activities or the receipts from financing related entities exceeds the receipts from any other readily identifiable category of receipts. 1. EXAMPLE. Related member has $1,000 of total receipts: $400 of royalty receipts from the licensing of intangibles, $300 of receipts from the sale of widgets and $300 of receipts from widget repair services. Because related member’s receipts from a specified intangible activity exceed its receipts from any other readily identifiable category of receipts, related member is “primarily engaged” in that activity for purposes of Ala. Code §40-18-35(b)(3) and paragraph (2)(c) of this regulation. 2. EXAMPLE. Related member conducts manufacturing operations, licenses intangible property and loans money to Taxpayer. Related member has $1,000 of receipts: $225 of royalty receipts from Taxpayer, $225 of interest receipts from Taxpayer, $400 of receipts from the sale of goods to Taxpayer, and $150 of miscellaneous receipts. Due to the fact that a greater percentage of related member’s total receipts (40%) is from the sale of goods, related member is not “primarily engaged” in either the specified intangible activities or the financing of related entities. 3. With respect to the indirect expenses described in (3) (d) below, the primarily engaged definition described in (3)(b) above should be applied to both the related member that transacts business directly with the taxpayer and to the related member that transacts business indirectly with the taxpayer through one or more additional related members. If either related member is primarily engaged in the specified intangible activities Rule 810-3-35-.02 Revenue 35-.02-2

or the financing of related entities, the taxpayer may not avail itself of the exception described in (2)(c) above. (c) “Related Member” includes but is not limited to any corporation that is included in the taxpayer’s federal consolidated corporate income tax return or any disregarded entity or subchapter K entity a majority of whose income is included in the taxpayer’s federal income tax return (separate or consolidated). 1. For purposes of determining whether a related member is primarily engaged in the specified intangible activities or the financing of related entities, subchapter K entities or entities that are disregarded for federal income tax purposes shall be separately considered. 2. EXAMPLE. Corporation A is the single member owner of Limited Liability Company B (“LLC B”), an entity disregarded for federal income tax purposes. Corporation A owns intangible property that it licenses to Corporation C, an Alabama corporate taxpayer. LLC B owns and operates retail store locations. Corporation A and Corporation C are wholly owned subsidiaries of Company D. For purposes of Corporation C, both Corporation A and LLC B are related members. Because LLC B, is a related member, separate and apart from Corporation A, LLC B’s activities will not be considered for purposes of determining whether Corporation A is primarily engaged in the specified intangible activities. (d) Any expense incurred by a taxpayer corporation, if the expense is related to an intermediate intangible or interest expense paid from one related member to a second related member, is an indirect intangible or interest expense that satisfies the definition of intangible expense and cost provided in Ala. Code §40-18-1(9) or interest expense and cost provided in Ala. Code §40-18-1(11). 1. EXAMPLE. Corporations B and C are related members with respect to Corporation A. Corporation A is an Alabama taxpayer that sells products it purchases from Corporation B on a cost plus basis. Corporation B licenses intangible property from Corporation C and makes intangible expense payments to Corporation C based in part on the sales Corporation B makes to Corporation A. To the extent the intangible expenses Corporation B pays to Corporation C are reflected in the costs of the products Corporation A purchases from Corporation B, the direct intangible expenses of Corporation B are considered to be indirect intangible expenses of Corporation A. Furthermore, for purposes of Ala. Code Revenue Rule 810-3-35-.02 35-.02-3

§40-18-35(b)(3) and subsection (2)(c) of this regulation Corporation A is deemed to directly pay an intangible expense to Corporation B and indirectly pay an intangible expense to Corporation C. (e) “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. (f) “[R]eported and included in income for purposes of a tax on net income” means reported and included in post-allocation and apportionment income for purposes of a tax applied to the net income apportioned or allocated to the taxing jurisdiction. (g) The exception described in (2)(d) is allowed only to the extent the recipient related member includes the corresponding item of income in post-allocation and apportionment income reported to the taxing jurisdiction. 1. EXAMPLE. Corporation A makes a $100 intangible expense payment to Corporation B, a related member with respect to Corporation A. Corporation B files an income tax return in State B where it apportions and or allocates 5% of its income, but files no other income tax returns. Corporation A must add-back $95 of the otherwise deductible $100 intangible expense payment it makes to Corporation B. (h) The adjustment required in (1) above will be considered unreasonable if: 1. The taxpayer establishes that, based on the entirety of the taxpayer's particular facts and circumstances, the adjustments have increased the taxpayer's Alabama income tax liability to an amount that bears no fair relation to the taxpayer’s Alabama presence, or 2. The taxpayer establishes that the interest or intangible expense was paid to a related member that “passed through” the interest or intangible payment via a corresponding interest or intangible expense payment to an unrelated third party. This subdivision of the unreasonable exception is subject to the limitations described in paragraphs (i), (ii), and (iii) below. Taxpayers must first apply the limitation imposed in paragraph (i) to determine the amount of “pass through” interest or intangible expense. “Pass through” interest or intangible expense will be subject to the additional limitations contained in paragraphs (ii) and (iii). When Rule 810-3-35-.02 Revenue 35-.02-4

the taxpayer’s related member interest expense exceeds both limitations, the limitations should be applied together as described in Example 2. (i) Related member interest or intangible expense paid to a related member that receives more related member interest or intangible income (expense to the payor) than it pays interest or intangible expense to unrelated third parties will be limited because only a portion of the related member interest or intangible expense/income is considered to have “passed through” to the unrelated third parties. (I) EXAMPLE 1. Taxpayer A makes a $100 interest payment to Related Member B. Related Member B receives a total of $400 of related member interest income ($100 from Taxpayer A plus $300 from other related payors). Related Member B pays $200 of interest expense to unrelated third parties. Related Member B will be deemed to have passed through to unrelated third parties only 50% of the interest expense/income it received from Taxpayer A. Only $50 of Taxpayer A’s $100 related member interest expense payment to Related Member B will be deemed to have been passed through to unrelated third parties and qualify for the unreasonable exception. (ii) With respect to both interest and intangible expenses, if the interest or royalty rate charged the taxpayer by the related member exceeds the interest or royalty rate charged the related member by unrelated third party lenders or licensors, then the excess expense will not qualify for the unreasonable exception and must be added back. If multiple lending or licensing arrangements exist between the taxpayer and the related member, or the related member and the unrelated third-party lender or licensor, then a weighted average rate should be calculated by dividing total interest expense by total interest bearing debt. The weighted average rate should then be used to determine the existence of non-qualifying excess interest or intangible expense. See (I) Example 2. (iii) With respect to interest expense, if the taxpayer’s debt over asset percentage exceeds the consolidated unrelated third party debt over asset percentage of its federal affiliated group (as represented by interest bearing debt reported on the Schedule L balance sheet(s) included in the consolidated and pro forma federal income tax returns), then the interest expense associated with Revenue Rule 810-3-35-.02 35-.02-5

the excess debt must be added back on Schedule A of the Alabama Form 20C and cannot qualify for the unreasonable exception based on a conduit financing arrangement. (I) EXAMPLE 2. Taxpayer B makes interest expense payments of $100 during its taxable year to its parent Company A (a related member) to service a $1,000 debt between B and A. Company A’s related member interest rate is 10% calculated by dividing its related member interest expense ($100) by its related member debt ($1000). Company A makes interest expense payments of $200 to Unrelated Lenders C and D to service the $4,000 of total debt existing between A and Unrelated Lenders C and D. A’s weighted average unrelated third party interest rate is five percent (5%) calculated by dividing total unrelated third party interest expense ($200) by total unrelated third party interest bearing debt ($4,000). (II) Taxpayer B’s separate company federal income tax return Schedule L balance sheet shows $1,500 of assets and $1,000 of interest bearing debt which produces a debt over asset percentage of 66.7%. The Company A and Subsidiaries’ federal consolidated income tax return Schedule L balance sheet shows $6,000 of assets and $3,000 of unrelated third party interest bearing debt which produces a debt over asset percentage of fifty percent (50%). Because Taxpayer B’s debt over asset percentage, 66.7%, exceeds the group’s unrelated third party debt over asset percentage, 50%, the amount of Taxpayer B’s related member interest expense that may qualify for the unreasonable exception is limited. The limitation is calculated by multiplying B’s assets ($1,500) by the lower of the taxpayer’s debt over asset percentage or the group’s unrelated third party debt over asset percentage (50%) and then multiplying the product ($750) by the lower of the taxpayer’s related member interest rate or the related member’s unrelated third party interest rate (5%), which yields an ultimate limitation of $37.50. (i) Requests for alternative adjustment agreements provided for in Code of Ala. 1975, §40-18-35(b)(2) and subdivision (2)(b) of this regulation should be directed to the Alabama Revenue Commissioner and submitted in writing to the Department of Revenue at least ten (10) weeks prior to the filing of the Rule 810-3-35-.02 Revenue 35-.02-6

taxpayer’s corporate income tax return for which the agreement is requested. The request should describe both the taxpayer’s particular facts and circumstances that warrant an alternative adjustment and the terms of the proposed alternative adjustment. If the taxpayer is unable to submit the request ten (10) weeks prior to the filing of the return, the taxpayer should pay the tax in full and request a refund in the request for an alternate adjustment agreement. Author: Joe Garrett Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-35(b). History: Adopted September 30, 1982. Amended: February 8, 1989; filed March 20, 1989. Repealed: Filed February 1, 2000; effective March 7, 2000. New Rule: Filed June 27, 2003; effective August 1, 2003. Amended: Filed June 2, 2006; effective July 7, 2006. Revenue Rule 810-3-35-.02 35-.02-7

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-36 PASS-THROUGH 810-3-36-.01 Electing Pass-Through Entity Returns. (1) Definitions. The following terms shall have the following meanings for purpose of these rules. (a) Pass-Through Entity. A Pass-Through Entity is an S Corporation defined in §40-18-160, Code of Ala. 1975, or a Subchapter K Entity defined in §40-18-1, Code of Ala. 1975. Single member limited liability companies, estates, trusts, business trusts, and disregarded entities are not included in this definition except in the capacity as an owner, member, partner, or shareholder of the Pass-Through Entity. (b) Taxable Income. The taxable income used to determine the tax for the Electing Pass-Through is the sum of nonseparately stated income (loss) and deductions plus separately stated income (loss) and deductions computed in accordance with §§40-18-24, 40-18-161, or 40-18-162. This income must be apportioned in accordance with §40-27-1, Code of Ala. 1975, and the accompanying rules. (c) Electing Pass-Through Entity Payment. A payment of Alabama Income Tax made by the Pass-Through Entity on behalf of its owners, members, partners, or shareholders; calculated on the owner’s, member’s, partner’s, or shareholder’s pro rata or distributive share of the Pass-Through Entity’s income, computed in accordance with §§40-18-24, 40-18-161, or 40-18-162, Code of Ala. 1975, and paid in the manner prescribed by the department. (d) Required Annual Payment. The required annual payment is the lessor of 100 percent of the tax shown on the return for the taxable year or 100 percent of the tax shown on the return for the preceding tax year. (2) Requirements for an Electing Pass-Through Entity. (a) Effective for taxable years beginning on or after January 1, 2021, a Pass-Through Entity may elect to be taxed as an Electing Pass-Through Entity. (b) An entity must make the election on Form PTE-E, Pass- Through Entity Election Form, and submit it electronically to the department via My Alabama Taxes (MAT) on or before the fifteenth day of the third month following the close of the Revenue Rule 810-3-36-.01 36-.01-1

tax year for which the entity elects to be taxed as an Electing Pass-Through Entity. (c) If the election form is not filed on Form PTE-E through MAT in a timely manner, the election to become an Electing Pass-Through Entity will be denied. The taxpayer may request the election for the subsequent tax year. (d) This election is binding for the year in which it is approved and all subsequent tax years until a request to revoke the election is made. The Electing Pass-Through Entity may request revocation by submitting Form PTE-E through MAT on or before the fifteenth day of the third month following the close of that tax year for which the entity elects to no longer be taxed as an Electing Pass-Through Entity. If the entity ceases to qualify as a Pass-Through Entity, the election is automatically revoked. 1. An Electing Pass-Through Entity is exempt from the composite payment requirements of §40-18-24.2, Code of Ala. 1975. (e) Each entity making the election must file Alabama Electing Form EPT (Electing Pass-Through Entity Payment Return), in addition to a complete Form 20S (S-Corporation Information/Tax Return) or Form 65 (Alabama Partnership/Limited Liability Return of Income) for the applicable taxable year for which the election was made and all taxable years thereafter unless the election is terminated. (f) In computing the amount of the Electing Pass-Through Entity tax liability: 1. The Pass-Through Entity must apply the maximum tax rate provided in §40-18-5, Code of Ala. 1975, to taxable income. 2. A net operating loss (carryforward) may not be used to offset income or gain. 3. The Pass-Through Entity cannot eliminate or exempt any owner, member, partner, or shareholder’s pro rata or distributive share of the Alabama taxable income. (g) Electing Pass-Through Entity returns and payments are due on the fifteenth day of the third month following the close of the Pass-Through Entity’s taxable year. 1. The entity is granted an automatic six-month extension of time for filing the Electing Pass-Through Entity return. Rule 810-3-36-.01 Revenue 36-.01-2

2. An extension of time granted to file the Electing Pass-Through Entity return is not an extension of time for payment of the tax. The amount of tax due must be paid on or before the original due date of the return without regard to the extension to file the Electing Pass-Through Entity return. (h) The owners, members, partners, or shareholders of an Electing Pass-Through Entity must file an Alabama return to report its pro rata or distributive share of the income of the entity in accordance with the provisions of §§40-16-4, 40-18-28, 40-18-29, or 40-18-39, as applicable. A refundable credit will be available to the owners, members, partners, or shareholders in an amount equal to its pro rata or distributive share of the Alabama income tax paid by the Electing Pass-Through Entity. (i) The 2017 Alabama Historic Rehabilitation Tax Credit and the Railroad Modernization Act of 2019 Credit shall only be claimed at the Electing Pass-Through Entity level and will not be passed through to the owners, members, partners, or shareholders of the entity. All other tax credits shall pass through to and may be claimed by an eligible taxpayer under the provisions applicable to that credit. (3) Transition Rules. When an entity is transitioning to an Electing Pass-Through Entity the following applies: 1. The required estimated quarterly payments will be 25% of the required annual payment. 2. Once the election is made, the initial return’s preceding tax year’s computation is computed using the total of either Form 20S or Form 65's Schedule K (Income (Loss) and Deductions) column C (Apportioned Amount), multiplied by 5%. 3. If an electing S-Corporation reported a loss on Schedule K for the first taxable year, the transition rules will not apply. (4) Payment of Tax. (a) In accordance with §41-1-20, Code of Ala. 1975, payments of $750 or greater are required to be made electronically through electronic funds transfer. (b) An Electing Pass-Through Entity is required to make estimated tax payments in accordance with §40-18-80.1, Code of Ala. 1975. 1. A Pass-Through Entity which makes estimate payments but does not make the election to be taxed as an Electing Pass-Through Entity, or makes a timely request to revoke Revenue Rule 810-3-36-.01 36-.01-3

the election, may request a refund by submitting Form PTE-C. (c) Penalties for underpayment of tax, underpayment of estimated taxes, and applicable interest will be imposed as provided by §40-2A-11, Code of Ala. 1975. Author: Tommy Galloway, Christina Hall, CPA Statutory Authority: §§40-2A-7(a)(5), 40-2A-11, 40-16-4, 40-18-1, 40-18-5, 41-1-20, 40-18-24, 40-18-28, 40-18-29, 40-18-39, 40-18-80.1, 40-18-160, 40-18-161, 40-18-162, and 40-18-557, Code of Ala. 1975. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Repealed: Filed February 1, 2000; effective March 7, 2000. New Rule: Published December 30, 2021; effective February 13, 2022. Amended: Published January 30, 2026; effective March 16, 2026. Rule 810-3-36-.01 Revenue 36-.01-4

ALABAMA DEPARTMENT OF REVENUE ALABAMA ADMINISTRATIVE CODE CHAPTER 810-3-38 ADDITIONAL CREDITS AND DEDUCTIONS ALLOWED FOR CORPORATIONS 810-3-38-.01 Additional Deductions Allowed For Corporations s (Repealed 1-18-18). (REPEALED) Author: Jeff Taylor, Income Tax Division Statutory Authority: Code of Ala. 1975, §40-18-38; Act 93-852. History: New Rule: Filed August 26, 1994; effective September 30, 1994. Repealed: Filed December 4, 2017; effective January 18, 2018. Revenue Rule 810-3-38-.01 38-.01-1

ALABAMA DEPARTMENT OF REVENUE ALABAMA ADMINISTRATIVE CODE CHAPTER 810-3-38 ADDITIONAL CREDITS AND DEDUCTIONS ALLOWED FOR CORPORATIONS 810-3-38-.02 Additional Credits Allowed For Corporations. For an Approved Company whose project is financed by the State Industrial Development Authority's Project Obligations, the following shall be allowed as credits against the state corporate income tax imposed by Section 40-18-31: (1) The credit available to an Approved Company pursuant to Section 41-10-44.8(a); and (2) The credit available to an Approved Company pursuant to Section 41-10-44.9. (3) The sum of the credits allowed in (1) and (2) above to an Approved Company in a given year shall not exceed the lesser of: (a) the Approved Company's state corporate income tax liability for such year on the income generated by or arising out of a Project; or (b) the total debt service payments made during such year by the Approved Company on the Project Obligations. (4) Income generated by or arising out of a Project shall be determined by an Approved Company in accordance with the method set forth in a written agreement between the Company and the Department entered into before any Job Development Fees are collected. (a) Whenever possible, such agreement shall require the Approved Company to separately account for all items of income and expense generated by or arising out of a Project. (b) If it is impossible or impractical to separately account for such items, such agreement shall require the Approved Company to apportion all items of income and expense generated by or arising out of the Project based on the ratio of the Approved Company's property, payroll and sales attributed to or arising from the Project to the Approved Company's total property, payroll and sales in Alabama. Revenue Rule 810-3-38-.02 38-.02-1

(c) If the methods set forth in (a) and (b) are impossible or impractical to utilize, such agreement shall require the use of any other method which has been agreed upon by the Approved Company and the Department to determine income generated by or arising out of a Project. (5) For purposes of the limitations set forth in paragraphs (a) and (b) of (3), excess corporate income tax liability or debt service payments which are unused as a result of the applications of such limitations in a given year may not be carried backward or forward for use by an Approved Company in prior or subsequent years. (6) For purposes of paragraphs (a) and (b) of (3), the term "Project" shall include the entire industrial, research or distribution facility acquired, constructed, expanded, or installed by an Approved Company at a given location as a result of the inducement available under Act No. 93-851 notwithstanding that only a portion of the cost of such facility may be financed with the proceeds of Project Obligations. (7) For purposes of the limitations set forth in paragraphs (a) and (b) of (3), the term "Project Obligations" shall have the meaning ascribed to it in Section 41-10-44.2. (8) Pursuant to Section 41-10-44.8(c), if an Approved Company fails to achieve the level of capital investment or employment anticipated at the time the State Industrial Development Authority agreed to finance the Project, the Department may, after notice and hearing, prospectively reduce or suspend all or part of the credits allowed in (1) and (2) above until such time as the anticipated capital investment and employment levels are met. (9) A taxpayer claiming either of the credits allowed in (1) and (2) shall attach to its corporate income tax return a certificate executed by the State Industrial Development Authority confirming the taxpayer's status as an Approved Company pursuant to Section 41-10-44.4 together with a copy of the agreement required by paragraph (4) above. Author: Jeff Taylor and Ann F. Winborne Statutory Authority: Code of Ala. 1975, §40-18-38, Act 93-852. History: New Rule: Filed August 26, 1994; effective September 30, 1994. Rule 810-3-38-.02 Revenue 38-.02-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.01 Corporation Returns. (1)(a) Each corporation, joint stock company, or association, except as provided in (b), subject to Alabama income tax shall file a separate return for each tax year, including organizations subject to taxation on unrelated business taxable income as provided in Section 40-18-32, Code of Ala. 1975. The return (Form 20C for corporations and organizations with unrelated business taxable income, and Form 20S for an Alabama S corporation) shall be filled out completely and in accordance with the instructions. The return must be signed by one of the following officers: the president, vice-president, treasurer, assistant treasurer, secretary, assistant secretary, chief accounting or financial officer. The individual preparing the return, if a paid preparer, must also sign the return, and his or her address should be shown… (b) In lieu of filing separate entity returns in Alabama, a group of related corporations may elect to be treated as an Alabama affiliated group filing a consolidated corporate income tax return. Qualifications for an “Alabama affiliated group” are found in Section 40-18-39(b)(1), Code of Ala. 1975. For more information about filing an Alabama consolidated return, see Alabama Rule 810-3-39-.03. (2) If the property or business of a corporation is operated by a receiver, trustee, or assignee, such person shall make a return for the corporation in the same manner as the corporation would otherwise make the return. Any tax due on the basis of such return shall be collected in the same manner as if collected from the corporation. (3) Nexus. A corporation having “substantial nexus” with Alabama is subject to Alabama income tax. A corporation has “substantial nexus” with Alabama if certain thresholds are exceeded pursuant to Section 40-18-31.2, Code of Ala. 1975. Author: Holly H. Coon Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-39. History: Adopted September 30, 1982. Amended: June 17, 1988; Filed July 27, 1988. Amended: Filed May 3, 2000, effective June 7, 2000. Repealed and New Rule: Filed May 4, 2018; effective June 18, 2018. Revenue Rule 810-3-39-.01 39-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.02 Extension Of Time For Filing A Corporation Return. (1) A corporation or an Alabama affiliated group will be granted an automatic extension to file its Alabama corporate income tax return consistent with the extension allowed for the taxpayer’s corresponding federal income tax return plus one month. The corresponding federal extension form must be submitted with the return. An extension of time granted pursuant to this section is not an extension of time for payment of the tax. The amount of tax due must be paid on or before the due date of the return without regard to the extension to file the return. Any tax due, not paid on or before the unextended due date, will be subject to interest until paid at the rate provided in Section 40-1-44, Code of Ala. 1975, and all applicable penalties. (a) Payment of the tax shall be made via the paper Business Income Tax Payment Voucher or by Electronic Funds Transfer (EFT). (b) However, payment must be made via EFT if the payment exceeds $750. Please refer to Alabama Administrative Rules 810-13-1-.01 and 810-13-1-.03. (2)(a) An entity that fails to file the required return by the extended due date may not be granted an automatic extension the following (ensuing) year, but may be required to request the extension in writing. (b) If a written request is required, the request must be made to the Commissioner of Revenue or to his designee, and must explain the reason for the request and the reason for failing to timely file the return in the previous year. The request also must state that the entity has no outstanding debts owed to the Department. (3) Estimated Payments. Those corporations with liabilities in excess of estimated payments or credits should remit the balance due on or before the unextended due date of the return. Members of an Alabama affiliated group which have carryover payments from a prior year’s filing of a separate return shall treat such carryover as a payment of estimated taxes on the Alabama consolidated return for the following year. Interest and penalties are due on all taxes not paid on or before the unextended due date. See Alabama Administrative Rule 810-3-42-.01. Revenue Rule 810-3-39-.02 39-.02-1

Author: Catherine McCary, Melody Moncrief, Ann F. Winborne, CPA, Richard H. Henninger, Holly Coon Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-39. History: Adopted September 30, 1982. Amended: June 17, 1988; filed July 27, 1988. Amended: Filed May 3, 2000, effective June 7, 2000. Amended: Filed November 26, 2008; effective December 31, 2008. Amended: Filed November 17, 2017; effective January 1, 2018. Amended: Published September 30, 2022; effective November 14, 2022. Rule 810-3-39-.02 Revenue 39-.02-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.03 Consolidated Filing. (1) Election to file an Alabama consolidated return. In lieu of filing separate entity returns in Alabama, a group of related corporations may elect to be treated as an Alabama affiliated group filing a consolidated corporate income tax return. Such election may be made by submitting items (a) through (c) below to the Department by the due date or extended due date of the return: (a) Submit a completed Form 20C-CRE (Election to File Consolidated Corporate Income Tax Return). This form must be filed by the common parent of the Alabama affiliated group. If the common parent is not a member of the Alabama affiliated group, the members of the Alabama affiliated group must designate the member that will serve in this role. (b) Submit a Form 20C-C (Alabama Consolidated Return) for the Alabama affiliated group and include all pertinent schedules, including Schedule AS (Affiliation Schedule) and a proforma Form 20C for each member. The Alabama consolidated return must be signed by one of the officers of the common parent listed in Alabama Rule 810-3-.39-.01(1)(a) on behalf of the Alabama affiliated group. (c) Pay the annual fee for the privilege of filing an Alabama consolidated return. The annual fee is a graduated fee based upon the aggregate amount of total assets and is determined by Section 40-18-39(b)(8), Code of Ala. 1975. “Aggregate amount of total assets” means, for purposes of this rule, the aggregate of all member’s total assets as determined on a proforma separate entity basis. (2) Nexus. Only corporations having substantial nexus with Alabama may be included as part of the Alabama affiliated group. A corporation has substantial nexus with Alabama if certain thresholds are exceeded pursuant to Section 40-18-31.2, Code of Ala. 1975. (3) Liability. Each corporation included in the Alabama consolidated return will be jointly and severally liable for the Alabama income tax liability of the Alabama affiliated group. If a corporation is a member of the Alabama affiliated group for only part of the tax year, then the corporation will be liable for only the portion of the Alabama consolidated tax liability attributed to that portion of the year that the corporation was a member of Revenue Rule 810-3-39-.03 39-.03-1

the Alabama affiliated group prorated on a daily basis. The tax liability of the Alabama affiliated group will be the Alabama tax rate specified in Section 40-18-31, Code of Ala. 1975 applied to the taxable income of the Alabama affiliated group. (a) Part-year members. If an eligible corporation becomes a member of an Alabama affiliated group after the beginning of the Alabama consolidated return year or ceases to be a member of the Alabama affiliated group during the consolidated return year, two tax returns will be due for that taxable year. The Alabama consolidated return shall include amounts attributable to such corporation for the part of the year in which it was a member of the Alabama affiliated group. A separate return shall be filed and include (or if a member of a different Alabama affiliated group, such group’s Alabama consolidated return shall include) amounts attributable to such corporation for the remainder of the taxable year. The method used to determine the federal taxable income of that member will be used to attribute amounts of taxable income or loss, modifications, business income or loss, apportionment factors, nonbusiness or partnership income or loss, and credits to the different portions of the taxable year. (b) Ineligible members. If a part-year member is a taxpayer that is ineligible to be a member of an Alabama affiliated group, it shall file a separate tax return for the respective period(s) using the accounting method used in determining federal taxable income of such member. (c) Liability of corporation after withdrawal. If a corporation has ceased to be a member of an Alabama affiliated group and if such cessation resulted from a bona fide sale or exchange of its stock for fair value and occurred prior to the date upon which any deficiency is assessed, the Commissioner may, if the Department determines that the assessment or collection of the balance of the deficiency will not be jeopardized, make assessment and collection of such deficiency from such former member in an amount not exceeding the portion of such deficiency which the Commissioner may determine to be allocable to it. If the Commissioner makes assessment and collection of any part of a deficiency from such former member, then for purposes of any credit or refund of the amount collected from such former member, the agency of the common parent will not apply. (4) Computation of consolidated income. Each member of an Alabama affiliated group must separately calculate its Alabama taxable income or loss (Form 20C) in accordance with Title 40, Code of Ala. 1975. The members will then combine such incomes and losses on a single return (Form 20C-C). Transactions between members of an Alabama affiliated group are not eliminated in determining the member’s Alabama taxable income. Rule 810-3-39-.03 Revenue 39-.03-2

(5) Net Operating Losses. A net operating loss (“NOL”) earned by one member of an Alabama affiliated group may offset income earned by another member in the year in which it was earned. To the extent the Alabama affiliated group, as a whole, earns a NOL for a tax year, such loss may be carried forward to offset taxable income earned by the Alabama affiliated group in subsequent tax years pursuant to Section 40-18-35.1, Code of Ala. 1975. (a) Addition of a new member to the Alabama affiliated group. Pursuant to Section 40-18-39(h), Code of Ala. 1975, NOLs earned by a corporation before it was part of the Alabama affiliated group are deductible only to the extent the corporation reports separate company income and such deduction should be shown on the member’s proforma Form 20C in the tax year in which the NOL was utilized. (b) Assignation of NOL to a departing member. When a member departs an Alabama affiliated group, any unutilized NOL earned in a previous tax year must be evaluated to determine if any portion of such loss should be assigned to the departing member. Such NOLs are assigned to the members of the Alabama affiliated group based on the percentage in which the members contributed to the loss in the tax year in which the net operating loss was earned. Example: Company A, Company B, and Company C elected to file an Alabama Consolidated return in 2013. The Alabama affiliated group earned a ($40,000,000) NOL in tax year 2015. The members separate Alabama taxable income for tax year 2015 were as follows: Company A: ($20,000,000), Company B: $10,000,000, Company C: ($30,000,000). The Alabama affiliated group utilized $20,000,000 of the 2015 NOL in tax year 2016. On the last day of the 2016 tax year, Company C left the Alabama affiliated group. The unutilized 2015 tax year NOL of ($20,000,000) ($40,000,000 - $20,000,000) must be analyzed to determine if a portion should be assigned to Company C. Only Company A and Company C contributed to the 2015 NOL earning a total negative taxable income of ($50,000,000) (20,000,000 + 30,000,000). Company A is assigned 40% (20,000,000/50,000,000) of the NOL generated in tax year 2015 while Company C is assigned 60% (30,000,000/50,000,000). The Alabama affiliated group may carryforward $8,000,000 of the remaining 2015 NOL while Company C may carryforward $12,000,000. (6) Income Tax Credits. Members of an affiliated group that have been approved for various income tax credits allowed by Alabama law must calculate those credits on a separate entity basis. Such credits may offset only the income tax liability of the specific member authorized to use the credit. Income tax credits earned by one member may not offset the income tax liability of another member. Credits may not be used to reduce the Alabama affiliated group’s consolidated filing fee. Revenue Rule 810-3-39-.03 39-.03-3

(7) Consolidated Estimated Tax. If an election has been made to file an Alabama consolidated return, estimated tax payments must be submitted for the Alabama affiliated group in the name of the common parent or its designee. (8) Records. In accordance with Section 40-2A-7 Code of Ala. 1975, taxpayers must maintain records to allow the Department to determine the correct amount of tax including support for deviations from federal to Alabama income, gain computations, elimination entries, etc. (9) Federal statutes. For interpretation of federal statutes adopted by the Alabama Legislature, see Alabama Rule 810-3-1.1-. 01, Operating Rules. Author: Holly H. Coon Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-31.2, 40-18-35.1, 40-18-39. History: New Rule: Filed December 15, 1999; effective January 19, 2000. Amended: Filed October 15, 2010; effective November 19, 2010. Repealed and New Rule: Filed November 17, 2017; effective January 1, 2018. Rule 810-3-39-.03 Revenue 39-.03-4

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.04 Incentives Rules For Alabama Affiliated Groups Filing Consolidated Alabama Income Tax Returns (Repealed 1-1-18). (REPEALED) Author: Michael E. Mason, Commissioner's Office; Verlon Frost, Melody Moncrief, Individual and Corporate Tax Division Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-39, 40-18-57. History: New Rule: Filed May 3, 2000, effective June 7, 2000. Repealed: Filed November 17, 2017; effective January 1, 2018. Revenue Rule 810-3-39-.04 39-.04-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.05 Taxable Years Following An Election Period For An Alabama Affiliated Group. (1) Except as provided in paragraph (2), for any taxable year beginning after the expiration of the election period set forth in Section 40-18-39(c)(6), Code of Ala. 1975, each member of the Alabama affiliated group subject to Alabama income tax shall file a separate return unless the Alabama affiliated group elects to file an Alabama consolidated return and is not otherwise prohibited from doing so. (2) The former Alabama affiliated group may renew their election to file an Alabama consolidated return by submitting the items required by Alabama Rule 810-3-39-.03(1). Such items must be submitted by the due date or extended due date of the tax return, as applicable pursuant to Alabama Rule 810-3-39-.02. Such election will establish a new election period pursuant to Section 40-18-39(c)(6). Author: Michael E. Mason, Commissioner's Office; Verlon Frost, Holly Coon, Individual and Corporate Tax Division Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-39, 40-18-57. History: New Rule: Filed May 3, 2000, effective June 7, 2000. Amended: Filed November 17, 2017; effective January 1, 2018. Revenue Rule 810-3-39-.05 39-.05-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.06 Mechanics Of Consolidated Filing (Repealed 1-1-18). (REPEALED) Author: Michael E. Mason, Commissioner's Office; Verlon Frost, Individual and Corporate Tax Division Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57. History: New Rule: Filed December 15, 1999; effective January 19, 2000. Repealed: Filed November 17, 2017; effective January 1, 2018. Revenue Rule 810-3-39-.06 39-.06-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.07 Participation In The Federal/State Electronic Filing Program – Corporate Income Tax Returns. (1) The Department will participate with the Internal Revenue Service in the Federal/State Electronic Filing Program for the joint electronic filing of Corporate Income Tax Returns, effective for tax years beginning on or after January 1, 2005. Author: Kathleen F. Campbell, Melissa Gillis, Michaelyn N. Adams Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-4. History: New Rule: Filed February 13, 2006; effective March 20, 2006. Amended: Filed January 27, 2014; effective March 3, 2014. Amended: Filed May 4, 2018; effective June 18, 2018. Revenue Rule 810-3-39-.07 39-.07-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.08 Terms And Definitions For The Alabama Electronic Corporate Income Tax Return. (1) SCOPE – This rule defines certain terms used in connection with the Alabama Business Modernized E-File Program. (2) Definitions (a) XML Schema – A single file or collection of files that describe the structure of an XML instance document along with rules for data content and semantics such as what fields an element can contain, which sub elements it can contain and how many items can be present. It can also describe the type and values that can be placed into each element or attribute. (b) XML instance document – The actual return data defined by the XML Schema. This document is validated against the XML schema to ensure the contents and structures are correct. (c) Business Rules – A document that defines the criteria that needs to be met for an electronic return to be accepted based on the filing instructions and system requirements for a specific tax return. (d) Corporate Income Tax – The tax levied by Sections 40-18-2, 40-18-31 and 40-18-39, Code of Ala. 1975. (e) Software Developer - An authorized IRS Provider that develops software for the purposes of 1. formatting the electronic portions of returns according to IRS Publication 4164 or Department specifications and/or 2. transmitting the electronic portion of returns directly to the IRS or the Department. A Software Developer may also sell its software. (f) Electronic Return Originator (ERO) - A firm, organization or individual who is an authorized IRS e-file provider that originates the electronic submission of returns Because the electronic filing process is a joint program between the IRS and the Department, an ERO must be approved by the Internal Revenue Service to qualify for this program. Revenue Rule 810-3-39-.08 39-.08-1

(g) AL8453-C - A document used to satisfy signature requirements for electronically filed C-Corporation Income Tax Returns submitted to the State of Alabama by an Electronic Return Originator (ERO). (h) AL8453-PTE - A document used to satisfy signature requirements for electronically filed S-Corporation/ Partnership/ LLC Income Tax Returns submitted to the State of Alabama by an Electronic Return Originator (ERO). (i) Accepted return – An electronic Alabama Corporate Income Tax Return that has successfully completed the schema and business rules validation process and the Department has sent an acknowledgement with an Acceptance Status of “Accepted” for MeF (Modernized e-File) returns. (j) Rejected Return – An electronic Alabama Corporate Income Tax Return that was received but failed to complete the schema and or business rule validation process and the Department has sent an acknowledgement with an Acceptance Status of “Rejected” for MeF returns. (k) Transmission Perfection Period – A ten (10) calendar day period from the date of the first transmission of a Corporate MeF (Modernized E-file) Income Tax Return that a taxpayer has to correct and resubmit a rejected electronically transmitted Corporate MeF Income Tax Return that was originally timely filed. (l) Electronic Postmark– A record of the date and time (in a particular time zone) that an authorized electronic return transmitter receives the transmission of a taxpayer’s electronically filed document on its host system. However, if the taxpayer and the electronic return transmitter are located in different time zones, it is the taxpayer’s time zone that controls the timeliness of the electronically filed document. (m) Timely Filed return – An electronic return that is received and accepted by the due date or within an extension of time for filing the Corporate/Partnership Income Tax Return according to the same manner as allowed by federal law. It also includes a timely filed rejected return that is resubmitted and accepted during the transmission perfection period. (n) Electronic Return Transmitter – An authorized IRS e-file Provider that transmits the electronic portion of a return directly to the IRS or the Department. An entity that provides a “bump up” service is also a Transmitter. A bump up service provider increases the transmission rate or line speed of formatted or reformatted information that it is sending to the IRS. Rule 810-3-39-.08 Revenue 39-.08-2

(o) Standard Letter of Intent (LOI) – A form which must be completed to request approval from the Department to provide tax preparation software for electronic forms submissions. By completing this form, the software developer agrees to comply with all national security summit standards and requirements in addition to the specific Alabama requirements included in the LOI. (p) Submission Error Rate – A Software Developer’s percentage of business rule rejections compared to the total amount of returns submitted. This will be calculated by taking the total amount of business rule rejections per form type for a particular form year divided by the total amount of returns transmitted for that same form type with regards to the form year in question. (q) Original Corporate/Partnership Income Tax Return – Any return that is required to be filed with respect to the tax imposed as defined by Section 40-18-2, Code of Ala, 1975. (r) Acceptable Corporate/Partnership Income Tax Return –Any original Corporate/Partnership Tax return that is authorized by the Department to be filed solely using electronic technology as defined in Section 40-30-3(2), Code of Ala, 1975. (s) Tax Preparation Software – Any computer software program intended for accounting, tax preparation and or tax compliance. (t) Electronic Signature Pad – An electronic device with a touch sensitive LCD screen which allows users to acquire and register a signature or any other physical signature capture device that captures and converts a signature into an electronic format. (u) Suitability – A check conducted on all software developers including rebranded and white labeled products, when an application is initially processed and on a regular basis thereafter. The suitability check may include background and personal tax compliance checks conducted by the Department to ensure the software developers are eligible for participation in the Department’s e-file program. (v) Business Acceptance or Assurance Testing (BATS) – Required testing for software developers that participate in the Department’s Business e-file program. This testing is used to assess their software and transmission capability with the Department prior to live processing. Author: Kathleen F. Campbell, Melissa A. Gillis, Michaelyn N. Adams Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-5. Revenue Rule 810-3-39-.08 39-.08-3

History: New Rule: Filed February 13, 2006; effective March 20, 2006. Repealed and New Rule: Filed January 27, 2015; effective March 3, 2015. Amended: Filed April 27, 2018; effective June 11, 2018. Rule 810-3-39-.08 Revenue 39-.08-4

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.09 Requirements For The Corporate Income Tax Declaration For Electronic Filing. (1) SCOPE – This rule defines the information required for the Corporate Income Tax declaration for electronic filing through the Alabama Business Modernized E-File Program (MeF). (2) The Corporate Income Tax Declaration for Electronic Filing requires the following information and authorization for both Corporation and S-Corporation filers: (a) The corporation’s name. (b) The corporation’s Federal Employer Identification Number. (c) The corporation’s address. (d) The corporation’s phone number. (e) The Alabama taxable income reported by the electronic return. (f) The total tax liability reported by the electronic return. (g) The total tax payments and credits reported by the electronic return. (h) The total reductions reported on the electronic return. (i) The amount of the refund reported by the electronic return. (j) The amount of the payment transmitted electronically. (k) If applicable, authorization for the Department and its designated financial agent to initiate an electronic funds withdrawal (direct debit) entry to the financial institution account indicated in the tax preparation software for payment of the corporation’s Alabama taxes owed on this return, and the financial institution to debit the entry to this account. (l) Authorization for the Department to discuss the return and attachments with the preparer. Revenue Rule 810-3-39-.09 39-.09-1

(m) Consent to the disclosure of all information pertaining to the user of the computer system and software used to create the business return and to the electronic transmission of the business tax return to the Department. (n) The signature of an officer of the corporation, their title and date of the signature. The Department will accept a signature made on a signature pad (defined in 810-3-39-.08 (o) The signature of the electronic return originator and date of the signature. (p) An indication whether the electronic return originator is self-- employed. (q) The firm name of the electronic return originator. (r) The address, including the zip code, of the electronic return originator. (s) The Federal Employer Identification Number of the electronic return originator. (t) If the paid preparer is different from the electronic return originator, the following information is required: 1. The signature of the paid preparer and date of the signature. 2. An indication whether the paid preparer is self- employed. 3. The firm name of the paid preparer. 4. The address, including the zip code, of the paid preparer. (3) The signatures of the corporate officer, the electronic return originator, and the paid preparer (if the paid preparer is different from the electronic return originator) must be affixed to the Alabama Form AL8453-C - Corporate Income Tax Declaration for Electronic Filing (C-Corporations) or AL8453-PTE - S- Corporation/Partnership Income Tax Declaration for Electronic Filing (S-Corporations) before the return is electronically transmitted. (a) Members of the firm or designated employees may sign for the electronic return originator. (b) If the taxpayer is unable to obtain the paid /preparer’s signature on the Alabama Form AL8453-C AL8453-PTE, in lieu of the paid preparer’s signature the electronic return originator may attach to the Alabama Form AL8453-C/AL8453-PTE a copy of Rule 810-3-39-.09 Revenue 39-.09-2

the appropriate pages of the paper return with the paid preparer’s signature. (c) Electronic return originators and electronic return preparers are prohibited from allowing taxpayers to sign /a blank Alabama Form AL8453-C AL8453-PTE. (4) The completed and signed Alabama Form AL8453-C/ AL8453-PTE will serve as the filing declaration for the electronic Alabama Corporate Income Tax Return. (5) The completed and signed Alabama Form AL8453-C/AL8453-PTE must be retained by the electronic return originator for a period of three years from the due date of the return or three years from the date the return was filed, whichever is later. The electronic return originator will provide the Department with the original Alabama Form /AL8453-C AL8453-PTE within five business days of receiving a written request for the documents from the Department. Revenue Rule 810-3-39-.09 39-.09-3

Author: Neal Hearn, Kathleen C. Abrams, Veronica Jennings, Melissa A. Gillis, Michaelyn N, Adams Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-5. History: New Rule: Filed February 13, 2006; effective March 20, 2006. Amended: Filed January 28, 2010, effective March 4, 2010. Amended: Filed January 27, 2014; effective March 3, 2014. Amended: Filed January 27, 2015; effective March 3, 2015. Amended: Filed May 4, 2018; effective June 18, 2018. Rule 810-3-39-.09 Revenue 39-.09-4

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.10 Acceptance, Monitoring, And Revocation Of Acceptance Into The Alabama Business Modernize E- File Program For Software Developers – Corporate Income Tax. (1) SCOPE – This rule explains the requirements for software developers to obtain and sustain active approval to provide software that allows Corporate Income Tax returns to be electronically filed through the Alabama Business Modernized E- File program. (2) Software developers must be approved on an annual basis and maintain good standing with the Department. The Department has the right to deny any applicant’s acceptance into the Alabama Business Modernized E-File Program. To obtain approval software developers must adhere to the following guidelines. (a) Be accepted by and in good standing with the Internal Revenue Service (IRS) Electronic Filing Program. (b) Have satisfactorily completed the Department’s software developer suitability approval process. (c) Have an approved Letter of Intent, with original officer signature, on file with the Department. (d) Have satisfactorily completed the Business Acceptance Testing System (BATS) with the Department. (3) XML Schemas (record layouts), specifications and business rules for a complete Alabama electronic Corporate Income Tax return are issued annually by the Department. In addition, the ADOR annually releases the Alabama Business Modernized E-file Program: Handbook for Software Developers and Transmitters (Publication AL4164) which provides supplemental information pertinent to electronic return development. (4) Software developer testing will occur in conjunction with IRS testing in accordance with Alabama Business MeF Test Package (Publication AL4162). (5) Alabama electronic Corporate Income Tax returns received by the Department which are prepared by a software developer which has not completed the Department’s software developer testing and which has not been approved by the Department will be rejected by Revenue Rule 810-3-39-.10 39-.10-1

the Department. Paper Alabama Corporate Income Tax returns must then be submitted by the taxpayer or the taxpayer may electronically file the tax return using an approved software from another software developer. (6) The Department will conduct random monitoring visits with software developers to verify that the requirements of the Alabama Electronic Filing Program are being met. (7) The Department reserves the right to request a copy of the most current copy of the software product that is utilized in production. (8) The Department reserves the right to revoke the acceptance of a software developer for cause. Failure to comply with the guidelines set forth in the Alabama Business Modernized E-file Program: Handbook for Software Developers and Transmitters (Publication AL4164) is considered cause. (9) Any of the following can result in the revocation of a software developer’s acceptance into the Alabama Business Modernized E-File Program: (a) Conviction of a criminal offense under the revenue laws of any state or of any offense involving dishonesty or breach of trust. (b) Failure to file timely and accurate personal tax returns or business tax returns. (c) Failure to pay personal tax liabilities or business tax liabilities. (d) Failure or refusal to effect corrective action as required by the Department. (e) Other facts or conduct of a disreputable nature that would reflect adversely on the Alabama Business Modernized E-File Program. (f) Unethical practices in return preparation. (g) Suspension by IRS. (h) Prior year submission error rate of 70% or greater. (i) Failure to comply with any of the items listed in section 2 of this rule. Author: Kathleen F. Campbell, Melissa Gillis, Michaelyn N. Adams Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-5. History: New Rule: Filed February 13, 2006; effective March 20, 2006. Amended: Filed January 17, 2013; effective February 21, Rule 810-3-39-.10 Revenue 39-.10-2

2013. Amended: Filed April 4, 2014; effective May 9, 2014. Repealed and New Rule: Filed April 27, 2018; effective June 11, 2018. Revenue Rule 810-3-39-.10 39-.10-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.11 Acceptance, Monitoring, and Revocation Of Acceptance Into The Alabama Business Modernized E-File Program For Electronic Return Originators And Transmitters – Corporate Income Tax. (1) SCOPE – This rule explains the requirements for electronic return originators and transmitters (not to include software developers – See Rule 810-3-39-.10) to obtain and sustain active approval to serve as the Department electronic filing agent in order to transmit returns through the Alabama Business Modernized E-File Program. (2) Electronic return originators and transmitters accepted by and in good standing with the Internal Revenue Service (IRS) Electronic Filing Program are automatically accepted into the Alabama Electronic Filing Program. This does not include software developers who must complete the approval process with the Department (See Rule 810-3-39-.10). (3) Electronic return originators and transmitters accepted into the Alabama Electronic Filing Program serve as agents of the Department, and must comply with the requirements of the program as stated in the Alabama Business Modernized E-file Program: Handbook for Software Developers and Transmitters (Publication AL4164). (4) The Department will conduct random monitoring visits with Electronic Return Originators and Transmitters to verify that the requirements of the Alabama Electronic Filing Program are being met. (5) The Department reserves the right to revoke the acceptance of an electronic return originator or transmitter for cause. Failure to comply with the guidelines set forth in the Alabama Business Modernized E-file Program: Handbook for Software Developers and Transmitters (Publication AL4164) is considered cause. (6) Any of the following can result in the revocation of an electronic return originator’s or transmitter’s acceptance into the program: (a) Conviction of a criminal offense under the revenue laws of any state or of any offense involving dishonesty, or breach of trust. Revenue Rule 810-3-39-.11 39-.11-1

(b) Failure to file timely and accurate tax returns, both personal and business. (c) Failure to pay personal tax liabilities or business tax liabilities. (d) Failure or refusal to effect corrective action as required by the Department. (e) Other facts or conduct of a disreputable nature that would reflect adversely on the Alabama Electronic Filing Program. (f) Unethical practices in return preparation. (g) Suspension by IRS. Author: Kathleen F. Campbell, Melissa Gillis, Michaelyn N. Adams Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-6. History: New Rule: Filed February 13, 2006; effective March 20, 2006. Amended: Filed January 17, 2013; effective February 21, 2013. Amended: Filed May 4, 2018; effective June 18, 2018. Rule 810-3-39-.11 Revenue 39-.11-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.12 Alabama Requirements For Mandatory E-File Of Original Corporate Income Tax Returns. (1) Scope – This rule explains the electronic filing mandate requirements and exclusions for both an Income Tax Return preparer and the C-Corporation or S-Corporation. (2) Definitions. (a) Income Tax Preparer - a person, firm or company who meet one of the following: 1. Any person who prepares an Alabama Corporate/ Partnership Income Tax Return in exchange for compensation. 2. Any person who employs another person to prepare, in exchange for compensation, any current year Alabama Corporate/ Partnership Income Tax Return. 3. Any accounting firm or company who employs a person or group of people who prepare, in exchange for compensation, any current year Alabama Corporate/ Partnership Income Tax Return. (3) Income Tax Return Preparer Mandate. (a) If an Income Tax Return preparer prepares 10 or more acceptable, original Corporate/Partnership Income Tax Return using tax preparation software in a calendar year, then for that calendar year and for each subsequent calendar year thereafter, all acceptable Corporate/Partnership Income Tax Return prepared by that Income Tax Return preparer must be filed using electronic technology, as defined in the “Electronic Tax Return Filing Act,” as codified in Chapter 30 of Title 40, Code of Ala. 1975. (b) Paragraph (3a) of this rule, applies to acceptable Corporate/Partnership Income Tax Returns required to be filed for taxable years beginning on and after January 1, 2009. Paragraph (3a) shall cease to apply to an Income Tax Return preparer if, during that calendar year and all subsequent years, the Income Tax Return preparer prepared no more than 5 original Corporate/Partnership Income Tax Returns. Revenue Rule 810-3-39-.12 39-.12-1

(c) Paragraph (3a) of this rule, may not be interpreted to require electronic filing of acceptable Corporate/Partnership Income Tax Returns that are required to be filed on or before January 1, 2009. (4) C-Corporation/S-Corporation Mandate. (a) Corporations with assets of $5 million or more, or partnerships with 50 or more partners at the end of the corporation/partnership’s taxable year are mandated to e-file Alabama Corporate/Partnership Income Tax Returns, for that calendar year and all subsequent tax years. (5) Exclusions from the E-file Mandate. (a) If an entity is exempt from filing the federal 1120 or 1120S as stated in the IRS publication 4164 for the tax year of the Alabama return being filed, then they are exempt from the Alabama e-file mandate. (b) Opting to paper file the federal 1120 or 1120S does not exclude an Income Tax Return preparer or corporation from the Alabama e-file mandate. To be in compliance with the Alabama e-file mandate, an accepted current tax year federal return must be transmitted electronically with the mandated electronic Alabama return. (6) Preparer Compliance with the E-File Mandate. (a) An income tax return preparer may be subject to a random monitoring visit for not electronically filing returns. (b) If it is shown that failure to electronically file Corporate/Partnership Income Tax Returns is due to willful neglect and no prior approval from the Department has been obtained to paper file, then that tax preparer’s acceptance in the Alabama Business MeF Program shall be revoked. The tax preparer will be unable to electronically transmit Corporate/ Partnership Income Tax Returns to the Department. Author: Melissa Gillis, Veronica Jennings, Michaelyn N. Adams Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-40, 40-30-1 through 6, History: New Rule: Filed January 28, 2010, effective March 4, 2010. Amended: Filed January 17, 2013; effective February 21, 2013. Repealed and New Rule: Filed November 10, 2015, effective December 15, 2015. Amended: Filed April 27, 2018; effective June 11, 2018. Amended: Published November 26, 2025; effective January 10, 2026. Rule 810-3-39-.12 Revenue 39-.12-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-39 CORPORATION RETURNS 810-3-39-.13 Requirements For The Alabama Corporate Income Tax Return. (1) SCOPE – To define the filing and payment requirements for an Alabama electronic Corporate Income Tax return filed through the Alabama Business Modernized E-File program. Terms are defined to clarify when an electronic return is considered to be timely filed for accepted and rejected returns. (2) Return Filing and Payment Requirements (a) A complete Alabama electronic Corporate Income Tax return will consist of XML data transmitted electronically and supporting binary documents (such as .pdf documents) as required by the Alabama Corporate Modernized Electronic Filing (MeF) schemas, business rules, and Alabama Business MeF Software Developers and Transmitters Guidelines (Publication 4164). A complete Alabama electronic Corporate Income Tax return must contain the same information as a comparable Alabama Corporate Income Tax return as if filed entirely on paper. (b) Corporations that electronically file their Alabama Corporate Income Tax return must also pay their tax liability electronically. (c) S-Corporations that electronically file their Alabama S- Corporation Income Tax return must also pay their tax liability electronically on the Form PTEC (Nonresident Composite Payment Return) if applicable. (3) Timely Filed Information for Accepted and Rejected Returns (a) The electronic postmark or IRS received date of an accepted Alabama electronic Corporate Income Tax return will be used to determine timely filing of an electronic return in the same manner that the postmarked date is used to determine timely filing of a paper Alabama Corporate Income Tax return. (b) The electronic postmark (based on the taxpayer’s time zone) will be used as the received date of the electronic transmission if the electronic postmark is within three (3) days of the IRS received date. However, if there is no electronic postmark date or if the electronic postmark date is Revenue Rule 810-3-39-.13 39-.13-1

greater than three (3) days of the IRS received date, then the IRS received date will be used. (c) If a timely filed electronic return is rejected, the filer has the later of 10 calendar days from the date of the first transmission or the due date of the return (with extensions) to correct the errors and resubmit the return. In order for the Department to acknowledge the transmission date of the original return, the submission ID of the original return must be transmitted in each subsequent filing. If the return is resubmitted and accepted after the due date (with extensions) or the transmission perfection period, the received date will be the transmission date of the accepted resubmitted (perfected) return and not the date that the original rejected return was submitted. (d) Perfection of a return for electronic re-transmission is generally required when the original timely filed electronic return had errors in the XML format, or errors that caused the return to fail Alabama Corporate MeF schema validation and or business rules. Therefore, the transmission perfection period is not an extension of time to file; it is a period of time to correct errors in the electronic file. (e) If a filer is unable to correct a rejected electronic Alabama Corporate Income Tax Return to an accepted status, the filer must submit their paper return with a copy of the last rejection notification from the Department. To be considered timely filed, this paper return must be postmarked by the later of the due date of the return (including extensions) or 10 calendar days after the date that Alabama last gives notification that the return was rejected. If the paper return is received after the due date or the transmission perfection period, the received date will be the postmark date of the paper return. Author: Michaelyn N. Adams, Melissa A. Gillis Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-30-5. History: New Rule: Filed January 28, 2010, effective March 4, 2010. Repealed and New Rule: Filed April 27, 2018; effective June 11, 2018. Rule 810-3-39-.13 Revenue 39-.13-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-40 ASSESSMENT OF INCOME TAXES 810-3-40-.01 Tax To Be Reported On Prescribed Forms. (1) All tax shall be reported on forms prescribed by the Department. Each taxpayer shall file a return or returns with the Department for each tax year on forms prescribed for taxpayers of the class within which the taxpayer falls. Should the Department not furnish copies of the appropriate form to the taxpayer, the taxpayer may obtain them upon request. (2) The amount shown to be due on the return or returns filed by the taxpayer with the Department shall constitute the prima facie liability of the taxpayer. If the Department finds no error in a return, it shall be entered on the tax rolls. The taxpayer will receive no notification of this action unless the tax as shown to be due by the return has not been paid. (3) The Department may assess additional tax, penalty, and/or interest pursuant to Chapter 2A, Title 40, Code of Ala. 1975, and the rules promulgated thereunder. (4) For the purposes of reporting, paying, and notifying the Department of changes made by the Internal Revenue Service, changes due to a federal amended return, or other changes to the federal return which result in an increase or decrease of income or estate tax due the state or the taxpayer, the following rules shall be followed: (a) The taxpayer shall file a completed amended return for each year indicating the additional tax owed the state or refund requested. (b) If the amended return is filed as a result of changes made by the Internal Revenue Service a copy of the federal revenue agent's report or any other itemized explanation of the federal changes furnished to the taxpayer shall be attached to each amended return filed. (c) Forms authorized by the department must be used to report such changes. 1. Individuals shall file a Form 40X. 2. Partnership's, fiduciary's, "C" corporations and "S" corporations shall check the "Amended Return" box. Revenue Rule 810-3-40-.01 40-.01-1

(d) Example: A taxpayer has a 1988 tax year audit finalized with the Internal Revenue Service which has resulted in additional tax due this state. The taxpayer intends to notify the state of such changes but does not have available a 1988 Alabama corporation income tax form. The taxpayer shall contact the Department and request a 1988 form or the taxpayer may use a similar version of the 1988 form. In this case the taxpayer has a 1993 Form 20C. The taxpayer strikes through "1993" and writes "1988." The taxpayer checks the "amended return" box and completes the form. The taxpayer mails or delivers to the department the amended return, a check for the additional tax and applicable interest, and a copy of the Internal Revenue Service changes. (5) A taxpayer failing to substantially comply with the rules and example outlined in subsection (4) above shall be subject to the five percent negligence penalty pursuant to §40-2A-11(c), Code of Ala. 1975. See Nellie F. Crumb v. State, Inc. 96-497 (Admin. Law Div. 4/10/1997). Author: Anne Simms, Carmen Mills, Verlon R. Frost Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Repealed: Filed September 15, 1998; effective October 20, 1998. New Rule: Filed May 3,2000; effective June 7, 2000. Rule 810-3-40-.01 Revenue 40-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-40 ASSESSMENT OF INCOME TAXES 810-3-40-.02 Whole Dollar Reporting. (1) Whole Dollar Reporting Mandatory. Effective December 31, 1998, all tax forms, declarations, statements or other documents submitted to the Individual and Corporate Tax Division shall be completed using whole dollar amounts only. (2) Rounding to Nearest Whole Dollar Amount. Amounts of 49 cents or less shall be rounded down to the nearest whole dollar amount. Amounts of 50 to 99 cents shall be rounded up to the nearest whole dollar amount. Author: Judy A. Robbins Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-40. History: New Rule: Filed May 3, 2000; effective June 7, 2000. Revenue Rule 810-3-40-.02 40-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-42 TIME AND METHOD OF PAYMENT OF INCOME TAX 810-3-42-.01 Time Of Payment Of Tax. (1) Individuals. The income tax return for an individual is due on April 15th following the close of the calendar year or the fifteenth day of the fourth month following the close of a fiscal year. Any balance due, as shown on the return when filed, after applicable credits for taxes paid through withholding and through declarations of estimated tax, must be paid on or before the due date for filing the return. (2) Fiduciaries. The income tax returns for fiduciaries are due on April 15th following the close of a calendar year or the fifteenth day of the fourth month following the close of the tax year. The tax shown due on the return must be paid on or before the due date for filing the return. (3) Corporations. The income tax returns for corporations are due on March 15th following the close of the calendar year or on the fifteenth day of the third month following the close of the fiscal year. The tax due on the return, after applicable credits, must be paid on or before the due date for filing the return. (4) Organizations with unrelated business taxable income. The income tax returns for organizations with unrelated business taxable income are due at the same time as returns for corporations as specified in paragraph (3) above. (5) Interest on all past due and unpaid taxes will be collected at the current interest rate prescribed by §40-1-44. (6) Advance payments. Any taxpayer may pay any portion or all of his tax prior to the dates stated above. However, the Department has no authority to discharge a liability for income tax before the end of the taxable year, as the liability cannot be determined until the year is ended. (7) For tax years ending after December 31, 1984, any payment which is postmarked on or before the last date for timely payment will be considered to be timely paid. See Reg. 810-1-5-.01. Author: Carmen Mills, Anne Simms Statutory Authority: Code of Ala. 1975, §§40-2A-7-(a)(5), 40-18-42. Revenue Rule 810-3-42-.01 42-.01-1

History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Amended: Filed May 3, 2000; effective June 7, 2000. Rule 810-3-42-.01 Revenue 42-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-42 TIME AND METHOD OF PAYMENT OF INCOME TAX 810-3-42-.02 Extension Of Time For Payment. (1) The Department is authorized to grant extensions for the payment of tax for a period not to exceed three months. Applications for extension should be made in writing in time for consideration by the Department before the date on which the payment is due. The application should be signed by the taxpayer or his duly authorized agent. (2) If an extension of time to make payment is granted, no penalty for late payment will be incurred, if payment is made within the extended period, but interest will accrue at the rate provided in §40-1-44 from the unextended due date for payment until payment is made. (3) For extension of time for filing returns, see §40-18-27. Author: Anne Simms, Carmen Mills Statutory Authority: Code of Ala. 1975, §§40-2A-7-(a)(5), 40-18-42. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Amended: Filed May 3, 2000; effective June 7, 2000. Revenue Rule 810-3-42-.02 42-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-42 TIME AND METHOD OF PAYMENT OF INCOME TAX 810-3-42-.03 Deferment Of Tax In Hardship Cases Under Soldiers' And Sailors' Civil Relief Act. (1) Public Law No. 861 of the United States known as the Soldiers' and Sailors' Civil Relief Acts provides that persons in the military service of the United States who can show their inability to pay income tax by reason of such service be granted deferment of income tax, without interest, during the period of military service and for a period extending not more than six months after termination of the military service. (2) Military personnel claiming the benefit of this relief will be required to file with the Department of Revenue requests for deferment stating their financial condition and affirming that their ability to pay the state income tax has been materially impaired by reason of their military service. Author: Statutory Authority: Code of Ala. 1975, §40-18-57. History: Revenue Rule 810-3-42-.03 42-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-42 TIME AND METHOD OF PAYMENT OF INCOME TAX 810-3-42-.04 Penalties For Failure To Remit Tax (Repealed 6/7/00). (Repealed) Author: Carmen Mills, Anne Simms, Fred H. Pritchard, John H. Burgess Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-42. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Repealed: Filed May 3, 2000; effective June 7, 2000. Revenue Rule 810-3-42-.04 42-.04-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-43 RAILROAD MODERNIZATION ACT OF 2019 810-3-43-.01 Availability, Claiming, And Transferability Of The Rail Credit. (1) Purpose. This rule sets forth guidelines and procedures for claiming, applying, and transferring the rail credit provided under the Railroad Modernization Act of 2019, as codified in Chapter 11C of Title 37 of the Code of Ala. 1975. (2) Definitions. For purposes of this rule, these terms shall be defined as follows: (a) DEPARTMENT - The Alabama Department of Revenue. (b) ELIGIBLE TAXPAYER – Any class II or III railroad that is awarded a rail credit certificate. (c) ELIGIBLE TRANSFEREE – A taxpayer to which any or all portion of a rail credit is transferred. (d) TAX CREDIT CERTIFICATE - A form or letter issued to the eligible taxpayer, that includes information about the qualified railroad rehabilitation project and the total amount of credit issued to the eligible taxpayer. (e) TRANSFER TAX CREDIT CERTIFICATE - A certificate issued by the Department to an eligible transferee, which includes information about the qualified railroad project for which a tax credit certificate has been issued, and the amount of credit transferred to the transferee. (f) TRANSFEROR - Any eligible taxpayer who transfers any or all of their portion of the credit to the transferee. (g) TRANSFER STATEMENT - A statement filed with the Department by the transferor that identifies the transferor and each eligible transferee, the amount of tax credit transferred to each eligible transferee, and the effective date of the credit. (h) TRANSFER AGREEMENT - A contract, either in writing or in an electronic format, between the transferor and the eligible transferee that includes the following: 1. Description and the address of the rail carrier that has been issued a tax credit certificate. Revenue Rule 810-3-43-.01 43-.01-1

2. The date the project was completed and placed in service. 3. The amount of credit being transferred to each transferee. 4. The purchase amount of the credit. 5. A statement by the eligible taxpayer agreeing to sell, transfer, convey, assign, and deliver the credit to the buyer along with an acknowledgement from the buyer agreeing to purchase, acquire, and accept the credit from the owner. (3) Qualified Claimants. The credit may only be claimed by an eligible taxpayer holding a tax credit certificate or an eligible transferee that has been issued a transfer tax credit certificate. Tax credits granted or transferred to a pass-through entity must be claimed at the entity level. Tax credits granted or transferred to a single member limited liability company or a Q-sub that is disregarded for federal income tax purposes, must be claimed by the owner of the disregarded entity. (4) Application of the Credit. The eligible taxpayer and eligible transferee may apply the entire tax credit against the income tax liability imposed by Chapter 18 of Title 40 of the Code of Ala. 1975, for the taxable year in which the qualified railroad rehabilitation project is completed and placed in service. If the placed in-service date is later than the completion date, then the placed in-service date must be used in determining the taxable year in which the tax credit can be utilized. If the tax owed by the eligible taxpayer is less than the tax credit, the eligible taxpayer is entitled to claim a refund for the difference. The tax credit cannot be carried forward to any subsequent tax year. (5) Transferability. The eligible taxpayer may transfer any or all the credit on or after the issuance date listed on the tax credit certificate. Once the credit is transferred, only the eligible transferee may utilize the transferred credit and the credit cannot be transferred again. The transferred credit cannot be refunded or carried forward by the eligible transferee. (6) Value of the Transferred Credit. Any tax credit transferred shall be at the value of at least (85%) eighty-five percent of the present value of the tax credits. The present value shall be determined by discounting the face value of the tax credit to account for the time value of money considering the time between the date the tax credit is transferred, and the due date of the eligible transferee’s Alabama Income Tax return for the tax year the credit must be claimed using a discount rate equal to the federal short-term rate plus (3%) three percentage points in effect as of the first of the month the tax credit is transferred. Rule 810-3-43-.01 Revenue 43-.01-2

Example: A qualified railroad rehabilitation project is placed in service June 15, 2020. The eligible taxpayer transfers the credit to the eligible transferee with a face value of $1,000 on October 30, 2020, when the discount rate of interest equals four percent (4%). The eligible transferee is a calendar year end filer with an Alabama income tax return due date of April 15, 2021. For purposes of applying the statutory 85% of present value limitation, the present value of the tax credit is calculated by multiplying the tax credit’s face value by 1 divided by (1+6/12 of 4%) or $1,000 x [1/1 + (6/12 x 4%)] or $1,000 x 1/1.02 or $1,000 x 98%, which equals a present value of $980. The $980 present value is then multiplied by 85% to establish a minimum sale price for the tax credit of $833.33. (7) Reporting Requirements. The transferor must file a transfer statement with the Department along with a copy of the executed transfer agreement(s), a copy of the tax credit certificate, and a $1,000 fee for each eligible transferee listed on the transfer statement no later than 30 days after the transfer agreement has been executed. The Department will issue a transfer tax credit certificate to each eligible transferee for the amount listed on the transfer statement within 30 days after receipt of the executed transfer agreement, along with the supporting documents. (8) The Department may examine records, books, or other relevant information maintained by the taxpayer for the purpose of computing and determining the correct amount of the credit. Author: Kelly Graham, Preeti Gratz Statutory Authority: Code of Ala 1975, §40-2A-7(a)(5), Chapter 11C of Title 37, and Chapter 18 of Title 40. History: New Rule: Published February 26, 2021; effective April 12, 2021. Amended: Published September 30, 2022; effective November 14, 2022. Revenue Rule 810-3-43-.01 43-.01-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-44 INSTALLMENT BASIS 810-3-44-.01 Installment Basis Sales - Sales Of Real Estate And Casual Sales Of Personal Property. (1)(a) For transactions prior to January 1, 1985 - With three important exceptions, §40-18-44 (as in effect before January 1, 1985) is with regard to the sale of real estate and the casual sale of personal property for a price exceeding $1,000, essentially the same as provisions of the United States Internal Revenue Code as in effect prior to January 1, 1985. The Department will therefore consider the rules and decisions of the Internal Revenue Service and the federal courts with respect to this section. The basic differences in the two laws are: (1) In §40-18-44(b)(ii), (as in effect prior to January 1, 1985) in order to qualify for the use of the installment method, the Alabama law requires that the principal payments received in the year of sale not exceed forty percent of the selling price. (2) Alabama law requires that the election to use the installment basis must be made in the return for the year of the sale. (3) The provision of the Federal Tax Reform Act of 1984 (P.L. 98-369) requiring that depreciation previously expensed be recognized in the year of sale whether or not any payments were received, does not apply. (b) Installment Sales - Dealers in Personal Property Prior to January 1, 1985. 1. A taxpayer who regularly sells personal property on the installment plan, may report the income from such sales on the installment basis. The seller may treat as income that proportion of the total payments received in the taxable year from installment sales that the gross profit realized or to be realized on the total installment sales made during each year bears to the total contract price of all such sales made during that respective year. (i) "Gross profit" means sales less cost of goods sold. Revenue Rule 810-3-44-.01 44-.01-1

(ii) "Total contract price" includes carrying charges and interest ascertainable at the time of sale, but excludes sales tax. (I) If state, county and city sales taxes are imposed on the consumer, and collected by the seller and remitted to the taxing agency, such sales taxes must not be included in the total contract price for purposes of computing taxable income from installment sales. Payments received are treated as applying first against the sales taxes. (II) If carrying charges or interest are not determinable at the time of sale and not included in the total contract price, payments received will be treated as applying to such charges before the gross profit percentage is applied against the balance of the total contract price. 2. The installment method described in section 1. above applies only to dealers and to sales of inventoriable personal property. (2) Installment Method - Transactions occurring after December 31, 1984, and before January 1, 1987. (a) Notwithstanding the provisions of Reg. 810-3-13-.03 (Method of Accounting), and subject to the requirements and restrictions of this rule, a taxpayer may elect to report income from installment sales under the installment method. (b) The election to report income from installment sales on the installment method must be made on or before the due date (with extensions) of the income tax return for the taxable year in which the installment sales occur. The election to report income from installment sales on the installment method may not be made, changed or revoked after the due date (with extensions) for the taxable year in which the installment sales occur. 1. The election to report on the installment method is made by including a statement with the income tax return for the taxable year in sufficient form to indicate the taxpayer is electing to report installment sales on the installment method, and containing details of the amounts of such installment sales, the amounts collected and included in income for the taxable year, and the amounts to be deferred to future taxable years. 2. For purposes of this paragraph (2), the following terms have the meanings ascribed to them: Rule 810-3-44-.01 Revenue 44-.01-2

(i) The term "installment sale" means a disposition of property (other than property of a kind which is required to be included in the inventory of the taxpayer if on hand at the close of the taxable year) where at lease one (1) payment is to be received after the close of the taxable year in which the disposition occurs. (I) The requirements of non-inventoriable property and at least one payment in a subsequent taxable year in section 1. above do not apply if the seller is a person who regularly sells or otherwise disposes of personal property on the installment plan. (ii) The term "installment method" means a method under which the income recognized for any taxable year from a disposition is that proportion of the payments received in that year which the gross profit (realized or to be realized when payment is completed) bears to the total contract price. (I) As used in subsection (ii) above, the total contract price of all sales of personal property on the installment plan includes the amount of carrying charges or interest and sales taxes which are determined with respect to such sales and which are added on the books of account of the seller to the established cash selling price of such property. This subsection (I) does not apply with respect to sales of personal property under a revolving credit plan. (II) If the carrying charges or interest and sales taxes with respect to sales of personal property, the income from which is reported on the installment method, are not included in the total contract price, payments received with respect to such sales shall be treated as first applying against such carrying charges or interest and sales taxes. (3) For transactions after December 31, 1986 - (a) Unless otherwise provided an installment sale must be reported under the installment method. An installment sale means a disposition of property where at lease one payment is received after the close of the taxable year in which the disposition occurs. 1. Exceptions to (a) include dealer dispositions. A dealer in real and/or personal property may not use the Revenue Rule 810-3-44-.01 44-.01-3

installment method to report the gain from "dealer dispositions." This includes: (i) any disposition of personal property by a person who regularly sells such property on the installment plan, and (ii) any disposition of real property that is held by a taxpayer for sale to customers in the ordinary course of the taxpayer's trade or business. 2. A taxpayer may elect to not have an installment sale be reported as an installment disposition. An election not to report an installment sale on the installment method shall be made on or before the due date prescribed by law (including extensions) for filing the taxpayer's return. Such an election shall be the same for Alabama purposes as for federal purposes. Once the election has been made, it may only be revoked if the IRS allows the election to be revoked for federal purposes. (b) Second dispositions by related persons - When a person makes an installment sale of property to a related person (first disposition) who in turn, sells the property before the installment payments are made in full (second disposition), the amount realized by the related party from the second disposition is treated as received by the initial seller at the time of the second disposition. Except in the case of marketable securities the related party rule will not apply if the second disposition took place more than two years after the first disposition. Further exceptions are: 1. Reacquisitions of stock by the issuing company. 2. A compulsory or involuntary conversion and any transfer thereafter shall be treated as a second disposition if the first disposition occurred before the threat or imminence of the conversion. 3. Second dispositions occurring after the death of the installment seller or the related purchaser. (c) Depreciable Property Sales. The installment method does not apply to installment sales of depreciable property between related persons. Therefore, all payments are deemed received in the year of disposition unless the disposition did not have as one of its principal purposes the avoidance of tax. For this purpose the term "related person" is as defined in I.R.C. §1239(b) and includes partnerships that are more than 50% owned, either directly or indirectly, by the same person. (d) Use of Installment Method by Shareholders In Certain Liquidations. If in a liquidation to which I.R.C. §331 applies Rule 810-3-44-.01 Revenue 44-.01-4

the shareholder received (in exchange for the shareholder's stock) an installment obligation then the shareholder may report the gain when received. Gain on the transfer of an installment obligation to a shareholder during a liquidation is not immediately taxed to the shareholder. [See I.R.C. §453(h)(1) for restrictions for use of this rule.] (e) Exceptions to Dealer Dispositions in (a) that may be reported using the installment method include: 1. The disposition of any property used or produced in the trade or business of farming. 2. The disposition of any residential lot, provided the dealer or any related person is not obligated to make any improvements to the lot. 3. The disposition of time-share rights to use or own residential real property for not more than six weeks per year or a right to use specific campgrounds for recreational purposes. (i) In order to use the installment method for the disposition of residential lots and timeshares, the taxpayer must pay interest (at the applicable state rate) on the amount of tax that is attributable to the installment payments received during the year (See I.R.C. §453(l)(3)(B)). (f) As this section adopts by reference I.R.C. §453 as in effect from time to time, decisions and interpretations of federal courts and agencies will be given due weight in interpreting this section. Author: Royce Lader. Statutory Authority: Code of Ala. 1975, §40-18-44. History: Adopted September 30, 1982. Amended: filed July 27, 1988; May 15, 1992. Revenue Rule 810-3-44-.01 44-.01-5

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-44 INSTALLMENT BASIS 810-3-44-.02 Disposition Of Installment Obligation (Repealed 11/16/01). (Repealed) Author: Royce Lader Statutory Authority: Code of Ala. 1975, §40-18-44. History: Adopted September 30, 1982. Amended: Filed July 27, 1988; May 15, 1992. Repealed: Filed October 12, 2001; effective November 16, 2001. Revenue Rule 810-3-44-.02 44-.02-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-45 PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION - ESTABLISHED; REQUEST FOR PROMPT ASSESSMENT (REPEALED) 810-3-45-.01 Limitation On Assessment And Collection (Repealed). (Repealed) Author: Ann Winborne. Statutory Authority: Code of Ala. 1975, § 40-18-43. History: Adopted September 30, 1982. Amended filed May 15, 1992. Repealed filed October4, 1993; effective November 8, 1993. Revenue Rule 810-3-45-.01 45-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-47 LIMITATIONS UPON CIVIL ACTIONS AND PROCEEDINGS BY TAXPAYER (REPEALED) 810-3-47-.01 Limitations Upon Suits And Proceedings By The Taxpayer (Repealed). (Repealed) Author: Ann Winborne. Statutory Authority: Code of Ala. 1975, § 40-18-43. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988.Repealed filed October 4, 1993; effective November 8, 1993. Revenue Rule 810-3-47-.01 47-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-49 ASSESSMENT OF TAX AND PENALTIES AGAINST THOSE FAILING TO MAKE RETURNS (REPEALED 11/16/01) 810-3-49-.01 Persons Failing To Make Returns And Persons Making Fraudulent Returns (Repealed). (Repealed) Author: Ann Winborne. Statutory Authority: Code of Ala. 1975,§ 40-18-43. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988.Repealed filed October 4, 1993; effective November 8, 1993. Revenue Rule 810-3-49-.01 49-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-53 INSPECTION OF RETURNS BY THIRD-PARTY AGENCIES (REPEALED 11/16/01) 810-3-53-.01 Inspection Of Returns By Third-Party Agencies (Repealed 11/16/01). (Repealed) Author: Ann Winborne Statutory Authority: Code of Ala. 1975, §40-18-53. History: Effective September 21, 1992. Repealed: Filed October 12, 2001; effective November 16, 2001. Revenue Rule 810-3-53-.01 53-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-100 SETOFF DEBT COLLECTION (REPEALED 11/16/01) 810-3-100-.01 Collection Of Debts By Setoff Of Income Tax Refund. Act 81-696 (now codified at § 40-18-100, et seq.) provides that debts owed the Alabama Commission on Higher Education and the Alabama Department of Human Services (formerly the Alabama Department of Pensions and Security) may be collected by setoff of an income tax refund of the debtor. Author: Carmen Mills, Anne Simms and John H. Burgess. Statutory Authority: Code of Ala. 1975, § 40-18-100. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Revenue Rule 810-3-100-.01 100-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-120 ACTIVE SOLAR ENERGY TAX CREDITS (REPEALED 11/16/01) 810-3-120-.01 Procedure For Claiming Credit. (1) In order to establish eligibility for the solar energy credit, the taxpayer shall submit a completed Application for Certificate of Eligibility, Schedule SCR-2, to Application Review Officer Alabama Solar Energy Center / UAH Huntsville, Alabama 35899 Submit the application as soon as practical after the solar energy system has been installed. (2) The approved Schedule SCR-2 and a completed Schedule SCR must be attached to the Alabama income tax return when filed. Schedule SCR Instructions provide detailed guidelines for determination of eligibility for credit. (3) There is no allowable credit (except for allowed carryovers from prior years) for active solar energy systems for tax years beginning after December 31, 1985. Author: Anne Simms, Carmen Mills and John H. Burgess. Statutory Authority: Code of Ala. 1975, § 40-18-120. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Revenue Rule 810-3-120-.01 120-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-121 PASSIVE SOLAR ENERGY TAX CREDITS (REPEALED 11/16/01) 810-3-121-.01 Procedure For Claiming Credit. (1) In order to establish eligibility for the solar energy credit the taxpayer shallsubmit a completed Application for Certificate of Eligibility, Schedule SCR-2, to Application Review Officer Alabama Solar Energy Center / UAH Huntsville, Alabama 35899 Submit the application as soon as practical after the solar energy system has been installed. (2) The approved Schedule SCR-2 and a completed Schedule SCR must be attached to your Alabama income tax return when filed. Schedule SCR Instructions provide detailedguidelines for determination of eligibility for credit. (3) There is no allowable credit (except for allowed carryovers from prior years) forpassive solar energy systems for tax years beginning after December 31, 1985. Author: Carmen Mills, Anne Simms and John H. Burgess. Statutory Authority: Code of Ala. 1975, § 40-18-121. History: Adopted September 30, 1982. Amended June 17, 1988; filed July 27, 1988. Revenue Rule 810-3-121-.01 121-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-135 INCOME TAX CREDITS 810-3-135-.01 Income Tax Credit For Qualifying Workplace Education Costs In The Basic Skills Education Program. (1) SCOPE. This regulation sets forth definitions of terms used in regulation 810-3-135-.02 which establishes the computation and limitation of the credit and procedures to be followed. (2) DEFINITIONS. The following terms have the meaning ascribed to them for the purposes of implementing Code of Ala. 1975, §40-18-135 and associated regulations, unless the context clearly indicates otherwise. (a) Approved basic skills education program. A basic skills education program that has received written approval from the Alabama Department of Education pursuant to this article. (b) Basic skills education program. An approved employer provided or employer sponsored education program that enhances basic skills of employees up to and including the twelfth grade functional level. (c) Costs of education. Direct instructional expenses incurred for or relating to instructors, materials, or equipment used in the qualifying program, or for supplies, textbooks, or salaries, including compensation paid to employees while participating in an approval basic skills education program. (d) Employee. An individual resident of Alabama who is employed for at least 24 hours per week by the employer seeking the income tax credit and who has been continuously employed for at least 16 weeks. (e) Employer. A resident or nonresident individual or corporate business, including but not limited to, a subchapter "S" corporation, that is subject to the state income tax. (f) Employer provided. An approved basic skills education program offered by the employer on the premises of the employer or on premises approved by the Alabama Department of Education. (g) Employer sponsored. A contractural arrangement with a school, college, university, adult basic skills education program, or other approved provider that offers an approved Revenue Rule 810-3-135-.01 135-.01-1

basic skills education program that is paid for by the employer. Author: Jeff Taylor, V. R. Frost Statutory Authority: Code of Ala. 1975, §40-18-135. History: New Rule: Filed January 4, 1996; effective February 8, 1996. Rule 810-3-135-.01 Revenue 135-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-135 INCOME TAX CREDITS 810-3-135-.02 Reporting And Calculating Credit For Approval Basic Skills Education Program. (1) SCOPE. This regulation applies to the computation and limitation of the credit available in the Basic Skills Education Program. (2) DEFINITIONS. Terms defined in regulation 810-3-135-.01 are incorporated herein by reference for purposes of this regulation, unless the context clearly indicates otherwise. (3) PROCEDURE. For tax periods beginning on or after January 1, 1993, an income tax credit equal to 20 percent of the actual costs of education of a qualified employee shall be provided to an employer who provides or sponsors a basic skills education program approved by and in compliance with the rules and regulations established by the Alabama Department of Education. (4) At the time of filing any tax return with the Department in which the education credit is claimed, the person signing the tax return shall file with the Department a statement indicating: (a) The actual costs of education of qualified employee(s), and, (b) A copy of the current year's "Workplace Education Tax Credit Certificate" and Certificate number issued by the Alabama Department of Education. (5) The income tax credit available shall be limited to the amount of the employer's income tax liability for the taxable year as computed without regard to this regulation. (a) In no event may the credit be carried forward or back to a prior or subsequent year. (6) No income tax credit shall be granted pursuant to this article to any employer of an employee participating in basic skills education program if the employer receives or requires reimbursement or any form of remuneration for any cost of the education. Author: Jeff Taylor, V. R. Frost Statutory Authority: Code of Ala. 1975, §§40-18-135, et seq. Revenue Rule 810-3-135-.02 135-.02-1

History: New Rule: Filed January 4, 1996; effective February 8, 1996. Rule 810-3-135-.02 Revenue 135-.02-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-135 INCOME TAX CREDITS 810-3-135-.03 Corporate Income Tax Credit For Alabama Coal Producer. (1) SCOPE. The department promulgates these rules to implement Act 95-239 and clarify the procedures used by a corporation to establish: (a) the definitions of terms and procedures used to calculate the credit; and, (b) the determination of when the credit is available; and, (c) the calculation of the annual credit available; and, (d) the information required to be reported to the department in order to utilize the credit. (2) DEFINITIONS. The following terms have the meaning ascribed to them for purposes of the regulation to implement Act 95-239, unless the context clearly indicates otherwise. (a) Alabama Coal. Coal produced from a location within Alabama. (b) Base Year. The calendar year 1994, or if the corporation did not produce coal in Alabama during 1994, a twelve-month consecutive period, subsequent to 1994, during which a corporation produces Alabama coal in each of the twelve consecutive months. (c) Base Year Production. The number of tons of Alabama coal produced during the base year. (d) Calendar Year. A period of twelve-months ending on December 31. (e) Corporation. Includes, but is not limited to, an association or joint stock company as defined in §40-18-1(2), or an Alabama S corporation as defined in §40-18-160(a). (f) Producer of Goal. A corporation that ultimately owns the right to extract coal which is subject to the Coal Severance Tax imposed by §40-13-2, Code of Ala. 1975. Revenue Rule 810-3-135-.03 135-.03-1

(3) PURPOSE. The purpose of this regulation is to provide the guidelines necessary to determine when a corporation is qualified for the coal credit and to calculate the credit available. (4) PROCEDURE. (a) Credit allowed. For tax periods beginning on or after January 1, 1995, every corporation at is doing business as a producer of coal in Alabama will be allowed a credit against the income tax imposed by §40-18-2, Code of Ala. 1975. (b) Amount of credit. The credit allowed shall be an amount equal to one dollar ($1) per ton coal produced during the tax period in excess of the coal produced during the base year of production. (c) Carry back or carry forward of credit. There is no provision in Act 95-239 for the carry forward or carry back of any utilized coal credit. Any credit in excess of the current year tax liability cannot applied to a prior or subsequent year corporate income tax liability. 1. Example: Corporation ABC produced 75,000 tons of coal during calendar year 1994. In calendar year 1995 ABC produced 100,000 tons of coal. ABC is entitled to a income tax credit of one dollar ($1) for every ton of coal produced in excess of the base year production or $25,000. ABC's calendar year 1995 Alabama income tax liability after application of all other credits is $15,000. The amount of credit excess of the current year liability cannot be applied to a prior or subsequent tax year liability. (d) Establishment of base year. The credit will not be allowed unless a base year has been established prior to the beginning of the current tax year. 1. Example: Corporation PLM, a calendar year taxpayer, began doing business in Alabama on January 1, 1996. PLM began producing Alabama coal on September 1, 1996, and produced 5,000 tons for coal per month during the next consecutive twelve-month period. PLM's base year is the twelve-month consecutive period from September 1, 1996, to August 31, 1997. The base year production is 60,000 tons. During calendar year 1997 PLM produced 75,000 tons of Alabama coal. PLM is not entitled to the coal credit for the 1997 tax year since the tax year is comprised of a portion of the base year. PLM will be entitled to the coal credit for the 1998 tax year for each ton of coal produced in excess of the base year production. (e) Tax period of less than twelve-months. There is no provision in Act 95-239 for the proration of the income tax Rule 810-3-135-.03 Revenue 135-.03-2

coal credit. The credit is based on the number of tons of coal produced during the short tax period in excess of the base year production. 1. Example: JKL Corporation base year production is 120,000 tons. JKL files a short tax year return for the period beginning January 1, 1996, and ending June 30, 1996. JKL produced 120,000 tons of Alabama coal during this six month period. JKL is not entitled to the coal credit since the number of tons of coal produced during the tax period did not exceed the base year production of 120,000 tons. 2. Example: Assume the same facts as in the preceding example except Corporation JKL reduced 150,000 tons of Alabama coal during the short tax period. JKL is entitled to a credit of $30,000. (f) Statement required to be attached to return. At the time of filing any tax return with the department in which the coal credit is claimed, the person signing the tax return shall file with the Department statement certifying the: 1. base year; and, 2. number of tons of coal produced in Alabama during the base year; and, 3. number of tons of coal produced in Alabama during the current tax period. (g) In the event two or more corporations are merged. 1. The following procedures will determine the base year and amount of credit available in the event of a merger/ acquisition between corporations with and without established base years, the surviving corporation or new corporation shall have as its base year the sum of the previous base years of participants. Upon filing the first tax return of the new or surviving corporation, the amount of credit available shall be the excess of coal produced during the first tax period over the base year. 2. In the event of a merger/acquisition between corporations having no established base years, the surviving or new corporation must establish a base year as provided within this regulation. 3. In the event that one or more of the corporations have filed a short period return and computed a credit as provided in subsection (4)(e) of this regulation, the surviving or new corporation may only compute the credit based only on Alabama coal produced which was not Revenue Rule 810-3-135-.03 135-.03-3

included in a short year return which such production was used to calculate a coal credit. The excess of Alabama coal (as adjusted) reduced over the base year will be allowed as a credit. 4. Example: Corporation BNM and Corporation GHJ are producers of coal as defined in subsection (2)(f) of this regulation and file calendar year return. BNM and GHJ base year production amounts are 500,000 and 100,000 tons of Alabama coal respectively. On July 17, 1996, BNM and GHJ are consolidated into a new corporation, ZAZ Corporation. BNM and GHJ each file corporate income tax return the short tax period ending July 17, 1996. BNM and GHJ produced 600,000 and 125,000 tons of Alabama coal, respectively, during the short tax period ending July 17, 1996. Corporation BNM is entitled to a maximum credit of $100,000 and corporation GHJ is entitled to a maximum credit of $25,000 for the short period ending July 17, 1996. For the period beginning July 18, 1996, and ending December 31, 1996, ZAZ Corporation produced 1,000,000 tons of Alabama coal. ZAZ Corporation is entitled to a maximum credit of 400,000. Author: Jeffrey Taylor; Verlon R. Frost Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57. History: New Rule: Filed January 30,1996, effective March 5, 1996. Rule 810-3-135-.03 Revenue 135-.03-4

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-135 INCOME TAX CREDITS 810-3-135-.04 Volunteer Emergency Responders Credit – General Guidelines. 1. Purpose. This rule sets forth guidelines and procedures for administering the Volunteer Emergency Responders Credit as provided in Chapter 18, Article 23 of Title 40, Code of Ala. 1975. 2. Definitions. For purposes of this rule, all terms except the terms explicitly provided below, are defined in §40-18-480, Code of Ala. 1975. a. DEPARTMENT – The Alabama Department of Revenue. b. ELIGIBLE DEPARTMENT – An eligible department includes any of the following: i. A volunteer or combination fire department certified by the State Forestry Commission. ii. An organized rescue squad operating as a public corporation and member of the Alabama Association of Rescue Squad. iii. A rescue squad affiliated with a city, town, county, or other state subdivision. c. QUALIFYING EMERGENCY RESPONDER – The following individuals qualify as emergency responders: i. Volunteer Firefighter or Volunteer Firefighter II certified by the Alabama Firefighter’s Personnel Standards and Education Commission as a firefighter. ii. EMT-Basic, Advanced EMT, or EMT Paramedic licensed by the Alabama Department of Public Health as an emergency medical services provider. 3. Eligibility for Tax Credit. Qualifying emergency responders who are active members of an eligible department and complete the minimum 30 hours of required training each year are eligible to claim the credit amounts as follows: i. $300 credit for a certified Volunteer Firefighter or a licensed EMT-Basic actively serving in an eligible department. Revenue Rule 810-3-135-.04 135-.04-1

ii. $600 credit for a certified Volunteer Firefighter II, a licensed Advanced EMT or EMT-Paramedic actively serving in an eligible department. A qualifying emergency responder may receive more than one credit if they meet the requirements for each credit separately and submit the necessary documentation to substantiate both credits. 4. Credit Award Process. To apply for the credit, qualifying emergency responders must follow these steps: i. Obtain a completed certificate, signed by the certifying supervisor, confirming the qualifying emergency responder meets the qualifications for the credit. If the emergency responder requesting the credit is signing as both the qualifying emergency responder and the certifying supervisor, additional documentation must be provided to confirm their role as the certifying supervisor. ii. By signing the certificate, the certifying supervisor attests to having verified the qualifying emergency responder’s compliance with the requirements of the statute. Certificates from ineligible departments are not considered to be valid, and emergency responders certified by such departments will be denied the tax credit. iii. Once the certificate from a qualifying department is obtained, qualifying emergency responders must submit the certificate, along with any supporting documentation, through the department’s online system. iv. Credit claims must be submitted in the name of the individual listed on the certificate even when filing a joint return. Approval from the department must be obtained before the credit can be claimed on the income tax return. v. If an individual qualifies for more than one credit, a separate certificate must be submitted for each credit to confirm eligibility. A single certificate containing multiple credit claims will not be accepted. vi. Only credit claims approved through the department’s online system will be permitted on the qualifying emergency responder’s income tax return. Claims submitted without prior approval through the department’s online system will be automatically denied. 6. Refunds and Carryforward. The credit is non-refundable and cannot be carried forward to future tax years. Any unused portion of the credit will be forfeited. 7. Examination of Records. The department may examine records, books, or other relevant information maintained by the taxpayer to Rule 810-3-135-.04 Revenue 135-.04-2

verify the credit claim and ensure the correct credit amount is determined. Author: Preeti Gratz and Mollie Harry Statutory Authority: Section 40-2A-7(a)(5) and Chapter 18 of Article 23 of Title 40, Code of Ala. 1975. History: New Rule: Published January 31, 2025; effective March 17, 2025. Revenue Rule 810-3-135-.04 135-.04-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-135 INCOME TAX CREDITS 810-3-135-.05 Employer Tax Credit – General Guidelines. (1) Purpose. This rule sets forth guidelines and procedures to be used by the department in the administration of the Employer Tax Credit as codified in Article 28 of Chapter 18 of Title 40, Code of Ala. 1975. (2) Definitions. (a) For purposes of this rule, all terms except the terms explicitly provided below, are defined in Act 2024-303. (b) DEPARTMENT - The Alabama Department of Revenue. (3) Eligibility for Tax Credit. The credit is an incentive for employers that provide childcare services to their employees and incur expenses related to childcare at eligible childcare facilities as defined in the Act. To be eligible for the credit, an employer must have paid or incurred qualified childcare expenditures during the tax year for providing these services to employees. (a) An employer must meet the requirements of Act 2024-303, make a timely reservation through the Department’s online system, and incur eligible expenses, to be eligible for the tax credit. i. Small businesses that meet these requirements are eligible to claim a credit for 100 percent of eligible expenses up to six hundred thousand dollars per year, not to exceed the amount of credit reserved through the online system. ii. All other employers that meet these requirements may claim a credit for 75 percent of eligible expenses up to six hundred thousand dollars per year, not to exceed the amount of credit reserved through the online system. (b) The Taxpayer is required to submit proof of eligible expenses incurred related to providing these benefits by March 1 of each year, beginning with 2026 calendar year. No payments or reimbursements for expenses for children older than five years are allowed. The tax credit must be claimed for the tax year during which the eligible expenses are incurred by the employer. Revenue Rule 810-3-135-.05 135-.05-1

(c) The tax credit must not be awarded to employers who cannot demonstrate that they prioritize the payment of eligible expenses for the benefit of employees who are eligible for the earned income tax credit under the Internal Revenue Code of 1986, as amended. (d) Except for employers who are childcare providers as defined in Act 2024-303, the employer tax credit is nonrefundable, nontransferable, and cannot be carried forward. The credit is refundable for employers who are childcare providers. (4) Credit Reservation. All credits must be awarded on a first- come, first-served basis until the annual aggregate limit is reached. (a) Beginning March 1, 2025, employers may reserve a credit allocation for eligible expenses through the department’s online system. (b) At least 25 percent of the total amount of tax credits must be reserved for awards to small businesses or employers that are headquartered in rural areas. (c) If the reserved credits for small businesses or rural employers are not fully allocated by July 1 of each calendar year, the remaining funds must be allocated to other applicants. (d) Taxpayers with partial credit allocations or without an allocation will be prioritized based on reservation submission order. Any disallowed credits from ineligible taxpayers will be allocated to the next qualified taxpayer pursuant to the first-come, first-served basis. (5) Credit Award Process. Taxpayers who receive a credit allocation must submit a credit claim through the department’s online system by March 1 of each year, beginning with the 2026 calendar year. (a) The credit claim must include required documentation to support the taxpayer’s eligible expenses. i. For direct payments to childcare facilities, include copies of paid invoices from the childcare facility showing each participating child’s name and dates of service, along with a copy of the written agreement between the childcare facility and employer. The written agreement must include terms of service, payment structure, and allocation specifics for the employee’s child(ren). Rule 810-3-135-.05 Revenue 135-.05-2

ii. For reimbursements to employees for childcare expenses, include copies of paid invoices from the employee that contains name of childcare facility, each participating child’s name and dates of service. Reimbursement can be in the form of cash or payroll reimbursements or through stipends. Reimbursements must be supplemented by corresponding expense claims. If stipends were provided, copies of agreements or documentation specifying the amount, purpose, and confirmation that the stipend is exclusively for childcare use must be included. iii. For employer-owned or operated childcare facility expenses, include a detailed ledger listing all costs associated with the facility and copies of invoices for the corresponding expenses. iv. For equipment purchases for childcare facility, include receipts for any equipment purchases made to support the childcare facility and a description of each item purchased. (b) Employers who do not secure a credit reservation will not qualify to claim the credit. (c) Incomplete or unsubstantiated claims will be automatically denied. (d) Employers must provide documentation demonstrating that the employer prioritizes supporting employees eligible for the Earned Income Tax Credit (EITC) under the Internal Revenue Code. (6) Employee Payroll information. The employer is required to submit the participating employee’s wages for the tax year for which the expenses have incurred. If the employee was paid overtime or bonuses, the employee’s hourly wage and hours worked should be submitted. (7) Examination of Records. The Department may examine records, books, or other relevant information maintained by the taxpayer for the purpose of computing and determining the correct amount of the credit. Author: Preeti Gratz and Kelly Graham Statutory Authority: §40-2A-7(a)(5), Article 28 of Chapter 18 of Title 40, Code of Ala. 1975 and Act 2024-303. History: New Rule: Published January 31, 2025; effective March 17, 2025. Revenue Rule 810-3-135-.05 135-.05-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-135 INCOME TAX CREDITS 810-3-135-.06 Facility Tax Credit – General Guidelines. (1) Purpose. This rule sets forth guidelines and procedures to be used by the department in the administration of the Facility Tax Credit as codified in Article 28 of Chapter 18 of Title 40, Code of Ala. 1975. (2)Definitions. For purposes of this rule, all terms except the terms explicitly provided below, are defined in Act 2024-303. (a) DEPARTMENT - The Alabama Department of Revenue. (3) Eligibility for Tax Credit. A childcare provider that owns a qualifying childcare facility with an Alabama Quality STARS rating and serves eligible children may receive a tax credit. The credit is calculated based on the facility’s STAR quality rating and the average monthly number of eligible children during the qualifying tax year. To be eligible for the tax credit, the childcare provider must meet the requirements of Act 2024-303 and make a timely reservation through the department’s online system. (a) The reservation must include the estimated tax credit allocation based on the childcare facility’s quality rating and the estimated average monthly number of eligible children for the qualifying tax year, not to exceed $25,000 per year for each childcare facility. (b) The tax credit amount is determined as follows: (i) If the childcare facility has a five-star STARS quality rating, the tax credit is calculated at $2,000 per eligible child. (ii) If the childcare facility has a four-star STARS quality rating, the tax credit is calculated at $1,750 per eligible child. (iii) If the childcare facility has a three-star STARS quality rating, the tax credit is calculated at $1,500 per eligible child. (iv) If the childcare facility has a two-star STARS quality rating, the tax credit is calculated at $1,250 per eligible child. Revenue Rule 810-3-135-.06 135-.06-1

(v) If the childcare facility has a one-star STARS quality rating, the tax credit is calculated at $1,000 per eligible child. (4) Credit Reservation. All credits must be awarded on a first- come, first-served basis until the annual aggregate limit of $5 million is reached. (a) Beginning March 1, 2025, childcare providers may reserve credit allocations online through the department’s online system. (b) At least 25 percent of the total amount of tax credits must be reserved for awards to facilities operating exclusively in rural areas. (c) If the reserved credits for rural childcare providers are not fully allocated by July 1 of each calendar year, the remaining funds must be allocated to other applicants. (d) Taxpayers with partial allocations or without an allocation is prioritized based on reservation submission order. Any disallowed credits from taxpayers is allocated to the next qualified taxpayer pursuant to the first-come, first-served basis. (5) Credit Award Process. Eligible childcare providers who reserve a tax credit allocation must submit a credit claim through the online system by March 1 of each year, beginning with the 2026 calendar year to determine the actual award. Childcare providers who do not secure a credit reservation will not qualify to claim the credit. (a) The following documentation is required when submitting the Facility Tax credit claim: (i) A copy of the childcare facility’s quality rating certificate issued by the Alabama Department of Human Resources. (ii) The average monthly number of eligible children enrolled during the tax year for which the credit is being claimed. The average monthly number of eligible children must be calculated by adding the average number of eligible children for each month of the tax year and dividing the total by twelve. The average number of eligible children for each month must be calculated by adding the average number of eligible children for each day of the month and dividing by the number of days in the month. (b) Incomplete or unsubstantiated applications is automatically denied. Rule 810-3-135-.06 Revenue 135-.06-2

(6) Refunds and Carryforward. If the amount of the tax credit exceeds the childcare provider’s Alabama tax liability, the excess amount must be refunded to the childcare provider. Unused tax credits cannot be transferred or carried forward to subsequent tax years. (7) Examination of Records. The department may examine records, books, or other relevant information maintained by the taxpayer for the purpose of computing and determining the correct amount of the credit. Author: Preeti Gratz and Kelly Graham Statutory Authority: §40-2A-7(a)(5), Article 28 of Chapter 18 of Title 40, Code of Ala. 1975 and Act 2024-303. History: New Rule: Published January 31, 2025; effective March 17, 2025. Revenue Rule 810-3-135-.06 135-.06-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-136 HISTORICAL REHABILITATION TAX CREDIT 810-3-136-.01 Historic Rehabilitation Tax Credit Of 2013 – General Guidelines. (1) This rule sets forth guidelines and procedures to be used by the Department of Revenue in the administration of the Historic Rehabilitation Tax Credit of 2013, as codified in Article 1 of Chapter 9F of Title 40 of the Code of Ala. 1975, which provides for a tax credit under Chapters 16 and 18 of Title 40 to Alabama taxpayers for the rehabilitation of certain historic and certain non-historic buildings in Alabama. (2) Definitions. In addition to the following definitions, for purposes of this rule, all terms shall have the same meanings as provided by Alabama Historical Commission Rule 460-X-23-.02 or as defined in the Act. (a) Department. The Alabama Department of Revenue. (b) Commission. The Alabama Historical Commission. (c) Tax Credit Certificate. A written form or letter issued by the Commission to the Owner of the Project awarded a historic rehabilitation credit providing information about the Project and the total amount of credit issued to the Project. (d) Transfer Tax Credit Certificate. A certificate issued by the Department to a Transferee providing information about the Project for which a Historic Rehabilitation Tax Credit Certificate has been issued and the amount of credit allocated to the Transferee. (e) Allocation Schedule. A list identifying the Owners, or if the Owner is a pass through entity, its members or partners, and the amount of credit allocated to each partner, member or owner. If there is more than one Owner or if the Owner is a pass-through entity, the Allocation Schedule is required to be filed with the Department as part of the Tax Credit Certificate or the Transfer Statement. (f) Recipient Tax Credit Certificate. A form, promulgated by the Department that is issued to an Owner, partner or member identifying the amount of credit allocated to the taxpayer. This form shall be issued by the Owner if there is more than one Owner of the Project or if the Owner is a pass-through entity (or issued by a pass-through entity that is a partner Revenue Rule 810-3-136-.01 136-.01-1

or member of the Owner), and is required to be filed with the taxpayer’s tax return. (g) Transferor. Any Owner, partner, or member of a Project for which a Historic Rehabilitation Tax Credit Certificate was issued, which transfers all or part of their portion of the credit. (h) Transferee. Any taxpayer that is transferred all or a portion of a historic rehabilitation tax credit. (i) Transfer Statement. A statement to be filed with the Department by the Transferor prior to the effectiveness of the transfer that identifies the Transferor and each Transferee, the amount of tax credit to be transferred to each Transferee, and the date the Project was placed in service. (j) Transfer Agreement. A written contract between the Transferor and the Transferee that provides the following information, but may also contain such other information as the Department may from time to time require: 1. Description and address of the Project that has been issued a Historic Rehabilitation Tax Credit Certificate; 2. The date the Project was placed in service; 3. The amount of credit being transferred to Transferee; 4. The Transferee acknowledges that the recapture of a credit, other than a credit that is improperly obtained by the Owner, shall apply against the Transferee or any person to whom the tax credits have been passed through and utilized pursuant to Rule 810-3-136-.03(2), and 5. The Transferor is required to notify the Transferee of any recapture or related adjustments of the credit within 30 days after the Transferor is notified that the credit has been recaptured or adjusted. Author: Kelly Graham, Neal Hearn, Cameran Clark Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); Title 40, Chapter 9F, Article 1. History: New Rule: Filed March 25, 2015; effective April 29, 2015. Amended: Filed January 5, 2018; effective February 19, 2018. Rule 810-3-136-.01 Revenue 136-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-136 HISTORICAL REHABILITATION TAX CREDIT 810-3-136-.02 Historic Rehabilitation Tax Credit Of 2013 – Availability, Claiming And Transferability. (1) This rule sets forth guidelines and procedures to be used by the Department of Revenue in the administration of the Historic Rehabilitation Tax Credit of 2013, as codified in Article 1 of Chapter 9F of Title 40, Code of Ala. 1975, which provides for a tax credit under Chapters 16 and 18 of Title 40 to Alabama taxpayers for the rehabilitation of certain historic and certain non-historic buildings in Alabama. (2) The Owner of a Project that has been issued a Tax Credit Certificate shall forward a copy of the Tax Credit Certificate to the Department within 30 days from the date of issuance. If there is more than one Owner of the Project, or if the Owner is a pass- through entity, an Allocation Schedule must be filed with the Tax Credit Certificate. Projects that have been issued more than one Tax Credit Certificate will combine the credits awarded and file only one Allocation Schedule with the Department. In keeping with taxpayer confidentiality, the Allocation Schedule shall only be filed with the Department and should not be filed with any taxpayer’s tax return. (3) Credits may only be claimed by taxpayers holding a Tax Credit Certificate, a Transfer Tax Credit Certificate, or a Recipient Tax Credit Certificate and by filing a copy of such certificate with the taxpayer’s tax return. If the tax credit is passed through by a pass-through entity holding a Tax Credit Certificate or Transfer Tax Credit Certificate, the pass-through entity must issue a Recipient Tax Credit Certificate to each member or partner receiving a tax credit in accordance with the Allocation Schedule and such certificate shall also be filed with the taxpayer’s tax return. (4) A taxpayer may apply the entire tax credit against the state portion of any tax imposed by Chapters 16 or 18 for the taxable year in which the certified rehabilitation is placed in service. Since the tax imposed by Chapter 16 includes taxes that are distributed to the municipalities and counties within Alabama, in addition to the tax that is retained by the state; the credit is only available to offset that portion that is retained by the state. The state portion of any tax imposed with regard to Chapter 16 means, for purposes of this rule, the portion of the tax to be distributed to the state’s general fund. Forms and instructions will be made available to taxpayers to provide guidance on how to Revenue Rule 810-3-136-.02 136-.02-1

compute this credit for those taxpayers subject to tax under Chapter 16. (5) Any unused portion of the taxpayer’s credit cannot be refunded, but may be carried forward for up to 10 additional years from the year in which the certified rehabilitation Project is placed in service. (6) On or after the date the Tax Credit Certificate is issued to the Project, any partner, member, or Owner of the Project may transfer all or part of their credit. Once a credit is transferred, only the Transferee or Transferees, or their partners or members, may utilize such credit and the credit cannot be transferred again. (7) Prior to the effectiveness of a transfer, the Transferor shall file a Transfer Statement with the Department along with a copy of the draft or final Transfer Agreement(s), a copy of the Tax Credit Certificate and a $1,000 fee for each Transferee listed on the Transfer Statement. If the Transferee is a pass-through entity, the Transferee must provide an Allocation Schedule with the Transfer Statement. Unless previously filed, the Transferor shall also file a copy of the executed Transfer Agreement with the Department no later than 30 days after the agreement has been executed. The Department shall issue a Transfer Tax Credit Certificate to each Transferee for the amount listed on the Transfer Statement within 30 days after receipt of the executed Transfer Agreement. If the amount of the Transferee’s tax credit listed in the agreement is different from the Transfer Statement originally filed with the Department, the Transferor shall submit an amended Transfer Statement with the executed agreement. (8) The aggregate amount of the tax credit taken or utilized by all of the Owners, partners, members of a Project or Transferees cannot exceed the amount of credit awarded on the related Tax Credit Certificate or Transfer Tax Credit Certificate, as applicable. Author: Kelly Graham, Neal Hearn Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); Title 40, Chapter 9F, Article 1. History: New Rule: Filed March 25, 2015; effective April 29, 2015. Amended: Filed January 5, 2018; effective February 19, 2018. Rule 810-3-136-.02 Revenue 136-.02-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-136 HISTORICAL REHABILITATION TAX CREDIT 810-3-136-.03 Historic Rehabilitation Tax Credit Of 2013 – Improperly Obtained Tax Credits And Recapture Of Tax Credits. (1) This rule sets forth guidelines and procedures to be used by the Department of Revenue in the administration of the Historic Rehabilitation Tax Credit of 2013, as codified in Article 1 of Chapter 9F of Title 40, Code of Ala. 1975, which provides for a tax credit under Chapters 16 and 18 of Title 40 to Alabama taxpayers for the rehabilitation of certain historic and certain non-historic buildings in Alabama. (2) The Department shall have the right to audit and assess 100% of any credit improperly obtained by the Owner. Any liability resulting therefrom shall apply against the Owner initially awarded the Tax Credit Certificate and not any subsequent Transferee of the tax credit or person to whom tax credits have been passed through pursuant to Section 40-9F-4(d). (3) Recapture of the credit shall apply against the taxpayer who utilizes the credit. The Owner shall report any recapture event to the Department, the Commission and the taxpayer. In the case of a Project which meets the requirements of, and a taxpayer in fact claims, the rehabilitation credit associated with the Project under Title 26, Section 47 of the Internal Revenue Code (the “Federal Historic Credit”), recapture and any related adjustments of basis due to recapture shall occur when and if recapture occurs with respect to the Federal Historic Credit and the amount of the recapture of the credit, and any required basis adjustments shall be proportionate to the recapture of the Federal Historic Credit. In all other cases, recapture occurs when the Project fails to meet the definitions of a Certified Historic Structure or a Certified Historic Residential Structure pursuant to Section 40-9F-2, and recapture and any related adjustments of basis due to recapture shall be governed by principles which correspond to those applicable to the Federal Historic Credit under Title 26 Section 50 of the Internal Revenue Code. Author: Kelly Graham, Neal Hearn, Cameran Clark Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); Title 40, Chapter 9F, Article 1. History: New Rule: Filed March 25, 2015; effective April 29, 2015. Amended: Filed January 5, 2018; effective February 19, 2018. Revenue Rule 810-3-136-.03 136-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-137 HISTORICAL REHABILITATION TAX CREDIT 810-3-137-.01 Historic Rehabilitation Tax Credit Of 2017 – General Guidelines. (1) This rule sets forth guidelines and procedures to be used by the Department of Revenue in the administration of the Historic Rehabilitation Tax Credit of 2017, as codified in Article 2 of Chapter 9F of Title 40 of the Code of Ala. 1975, which provides for a tax credit under Chapter 18 of Title 40 to Alabama taxpayers for the rehabilitation of certain certified historic buildings and residential historic structures in Alabama. (2) Definitions. In addition to the following definitions, for purposes of this rule, all terms shall have the same meanings as provided by Alabama Historical Commission Rule 460-X-25-.02 or as defined in the Act. (a) Department. The Alabama Department of Revenue. (b) Commission. The Alabama Historical Commission. (c) Tax Credit Certificate. A written form or letter issued by the Commission to the Owner of the Project awarded a historic rehabilitation credit providing information about the Project and the total amount of credit issued to the Project. (d) Transfer Tax Credit Certificate. A certificate issued by the Department to a Transferee providing information about the Project for which a Historic Rehabilitation Tax Credit Certificate has been issued and the amount of credit transferred to the Transferee. (e) Transferor. Any Owner of a Project for which a Historic Rehabilitation Tax Credit Certificate was issued, which transfers all or part of their portion of the credit. (f) Transferee. Any taxpayer that is transferred all or a portion of a historic rehabilitation tax credit. (g) Transfer Statement. A statement to be filed with the Department by the Transferor prior to the effectiveness of the transfer that identifies the Transferor and each Transferee, the amount of tax credit to be transferred to each Transferee, and the date the Project was placed in service. Revenue Rule 810-3-137-.01 137-.01-1

(h) Transfer Agreement. A written contract between the Transferor and the Transferee that provides the following information, but may also contain such other information as the Department may from time to time require: 1. Description and address of the Project that has been issued a Historic Rehabilitation Tax Credit Certificate; 2. The project number assigned to the Project by the Commission; 3. The date the Project was placed in service and if applicable, the taxable year the reservation was allocated to the project. If any supplemental credit is included in the transfer, include the taxable year the additional credit was allocated to the project; 4. The amount of credit being transferred to Transferee; 5. The purchase amount of the credit; 6. Statement that the transfer of the credit has been made and the transaction is closed; 7. The Transferee acknowledges that the recapture of a credit other than a credit that is improperly obtained by the Owner, shall apply against the Transferee who utilizes the tax credit pursuant to Rule 810-3-137-. 03(2), and 8. The Transferor is required to notify the Transferee of any recapture or related adjustments of the credit within 30 days after the Transferor is notified that the credit has been recaptured or adjusted. Author: Kelly Graha, Preeti Gratz Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); Title 40, Chapter 9F, Article 2. History: New Rule: Filed January 5, 2018; effective February 19, 2018. Amended: Published January 31, 2024; effective March 16, 2024. Rule 810-3-137-.01 Revenue 137-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-137 HISTORICAL REHABILITATION TAX CREDIT 810-3-137-.02 Historic Rehabilitation Tax Credit Of 2017 - Availability, Claiming And Transferability Of The Historic Rehabilitation Tax Credit. (1) This rule sets forth guidelines and procedures to be used by the department in the administration of the Historic Rehabilitation Tax Credit of 2017, as codified in Article 2 of Chapter 9F of Title 40, Code of Ala. 1975, which provides for a tax credit under Chapter 18 of Title 40 to Alabama taxpayers for the rehabilitation of certain historic and certain non-historic buildings in Alabama. (2) The owner of a project that has been issued a Tax Credit Certificate shall forward a copy of the Tax Credit Certificate to the department within 30 days from the date of issuance. (3) Credits may only be claimed by taxpayers holding a Tax Credit Certificate or a Transfer Tax Credit Certificate. Tax credits granted or transferred to a pass-through entity shall be claimed at the entity level. Tax credits granted or transferred to a single member limited liability company or a Q-sub that is disregarded for Federal Income Tax purposes shall be claimed by the owner of the disregarded entity. Any non-profit entity allowed a tax credit shall file an Alabama Income Tax Return for the tax year in which the reservation is allocated to a project, or the certified rehabilitation is placed in service to claim the credit. The tax credit shall not be claimed prior to the taxable year in which the certified rehabilitation is placed in service. (4) A taxpayer must apply the entire tax credit against the Income Tax imposed by Chapter 18 for the taxable year in which the reservation is allocated to a project or the certified rehabilitation is placed in service. Where the taxes owed by the taxpayer are less than the tax credit, the taxpayer shall be entitled to claim a refund for the difference. The tax credit cannot be carried forward to any subsequent tax year. The tax credit shall not be claimed prior to the taxable year in which the certified rehabilitation is placed in service. In the event that any additional credit is allocated to the taxpayer for a given project, the additional credit must be claimed in the taxable year the additional credit is allocated to the taxpayer. (5) On or after the date the Tax Credit Certificate is issued to the project, the owner of the project may transfer all or part of their credit. Once a credit is transferred, only the Transferee Revenue Rule 810-3-137-.02 137-.02-1

may utilize such credit and the credit cannot be transferred. If the tax owned by the transferee is less than the tax credit, the transferee is entitled to claim a refund for the difference. (6) Any tax credit transferred shall be at the value of at least eighty-five percent (85%) of the present value of the tax credits. The present value shall be determined by discounting the face value of the tax credit to account for the time value of money considering the time between the date the tax credit is transferred and the due date of the Transferee’s Alabama Income Tax Return for the tax year the credit must be claimed using a discount rate equal to the federal short-term rate plus three (3) percentage points in effect as of the first of the month the tax credit is transferred. Example: Project Z is placed in service June 15, 2019. The project owner transfers the credit to Transferee with a face value of $1,000 on September 30, 2019, when the discount rate of interest equals four percent (4%). The Transferee is a calendar year end filer with an Alabama Income Tax Return due date of March 15, 2020. For purposes of applying the statutory 85% of present value limitation, the present value of the tax credit is calculated by multiplying the tax credit’s face value by 1 divided by (1+6/12 of 4%) or $1,000 x [1/1 + (6/12 x 4%)] or $1,000 x 1/1.02 or $1,000 x 98% which equals a present value of $980. The $980 present value is then multiplied by 85% to establish a minimum sale price for the tax credit of $833.33. (7) Prior to the effectiveness of a transfer, the Transferor shall file a Transfer Statement with the department along with a copy of the draft or final Transfer Agreement(s), a copy of the Tax Credit Certificate and a $1,000 fee for each Transferee listed on the Transfer Statement. Unless previously filed, the Transferor shall also file a copy of the executed Transfer Agreement with the department no later than 30 days after the agreement has been executed. The department shall issue a Transfer Tax Credit Certificate to each Transferee for the amount listed on the Transfer Statement within 30 days after receipt of the executed Transfer Agreement. If the amount of the Transferee’s tax credit listed in the agreement is different from the Transfer Statement originally filed with the department, the Transferor shall submit an amended Transfer Statement with the executed agreement. (8) The aggregate amount of the tax credit taken or utilized by the owner or Transferees cannot exceed the amount of credit awarded on the related Tax Credit Certificate or Transfer Tax Credit Certificate, as applicable. Author: Kelly Graham, Preeti Gratz, Tawanna Small Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5) and Title 40, Chapter 9F, Article 2. History: New Rule: Filed May 30, 2018; effective July 14, 2018. Amended: Published November 30, 2020; effective January 14, 2021. Rule 810-3-137-.02 Revenue 137-.02-2

Amended: Published August 31, 2021; effective October 15, 2021. Amended: Published January 31, 2024; effective March 16, 2024. Revenue Rule 810-3-137-.02 137-.02-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-137 HISTORICAL REHABILITATION TAX CREDIT 810-3-137-.03 Historic Rehabilitation Tax Credit Of 2017 – Improperly Obtained Historic Rehabilitation Tax Credits And Recapture Of Historic Rehabilitation Tax Credits. (1) This rule sets forth guidelines and procedures to be used by the Department of Revenue in the administration of the Historic Rehabilitation Tax Credit of 2017, as codified in Article 2 of Chapter 9F of Title 40, Code of Ala. 1975, which provides for a tax credit under Chapter 18 of Title 40 to Alabama taxpayers for the rehabilitation of certain historic and certain non-historic buildings in Alabama. (2) The Department shall have the right to audit and assess 100% of any credit improperly obtained by the Owner. Any liability resulting therefrom shall apply against the Owner initially awarded the Tax Credit Certificate and not any subsequent Transferee of the tax credit pursuant to Section 40-9F-33. (3) Recapture of the credit shall apply against the taxpayer who utilizes the credit. The Owner shall report any recapture event to the Department, the Commission and the taxpayer. In the case of a Project which meets the requirements of, and a taxpayer in fact claims, the rehabilitation credit associated with the Project under Title 26, Section 47 of the Internal Revenue Code (the “Federal Historic Credit”), recapture and any related adjustments of basis due to recapture shall occur when and if recapture occurs with respect to the Federal Historic Credit and the amount of the recapture of the credit, and any required basis adjustments shall be proportionate to the recapture of the Federal Historic Credit. In all other cases, recapture occurs when the Project fails to meet the definitions of a Certified Historic Structure or a Certified Historic Residential Structure pursuant to Section 40-9F-31, and recapture and any related adjustments of basis due to recapture shall be governed by principles which correspond to those applicable to the Federal Historic Credit under Title 26 Section 50 of the Internal Revenue Code. Author: Kelly Graham Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5); Title 40, Chapter 9F, Article 2. History: New Rule: Filed January 5, 2018; effective February 19, 2018. Amended: Filed January 25, 2019; effective March 11, 2019. Revenue Rule 810-3-137-.03 137-.03-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-160 REQUIREMENTS FOR QUALIFICATION AS AN ALABAMA S CORPORATION 810-3-160-.01 Qualification Requirements For S Corporations. (1)(a) For tax years beginning before January 1, 1990, to qualify as an Alabama S corporation, the criteria to be met for each year of the election are - 1. a valid election must be in effect under I.R.C. § 1362, and 2. all nonresident shareholders who hold any stock interest in the electing corporation during any part of the tax year of the corporation must execute a consent agreement to report their share of the Alabama S corporation Alabama income to this state and pay any tax due thereon. (2)(a) The election will be made by filing Form 20S, together with the required consent agreements of all nonresident shareholders (if any), and any other required attachments; not later than the due date (with extensions) of the corporation return. (b) Once made, the election to be an Alabama S corporation for a taxable year may not be revoked or cancelled. (c) An "Alabama C corporation" means any corporation other than an Alabama S corporation. (3)(a) If the corporation ceases to qualify under I.R.C. § 1362, part-year S and C returns will be required as provided in I.R.C. § 1362(e). Such returns will be due not later than the fifteenth day of the third month after the close of the corporation's tax year, plus any extensions of time to file that may be granted. (b) An "S return" means Form 20S to be filed by qualified Alabama S corporations. A "C return" means Form 20S for domestic corporations or Form 2OF for foreign corporations. (4)(a) The consent agreement (Schedule NRA) to be executed by all nonresident shareholders shall contain the following information: 1. the name, address and social security number of the shareholder, and 2. a recitation of the agreement to report and pay tax to Alabama on the shareholder's share of the Alabama S Revenue Rule 810-3-160-.01 160-.01-1

corporation income in exchange for the benefits of allowing the corporation to file an Alabama S Corporation return, and 3. an agreement appointing the Alabama resident agent of the corporation and any agent or officer of the corporation present in Alabama as agent of the shareholder for service of process in any matter before the Department relating to the income tax returns of the shareholder and/or the corporation, and 4. be notarized or otherwise authenticated before some officer authorized to administer oaths. (b) If the stock is held by multiple owners (such as joint owners), each owner must execute a separate consent agreement. (c) Each nonresident shareholder may designate any other person or firm present in Alabama as agent for service of process, in addition to the agents required to be appointed in subparagraph (a) 3. above. (d) Any nonresident shareholder may, by power-of-attorney, authorize anyone to execute the required consent agreement on behalf of the shareholder. Such power-of-attorney, to be effective, must be filed with the Department on or before the due date (with extensions) of the first return in which a consent agreement is being executed under the power-of- attorney. The power-of-attorney need be filed only once and remains valid until the expiration date specified therein or until notice of revocation, cancellation or modification is received by the Department. Such power-of-attorney may be in any form sufficient to indicate the intent of the parties, and must be authenticated in the manner prescribed in subparagraph (a)4. above. (e)1. A nonresident is any person who is a legal resident of any state other than Alabama, or of any territory, possession, district or foreign country. 2. The status as a resident or nonresident will be determined as of the date of any distribution or deemed distribution. (5)(a) During all years (beginning on or after January 1, 1985 and before January 1, 1990) for which the corporation qualifies as an Alabama S corporation, the corporation will not be subject to income tax as a corporation under § 40-18-31. There are no provisions of Alabama law similar to Federal law (such as I.R.C. § 1374) imposing an income tax on the corporation for certain types of non-qualifying income or for excess investment income. Rule 810-3-160-.01 Revenue 160-.01-2

(b) The corporation will file a return on Form 20S for each year it qualifies as an Alabama S corporation. The S return will be due at the same time as other Alabama corporation income tax returns are due. An Alabama Schedule K-1 must be attached for each shareholder who held any stock interest in the Alabama S corporation during the taxable year, showing the shareholder's legal place of residence, and detailing the shareholder's pro rata share of the corporation's separately stated and nonseparately stated income and deductions attributed to Alabama (see Reg. 810-3-31-.02. for attribution of income to Alabama). The provisions of Reg. 810-3-39-.02 relating to extensions of time to file corporation returns are equally applicable to an Alabama S corporation. (6) For tax years beginning after December 31, 1989, an "Alabama S corporation" means any corporation qualified to do business in Alabama which has in effect a valid election under I.R.C. 1362. (For tax years beginning after December 31, 1989, see Reg. 810-3-176-.01 regarding composite returns for nonresidents.) Author: John H. Burgess. Statutory Authority: Act 89-837. History: Adopted November 13, 1985. Amended June 17, 1988; filed July 27, 1988. FiledJuly 22, 1992; October 30, 1992. Revenue Rule 810-3-160-.01 160-.01-3

ALABAMA DEPARTMENT OF REVENUEINDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-161 COMPUTING TAXABLE INCOME OF AN ALABAMA S CORPORATION 810-3-161-.01 Computation Of Taxable Income. (1) Nonseparately Stated Income. Nonseparately stated income for Alabama S corporations will be computed in the same manner as for individuals, except for those deductions and exemptions which are not applicable to nonindividuals, such as: (a) The personal exemption and credit for dependents allowed by §40-18-19, Code of Ala. 1975, (b) Charitable contributions allowed by §40-18-15, (c) The net operating loss deduction allowed by §40-18-15.2, (d) Medical expenses allowed by §40-18-15, (e) Moving expenses allowed by §40-18-15, (f) Alimony allowed by §40-18-15, (g) Contributions to an Individual Retirement Account (IRA) allowed by §40-18-15, (h) The deduction for certain expenses of producing income and determining taxes, allowed by §40-18-15, and (i) Depletion on oil and gas wells allowed by §40-18-15. (2) Separately Stated Income. Certain items of income, loss and deductions are to be passed through to the individual returns of the shareholders, rather than being deducted in computing the nonseparately stated income of the S corporation on the Alabama S corporation return. Separately stated items are those the separate treatment of which could affect the liability for tax of any shareholder. These items include: (a) Income taxes paid to the United States, (b) Charitable contributions, (c) Depletion on oil and gas wells, and (d) All items of income, loss, expense or deduction, which for the purpose of computing a net operating loss deduction for an individual would be classified as "nonbusiness" as defined in Revenue Rule 810-3-161-.01 161-.01-1

Rule 810-3-15-.22. These items classified as "nonbusiness" for Alabama net operating loss deduction purposes are usually classified as "portfolio income and expense" on the federal S corporation return and supporting schedules. (3) Net Operating Losses. The net operating loss carryback/ carryforward provision for individuals and the net operating loss carryforward provision for corporations are not applicable to Alabama S corporations. The yearly losses, if any, of the S corporation are passed through to the shareholders, and thus are not available at the corporate level for carryforward. Any losses incurred by a corporation in any years in which the corporation was not an Alabama S corporation, may not be carried forward to any years in which the corporation is an Alabama S corporation. (4) Multistate Operations. (a) For tax years beginning before January 1, 1990, Alabama S corporations which conducted business in more than one state were required to compute the income and deductions attributed to Alabama by allocating and apportioning the income and deductions to Alabama in accordance with the rules and regulations applicable to foreign corporations at that time. This includes Alabama S corporations which were created under Alabama law (domestic corporations). (b) For tax years beginning after December 31, 1989 and before January 1, 1997, the following rules applied for Alabama S corporations which conducted business in more than one state: 1. The Alabama S corporation was required to compute each resident shareholder's pro rata share of the entire income and deductions of the Alabama S corporation. (i) In computing taxable income under subparagraph 1., the Alabama S corporation was allowed a deduction for income taxes paid to states in which it was not treated as an S corporation. 2. The Alabama S corporation was required to compute each nonresident shareholder's pro rata share of income and deductions apportioned and allocated to Alabama in accordance with the rules and regulations applicable to foreign corporations at that time. For simplicity, compliance with the requirements of the Multistate Tax Compact, Chapter 27, Title 40, Code of Ala. 1975, will satisfy the requirement of this subparagraph. (c) For tax years beginning after December 31, 1996, Alabama S corporations which conduct business in more than one state shall compute the income, loss, deductions and credits to be attributed to Alabama in the same manner as provided in Rule 810-3-161-.01 Revenue 161-.01-2

accordance with the Multistate Tax Compact, Chapter 27, Title 40, Code of Ala. 1975. (d) An Alabama S corporation is conducting business in more than one state if it meets the provisions for being taxable in more than one state set out in Rule 810-27-1-4-.03. (e) Allocation and Apportionment Reporting Requirements. 1. For tax years beginning before January 1, 1990, an Alabama S corporation which did business in more than one state was required to complete the necessary schedules of Form 20S to compute the apportionment ratios and to apportion and allocate income, loss, deductions and credits among the states in which the corporation did business. 2. For tax years beginning on or after January 1, 1990 and before January 1, 1997, an Alabama S corporation which did business in more than one state and which had one or more nonresident shareholders was required to complete the necessary schedules of Form 20S to compute the apportionment ratios and to apportion and allocate income, loss, deductions and credits among the states in which the corporation did business. 3. For tax years beginning on or after January 1, 1997, an Alabama S corporation doing business in more than one state shall complete the necessary schedules of Form 20S to compute the apportionment ratios and to apportion and allocate income, loss, deductions and credits among the states in which the corporation does business. (5) Elections. Any election required or permitted to be made with respect to the computation of income, deductions, credits or allowances shall be made by the Alabama S corporation. Author: Verlon R. Frost, Jeff Taylor, Catherine McCary, Ann Winborne, CPA, CharlotteJordan, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-18-161. 40-2A-7(a) (5). History: Filed November 20, 1985. Amended: Filed May 15, 1992. Amended: Filed March 4,1997; effective April 8, 1997. Amended: Filed March 26, 1998; effective April 30, 1998. Amended: Filed March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-161-.01 161-.01-3

ALABAMA DEPARTMENT OF REVENUEINDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-161 COMPUTING TAXABLE INCOME OF AN ALABAMA S CORPORATION 810-3-161-.02 LIFO Recapture. (1) Definitions. For purposes of this regulation, the following definitions shall apply: (a) "LIFO recapture amount" means the excess of the inventory's value using the FIFO method over its value using the LIFO method. 1. For purposes of subparagraph (a), the inventory value means the aggregate amount of the inventory assets determined as of the end of the last tax year before the corporation converts to S status. 2. For purposes of subparagraph (a), the FIFO amount shall be determined by using the retail method if the corporation uses the retail method to determine the LIFO amount. If the corporation does not use the retail method to determine the LIFO amount, then the lower of cost or market method must be used to determine the FIFO amount. (b) "LIFO method" means the method authorized by 26 U.S.C. §472. For interpretation of federal statutes adopted by the Alabama legislature, see Rule 810-3-1.1-.01, Operating Rules. (c) "Inventory assets" means property which would normally be included in inventory of the corporation at the close of the taxable year. (2) LIFO Recapture Amount. (a) Any C corporation which converts to S corporation status, and which used the LIFO inventory method for its last C corporation tax year, must include the LIFO recapture amount in gross income for the last taxable year for which it was a C corporation. (b) Any amount included in gross income under paragraph (a) shall be included in the value of inventory by making the appropriate adjustments to basis. (3) Payment of Tax. The tax attributable to the inclusion in income of the LIFO recapture amount is payable in four equal installments. Revenue Rule 810-3-161-.02 161-.02-1

(a) The first installment must be paid on or before the unextended due date for filing the C corporation return for the last tax year before conversion to S corporation status. (b) The three remaining installments are due on or before the unextended due dates of the corporation's tax returns for the three succeeding tax years. (c) No interest will be charged if the installments are paid on or before their respective due dates. Author: Ed Cutter, CPA Statutory Authority: Act 89-837. History: Filed July 22, 1992, October 30, 1992. Amended: Filed March 31, 2000, effectiveMay 5, 2000. Rule 810-3-161-.02 Revenue 161-.02-2

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX DIVISION ADMINISTRATIVE CODE CHAPTER 810-3-162 INCOME TO BE REPORTED BY SHAREHOLDERS 810-3-162-.01 Income To Be Reported By Shareholders. (1)(a) For taxpayers who are shareholders of an Alabama S corporation with a tax year which began after December 31, 1996 and before January 1, 2011, each shareholder of an Alabama S corporation shall include in his individual Alabama income tax return each year his pro rata share of the: 1. separately stated items of income, loss, deduction or credit attributed to Alabama by the Alabama S corporation for the corporation's taxable year which ends with or during the individual's tax year; and 2. nonseparately stated items of income, loss, deduction or credit attributed to Alabama by the Alabama S corporation for the corporation's taxable year which ends with or during the individual's tax year. (b) For taxpayers who are shareholders of an Alabama S corporation with a tax year which began after December 31, 2010 - 1. Each resident shareholder shall include in his individual Alabama income tax return each year his pro rata share of the: (i) separately stated items of income, loss, deduction or credit of the Alabama S corporation for the corporation's taxable year which ends with or during the individual's tax year; (ii) nonseparately stated items of income, loss, deduction or credit of the Alabama S corporation for the corporation's taxable year which ends with or during the individual's tax year; and (iii) the Alabama resident’s inclusion of both the separately stated and nonseparately stated items shall be determined consistently with Code of Ala. 1975, §§40-18-162 and 40-18-14 and without regard to (a) above. Revenue Rule 810-3-162-.01 162-.01-1

2. Each nonresident shareholder shall include in his individual Alabama income tax return each year his pro rata share of the: (i) separately stated items of income, loss, deduction or credit attributed to Alabama by the Alabama S corporation for the corporation's taxable year which ends with or during the individual's tax year. (ii) nonseparately stated items of income, loss, deduction or credit attributed to Alabama by the Alabama S corporation for the corporation's taxable year which ends with or during the individual's tax year. (2) Any item included in the shareholder's pro rata share shall retain the same character as if received directly by the shareholder from the source. For example, the shareholder's pro rata share of interest income earned by the Alabama S corporation from United States government obligations would be exempt to the shareholder as if received directly by that shareholder from the U.S. Government. (3) If the sum of the separately stated and nonseparately stated items of income, loss and deduction is a net loss attributed to Alabama, that loss may be deducted on the individual return of the shareholder to the extent permitted below. (a) The net loss to be deducted on the return may not exceed the shareholder's Alabama adjusted basis in the stock of the Alabama S corporation, plus the shareholder's Alabama adjusted basis in any indebtedness of the Alabama S corporation to the shareholder. 1. For each year, the limitation is the Alabama adjusted basis of the shareholder's stock as determined under Reg. 810-3-164-.01(1), plus the Alabama adjusted basis of any indebtedness due the shareholder as determined under Reg. 810-3-164-.01(2). 2. Any loss in excess of the Alabama adjusted basis of the stock and indebtedness may be carried forward to the next succeeding year. 3. The Alabama adjusted basis of the stock and/or any indebtedness due the taxpayer will not be less than zero. (4) For taxpayers who are shareholders of an Alabama S corporation with a tax year which began after December 31, 1996 and before January 1, 2011 each shareholder shall include in gross income their deemed distributive share of the income or loss of the Alabama S corporation apportioned and allocated to Alabama. Rule 810-3-162-.01 Revenue 162-.01-2

Therefore, no income from sources without Alabama is included and no credit or deduction is allowable to the shareholder or the Alabama S corporation for income taxes paid by the shareholder or the corporation to any other state, local or foreign government in connection with such income. (5) For taxpayers who are shareholders of an Alabama S corporation with a tax year which began after December 31, 2010 - (a) resident shareholders include in gross income their deemed distributive share of the entire income or loss of the Alabama S corporation. Therefore, resident shareholders are allowed a credit, computed in accordance with Code of Ala. 1975, §40-18-21(a), for income taxes paid by or on behalf of the shareholder (including composite return and withholding payments) to any other state in which the corporation is treated as an S corporation. (b) nonresident shareholders include in gross income their deemed distributive share of the income or loss of the Alabama S corporation apportioned and allocated to Alabama. Therefore, no income from sources without Alabama is included and no credit is allowable to the nonresident shareholder for income taxes paid by the shareholder to any other state in connection with such income. (6) With the exception noted below, the amendments to this regulation which were filed with the Legislative Reference Service on March 21, 2011 are effective for tax years beginning after December 31, 2010. The Department of Revenue will not enforce these regulatory changes for tax periods ending prior to January 1, 2011, or for gains associated with the taxable disposition of all or any portion of a taxpayer’s assets or Subchapter K interests where the parties to the transaction can document that negotiations began prior to January 1, 2011 and continued with regularity until the transaction was completed in 2011. These amendments are consistent with the Administrative Law Division’s Ruling, McNees v. Department of Revenue, DOCKET NO. 06-523, entered December 12, 2006. (7) The Department will not rely on the amendments to this regulation which were filed with the Legislative Reference Service on March 21, 2011 for tax periods beginning after December 31, 2011. For tax periods beginning after December 31, 2011, the Department will issue new regulatory language addressing the issues to which these amendments pertain. Author: Catherine McCary, Ann F. Winborne, CPA, Individual and Corporate Tax Division; Joe Garrett, Tax Policy Administrator Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-162. History: Filed November 20, 1985. Filed with LRS November 19, 1991. Amended: June 19, 1992. Amended: Filed March 26, 1998; Revenue Rule 810-3-162-.01 162-.01-3

effective April 30, 1998. Amended: Filed August 3, 2011; effective September 7, 2011. Rule 810-3-162-.01 Revenue 162-.01-4

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-163 TAXATION OF TRANSACTIONS INDIVIDUALS RELATED TO SHAREHOLDERS OF ANALABAMA S CORPORATION 810-3-163-.01 Transactions Involving Related Individuals. (1) A related individual (as defined in subsection (2) below) who furnishes capital and/or provides services for an Alabama S corporation without receiving reasonable compensation for the capital and/or services, will be deemed to have received income from the Alabama S corporation equal to the value of reasonable compensation less the value of any compensation actually paid. A deduction will be allowed to the Alabama S corporation in an amount equal to the amount of income the related individual is deemed to have received from the corporation. No deduction is allowable to the related individual. (2) Definitons. For the purposes of this section, the following definitions apply: (a) Related Individual - Any person (or persons) who is the spouse, ancestor, or lineal descendent (or any trust for the primary benefit of such persons) related to a shareholder (or shareholders) of an Alabama S corporation or to any beneficiary (or beneficiaries) of a trust (or trusts) that is a shareholder of an Alabama S corporation. (b) Reasonable Compensation - The fair market value of capital furnished, or the fair market value of property, services, wages, fees or other compensation for services performed. The fair market value of capital furnished will be presumed to be equal to the rate of interest on delinquent taxes provided by §40-1-44, Code of Ala. 1975. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-163. History: Adopted November 13, 1985. Amended: Filed March 31, 2000; May 5, 2000. Revenue Rule 810-3-163-.01 163-.01-1

ALABAMA DEPARTMENT OF REVENUEINDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-164 COMPUTATION OF ADJUSTMENTS TO A SHAREHOLDER'S BASIS IN THE STOCK ANDINDEBTEDNESS OF AN ALABAMA S CORPORATION 810-3-164-.01 Adjustments To Basis Of Stock And Indebtedness. (1) Basis Adjustments - Shareholder's Stock in an Alabama S Corporation. (a) The shareholder's basis in the Alabama S Corporation stock is increased by: 1. Any separately stated income attributed to Alabama as computed under §40-18-162(a)(1), Code of Ala. 1975, to the extent included in the shareholder's return, as amended or adjusted. 2. Any nonseparately stated income attributed to Alabama as computed under §40-18-162(a)(2), to the extent included in the shareholder's return, as amended or adjusted. 3. Any oil and gas depletion deduction attributed to Alabama in excess of the basis of the wells being depleted. (b) The shareholder's basis in the Alabama S Corporation stock is decreased by: 1. Any distributions which constitute a return of capital under §40-18-165. 2. Any separately stated loss and deductions attributed to Alabama computed under §40-18-162(a)(1); such as charitable contributions. 3. Any nonseparately stated loss and deductions attributed to Alabama computed under §40-18-162(a)(2). 4. Any losses or expenses attributed to Alabama not deductible by the corporation or chargeable to its capital account. 5. Any depletion deduction attributed to Alabama on oil and gas property to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to the shareholder. Revenue Rule 810-3-164-.01 164-.01-1

(c) Basis Not Reduced Below Zero. The basis of the stock, as adjusted in the manner provided in paragraph (1) above, will not be reduced below zero. Any amount that would reduce the basis of the stock below zero will be used to adjust the shareholder's basis (but not below zero) in any indebtedness due to the shareholder from the corporation, as provided in paragraph (2) below. (d) Multistate Operations. For tax years beginning after December 31, 1996: 1. The increases under subparagraph (a) and the decreases under subparagraph (b) will include the entire amount, without allocation and apportionment under Chapter 27, Title 40, Code of Ala. 1975, of the shareholder's pro rata share of such increases and decreases during the taxable year. 2. If an item of income is subject to allocation and apportionment, the basis increases under subparagraphs (1)(a)1, (1)(a)2 and (1)(d)1 will be allowed only in proportion to the income reported on the taxpayer's return that bears to the amount of income allocated and apportioned to Alabama and required to be included in the shareholder's return. (2) Basis of Shareholder Loans to the Corporation. The shareholder's basis in any indebtedness due to the shareholder from the corporation will be: (a) The basis (determined as provided in §40-18-6) of the debt, less (b) Any excess basis adjustments to the shareholder's stock as provided in subparagraph (1)(c) above, but (c) Not less than zero. (3) See Rule 810-3-162-.01 for carryover of excess amounts which would reduce the basis of debt or stock below zero except for the provisions of this regulation. (4) Restoration of the Shareholder's Basis in Indebtedness and Stock. Positive adjustments to the shareholder's basis in future years will be first applied to increase the shareholder's basis in any indebtedness due to the shareholder from the corporation, and then applied to increase the shareholder's stock basis. (5) If the stock of the Alabama S corporation becomes worthless, the amount of loss to be deducted by the shareholder will be determined after making the basis adjustments set out in paragraph (1) above. Rule 810-3-164-.01 Revenue 164-.01-2

(6) For non-resident shareholders, the investment in Alabama S corporation stock and debt will be considered to be attributed to the shareholder's state of domicile. For resident shareholders, the investment in Alabama S corporation stock and debt will be considered to be attributed to Alabama in full. (7) Examples. The following examples will serve to illustrate the operation of this regulation: (a) Able, an Alabama resident, is the 100% owner of Sussex Corporation, an Alabama S corporation with all its activities attributed to Alabama. Able's basis for his Sussex Corporation stock at the beginning of 1985 is $1,000. In addition, Able has a basis of $500 in a loan from him to the corporation. 1. On its tax return for the year ended December 31, 1985, Sussex reports the following: Non-separately stated loss $1,200 Charitable contributions 100 2. Able's basis in his Sussex stock and in the debt of the corporation at December 31, 1985 is computed as follows: Basis in Basis in Stock Debt Basis at January 1, 1985 $1,000 $ 500 Non-separately stated loss and charitable contributions reduce stock basis (but not below zero) (1,000) (300) Basis at December 31, 1985 $ -0- $ 200 (b) In the year ended December 31, 1986, Sussex Corporation reports the following: Net income $2,500 Charitable contributions 300 1. Able's basis in his Sussex Corporation stock and the debt owed to him from the corporation at December 31, 1986 is computed as follows: Basis in Basis in Revenue Rule 810-3-164-.01 164-.01-3

Stock Debt Basis at January 1, 1986 (see above) -0- $ 200 Net income increases basis of debt to extent of prior reduction 300 Balance of net income and separately stated items increases basis in stock 1,900 Basis at December 31, 1986 $1,900 $ 500 (c) The situation is the same as in (a) and (b) above except (1) the tax periods are 1997 and 1998 and (2) the corporation has only 50% of its activities attributed to Alabama. 1. Able reports his 100% share of the income attributed to Alabama. 2. Able's basis in his Sussex Corporation stock and in the debt to him from the corporation will be the same as computed in (a) and (b) above. For tax periods beginning after December 31, 1996, the shareholder's basis is adjusted by his share of the total Alabama S corporation income (loss). (d) The situation is the same as in (c) above except Able (100% shareholder) reports on his 1998 tax return only 95% of the nonseparately computed income attributed to Alabama. Able's basis should increase by only 95 % of the nonseparately computed income. 1. Able's basis in his Sussex Corporation stock and in debt to him from the corporation at December 31, 1998 is computed as follows: Basis in Basis in Stock Debt Basis at January 1, 1998 (see above) $-0- $200 Net income increases basis of debt to extent of prior reduction 300 Rule 810-3-164-.01 Revenue 164-.01-4

Balance of net income (2375-300) and separately stated items (-300) increases basis in stock 1775 Basis at December 31, 1998 $1775 $500 (8) Inherited Stock of an Alabama S Corporation. (a) If any person acquires stock in an Alabama S corporation by reason of the death of a decedent or by bequest, devise, or inheritance, then the treatment of any item of income of the S corporation shall be determined in accordance with 26 U.S.C. §691, concerning recipients of income in respect of a decedents, which shall be applied as if the decedent had held directly his or her pro rata share of such item. For interpretation of federal statutes adopted by the Alabama legislature, see Rule 810-3-1.1-.01, Operating Rules. (b) The basis of any stock in an Alabama S corporation which is determined under §40-18-6 shall be reduced by the portion of the value of the stock that is attributable to items constituting income in respect of a decedent. Author: Verlon Frost, Catherine McCary, Ann Winborne, CPA, Charlotte Jordan, Ed Cutter,CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57, 40-18-164. History: Adopted November 13, 1985. Amended: Filed March 26, 1998; effective April 30,1998. Amended: Filed March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-164-.01 164-.01-5

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-165 TAXATION OF ACTUAL DISTRIBUTIONS BY AN ALABAMA S CORPORATION 810-3-165-.01 Taxation Of Actual Distributions By An Alabama S Corporation. (1) Treatment of Property Distributions. An actual distribution of property (not the prorata share taken into account under §40-18-162, Code of Ala. 1975) by an Alabama S Corporation in accordance with the provisions of §40-18-36, will be treated in the following manner: (a) If the Alabama S corporation has no accumulated earnings and profits (from any year in which an Alabama S election was not in effect or from a merger), the distribution will not be included in the shareholder's gross income to the extent the distribution does not exceed the adjusted basis of the stock. 1. To the extent the distribution exceeds the shareholder's adjusted basis in the stock of the Alabama S corporation, the excess will be treated as a gain from the sale or exchange of property. (b) If the Alabama S corporation has accumulated earnings and profits (from any year in which an Alabama S election was not in effect or from a merger), and the distribution does not exceed the Alabama Accumulated Adjustments Account, the distribution will not be included in the shareholder's gross income to the extent of the shareholder's adjusted basis of the stock. 1. To the extent the distribution exceeds the shareholder's adjusted basis of the stock, the distribution will be included in the shareholder's gross income as a dividend to the extent that it does not exceed the corporation's Alabama accumulated earnings and profits. 2. To the extent the distribution exceeds the corporation's Alabama accumulated earnings and profits, but not the Alabama Accumulated Adjustments Account (after application of subparagraph (b) above), the excess will not be included in the shareholder's gross income. 3. To the extent the distribution exceeds the corporation’s Alabama accumulated earnings and profits and the Alabama Accumulated Adjustments Account, the Revenue Rule 810-3-165-.01 165-.01-1

excess will be treated as a gain from the sale or exchange of property. (2) In applying the rules of this section, the shareholder's basis in his or her stock will first be adjusted as provided in Rule 810-3-164-.01 and the Alabama Accumulated Adjustments Account adjusted as provided in Rule 810-3-166-.01. (3) Special Election. As provided in §40-18-166(b), the Alabama S corporation may elect, with the consent of all the affected shareholders, to treat all distributions made during the taxable year as distributions first from accumulated earnings and profits rather than from the Alabama Accumulated Adjustments Account. See Rule 810-3-166.01. (4) Nonresident Shareholders. Nonresident shareholders who receive distributions under the provisions of this regulation are not required to include such amounts in their Alabama nonresident income tax returns, except when paragraph (3) above applies. (5) Examples. The following examples will serve to illustrate the operation of this regulation: (a)1. Jones is the 100% shareholder of Acme, Inc., an Alabama S corporation which has its first year of existence in 1985, and therefore has no accumulated earnings and profits. All its income and deductions are attributed to Alabama. Jones' basis in his Acme stock at January 1, 1985 is $1,000. 2. Acme reports the following on its tax return for the year ended December 31, 1985: Non-separately stated income $1,500 Distribution to Jones on 10/31/85 2,000 3. Jones' adjusted basis in his Acme stock at December 31, 1985, before giving effect to the distribution, is computed as follows: Basis at January 1, 1985 $1,000 Non-separately stated income for 1985 1,500 Basis on December 31, 1985 $2,500 4. The entire distribution to Jones on 10/31/85 is a non- taxable return of his basis. After giving effect to the distribution, Jones' basis is his Acme stock at December 31, 1985 is $500. (b) The facts are the same as in example (a) above, except that the distribution to Jones on October 31, 1985, is $3,000. Rule 810-3-165-.01 Revenue 165-.01-2

1. The distribution to Jones is characterized as a non- taxable return of his basis to the extent of his adjusted basis before giving effect to the distribution. The excess of this distribution over his basis is taxed as a gain from the sale or exchange of his Acme stock. His adjusted basis on December 31, 1985 is $2,500 before recognizing the distribution (see example (a)3, above). Therefore, Jones has a non-taxable return of basis of $2,500 and a gain from the exchange of his stock of $500. (c) The facts are the same as in the example (b) above, except that Acme has accumulated earnings and profits from prior C corporation years in the amount of $3,000. 1. Acme's accumulated adjustments account at December 31, 1985, before giving effect to the distribution is $1,500, the amount of the non-separately stated income. The $3,000 distribution to Jones on October 31, 1985, is characterized as follows: Non-taxable restoration of basis to the extent of the Alabama Accumulated Adjustments Account $1,500 Taxable dividend paid from accumulated earnings and profits $1,500 Total Distribution $3,000 2. Jones' basis in his Acme stock at December 31, 1985, after giving effect to the distribution is $1,000. The balance in Acme's accumulated earnings and profits account at December 31, 1985, after giving effect to the distribution, is $1,500. (d) The facts are the same as in example (c) above, except that Acme, with Jones' consent, has elected under Rule 810-3-166-.01 to treat all distributions in the taxable year as coming first from accumulated earnings and profits. 1. The entire distribution is characterized as a taxable dividend paid from accumulated earnings and profits. Jones' basis in his Acme stock at December 31, 1985 is $2,500, and the balance in Acme's accumulated adjustments account at December 31, 1985 is $1,500. Acme has no accumulated earnings and profits at December 31, 1985, after giving effect to the distribution. (6) For tax years beginning after December 31, 1996, adjustments for distributions are made before applying the loss limitation. The stock basis is adjusted by the positive adjustments under Rule Revenue Rule 810-3-165-.01 165-.01-3

810-3-164-.01 but is not decreased by any of the negative adjustments before taking into account any distributions. Author: Verlon Frost, Catherine McCary, Ann Winborne, CPA, Charlotte Jordan, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-165. History: Adopted November 13, 1985. Filed July 22, 1992; October 30, 1992. Amended: Filed March 26, 1998; effective April 30, 1998. Amended: Filed March 31, 2000; effective May 5, 2000. Rule 810-3-165-.01 Revenue 165-.01-4

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-166 COMPUTATION OF THE ALABAMA ACCUMULATED ADJUSTMENTS ACCOUNT 810-3-166-.01 Alabama Accumulated Adjustments Account. (1) The Alabama Accumulated Adjustments Account. (a) The Alabama Accumulated Adjustments Account (AAAA) is an account maintained for an Alabama S corporation which details the amounts of earnings, profits, losses, gains and deductions which have been previously included by the individual shareholders on their respective income tax returns. It is used to compute the tax effect of distributions made by Alabama S corporations which have accumulated earnings and profits. (b) For tax years beginning after December 31, 1990, and before January 1, 1997, the adjustments to the Alabama Accumulated Adjustments Account included: 1. The amounts of earnings, profits, losses, gains and deductions attributed to Alabama and includible by the nonresident shareholders on their respective returns, and 2. The entire amounts of earnings, profits, losses, gains and deductions includible by the Alabama resident shareholders on their respective returns. (c) For tax years beginning on or after January 1, 1997, the adjustments to the Alabama Accumulated Adjustments Account include the entire earnings, profits, losses, gains and deductions of the S corporation to the extent includible by the individual shareholders on their respective returns. 1. If an item of income is subject to allocation and apportionment, the adjustment is an amount that is in proportion to the amount of the income reportable on the shareholder’s return bears to the amount of income allocated and apportioned to Alabama and required to be included in the shareholder’s return. (2) Adjustments to the Alabama Accumulated Adjustments Account. The AAAA is equal to zero on the first day of the first year the corporation is an Alabama S corporation. (a) The balance of the account is increased by the following amounts: Revenue Rule 810-3-166-.01 166-.01-1

1. Any separately stated income, except exempt income (as defined in §40-18-14, Code of Ala. 1975), as computed under §40-18-162(a)(1), Code of Ala. 1975, 2. Any nonseparately stated income, except exempt income as defined in §40-18-14, as computed under §40-18-162(a) (2), and 3. Any oil and gas depletion deduction in excess of the basis of the wells being depleted. (b) The balance of the account is decreased by the following amounts: 1. Any separately stated loss and deductions, as computed under §40-18-162(a)(1), 2. Any nonseparately stated loss and deductions, as computed under §40-18-162(a)(2), 3. Any deduction for oil and gas depletion to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to the shareholder, and 4. Any distribution of the type described in Rule 810-3-165-.01, subdivisions (1)(a)or (1)(b). (c) For tax years beginning after December 31, 1996, in applying the rules of §40-18-166 to distributions, the AAAA for the end of the taxable year will be determined without regard to the net loss for the taxable year. (3) AAAA Adjustment Upon Redemption of Stock. If the Alabama S corporation redeems parts of its stock, the AAAA will be decreased by an amount which bears the same ratio to the balance in such account as the number of shares redeemed in such redemption bears to the total number of shares of the S corporation issued and outstanding immediately before the redemption. For example, if the S corporation should redeem one-half of its stock, the AAAA would be reduced by one-half. (4) Election Concerning Distribution Treatment. An Alabama S corporation may, with the consent of all affected shareholders, elect to have all distributions treated as distributions first from the accumulated earnings and profits, rather than as distributions of amounts from the AAAA. See Rule 810-3-165-.01(3). (a) The term "affected shareholder" means any shareholder who receives a distribution from the Alabama S corporation during the taxable year of the corporation. Rule 810-3-166-.01 Revenue 166-.01-2

(b) The consent may be in any form which clearly reflects the shareholder's election under §40- 18-166(b) to treat actual distributions as being first from accumulated earnings and profits, rather than a tax-free distribution from the Alabama Accumulated Adjustments Account, and must be notarized or otherwise authenticated before some officer authorized to administer oaths. (c) The consent must be attached to the return (Form 20S) of the Alabama S corporation for the taxable year. (d) This election and consent will not affect the requirement under §40-18-162 for the shareholder to include his or her prorata share of the corporation's income, gains, losses and deductions attributed to Alabama in his or her Alabama individual income tax return. (5) In administering and interpreting this regulation, the Department will consider administrative rulings and judicial decisions in respect to the similar provisions of the Internal Revenue Code and Regulations thereunder. Author: Jeffrey Taylor, Verlon Frost, Catherine McCary, Ann Winborne, CPA, Charlotte Jordan, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-166. History: Adopted November 13, 1985. Filed July 22, 1992; October 30, 1992. Amended: Filed March 26, 1998; effective April 30, 1998. Amended: Filed March 31, 2000, effective May 5, 2000. Revenue Rule 810-3-166-.01 166-.01-3

ALABAMA DEPARTMENT OF REVENUE INDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-167 APPLICABILITY OF INCOME TAX RULES AND REGULATIONS TO ALABAMA S CORPORATIONS AND SHAREHOLDERS (REPEALED 11/14/22) 810-3-167-.01 Applicability Of Income Tax Rules And Regulations (Repealed 11/14/22). (REPEALED) Author: Verlon Frost, Catherine McCary Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57, 40-18-167. History: Adopted November 13, 1985. Amended: Filed March 26, 1998; effective April 30, 1998. Amended: Filed March 31, 2000, effective May 5, 2000. REPEALELD: Published September 30, 2022, effective November 14, 2022. Revenue Rule 810-3-167-.01 167-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-168 NET OPERATING LOSS DEDUCTION NOT APPLICABLE TO AN ALABAMA S CORPORATION 810-3-168-.01 Net Operating Loss Deduction For S Corporations. (1) No net operating loss carryback or carryforward deduction is allowable for an Alabama S corporation. See Rule 810-3-161-.01 and 810-3-35.1-.01. (2) No carryforward and no carryback shall arise at the corporate level for a taxable year for which a corporation is an Alabama S corporation. (3) The taxable year that a corporation is an Alabama S corporation may be considered in determining the number of taxable years which a net operating loss item can be carried back or carried forward. (4) See also Rule 810-3-174-.02, Built-in Gains Tax. Author: Ed Cutter, CPA, Ann Winborne, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-168. History: Adopted November 13, 1985. Amended: Filed March 31, 2000, effective May 5, 2000. Revenue Rule 810-3-168-.01 168-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-169 ADJUSTMENTS TO THE EARNINGS AND PROFITS ACCOUNT OF AN ALABAMA S CORPORATION 810-3-169-.01 Adjustments To Earnings And Profits. (1) Except as provided below, no adjustments will be made to the earnings and profits account of an Alabama S corporation. An Alabama S corporation will have no earnings and profits accruing during any period in which such an election is in effect. (2) In the case of a redemption, liquidation, or reorganization (including a divisive reorganization) of an Alabama S corporation, the accumulated earnings and profits account (if any) shall be increased or decreased accordingly. For example, if 50% of the fair market value of the assets of the Alabama S corporation are transferred to a new corporation, then 50% of the Alabama accumulated earnings and profits account will also be transferred to the new corporation. In the case of a merger, the accumulated earnings and profits will be increased or decreased by the accumulated earnings and profits of the merged corporation. (3) If an Alabama S corporation makes a distribution which is in excess of the Alabama Accumulated Adjustments Account, but not in excess of the accumulated earnings and profits account, the earnings and profits account will be decreased by the amount of the excess distribution. See Rule 810-3-165-.01. (4) If a corporation makes a distribution of money with respect to its stock during a post-termination transition period, the basis of the stock will be reduced by the amount of the distribution which does not exceed the Alabama Accumulated Adjustments Account. An Alabama S corporation may elect to have the preceding sentence of this paragraph not apply to all distributions made during a post-termination transaction period described in §40-18-172, Code of Ala. 1975, but only if all the shareholders of the Alabama S corporation to whom distributions are made by the Alabama S corporation during such post-termination transition period consent to such election. Author: Jeffery Taylor Statutory Authority: Code of Ala. 1975, §40-18-169. History: Filed November 20, 1985. Amended filed May 15, 1992. Amended: Filed March 31,2000; effective May 5, 2000. Revenue Rule 810-3-169-.01 169-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-170 RESERVED (REPEALED 5/5/00) 810-3-170-.01 Two-Percent Rule (Repealed 5/5/00). (REPEALED) Author: John H. Burgess Statutory Authority: Code of Ala. 1975, §40-18-170. History: Adopted November 13, 1985. Repealed: Filed March 31, 2000; effective May 5,2000. Revenue Rule 810-3-170-.01 170-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-171 COMPUTATION OF EACH SHAREHOLDER'S SHARE OF THE INCOME, LOSS, DEDUCTION &CREDIT FROM AN ALABAMA S CORPORATION 810-3-171-.01 Determination Of Shareholder's Pro Rata Share. (1) The "post-termination transition period" is: (a) The period that begins on the day following the last day of the last S year, and ending on the later of: 1. One year from the last day of the S year, or 2. The due date, including extensions, for filing the return for the last S year. (b) The 120-day period beginning on the date of a determination pursuant to an audit of the taxpayer which follows the termination of the corporation's election to be treated as a federal S corporation and which adjusts a subchapter S item of income, loss, or deduction of the corporation. (c) The 120-day period beginning on the date of a determination that the S corporation's election under 26 U.S.C. §1362 for a previous tax year had been terminated. (d)1. For example, if (a) above applies, the return, with extensions, will be due not later than 8 ½ months after the year end, and the post-termination transition period would always end one year from the last day of the S year. For instance, if the S year ends on December 31, 1985, the post- termination transition period begins on January 1, 1986, and ends on December 31, 1986. 2. If (c) above applies, and a determination is made on July 1, 1986, that the S election was invalid for the year ended December 31, 1985, the post-termination transition period begins on July 1, 1986, and ends on October 28, 1986. (2) The term "determination", as used herein, means: (a) A determination as defined in U.S.C. §1313(a); or (b) An agreement between the corporation and the U.S. Secretary of the Treasury that the corporation failed to qualify as an S corporation. Revenue Rule 810-3-171-.01 171-.01-1

(3) The term "S year" means a taxable year for which a corporation is an Alabama S corporation. Author: Verlon Frost, Catherine McCary, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-18-171, 40-18-57. History: Adopted November 13, 1985. Amended: Filed March 31, 2000; effective May 5,2000. Rule 810-3-171-.01 Revenue 171-.01-2

ALABAMA DEPARTMENT OF REVENUEINDIVIDUAL AND CORPORATE TAX ADMINISTRATIVE CODE CHAPTER 810-3-172 COMPUTATION OF THE TRANSITION PERIOD AFTER TERMINATION OF STATUS AS AN ALABAMA S CORPORATION 810-3-172-.01 Post-Termination Transition Period. (1) The "post-termination transition period" is: (a) The period that begins on the day following the last day of the last S year, and ending on the later of: 1. One year from the last day of the S year, or 2. The due date, including extensions, for filing the return for the last S year. (b) The 120-day period beginning on the date of a determination pursuant to an audit of the taxpayer which follows the termination of the corporation's election to be treated as a federal S corporation and which adjusts a subchapter S item of income, loss, or deduction of the corporation. (c) The 120-day period beginning on the date of a determination that the S corporation's election under 26 U.S.C. §1362 for a previous tax year had been terminated. (d)1. For example, if (a) above applies, the return, with extensions, will be due not later than 8 ½ months after the year end, and the post-termination transition period would always end one year from the last day of the S year. For instance, if the S year ends on December 31, 1985, the post- termination transition period begins on January 1, 1986, and ends on December 31, 1986. 2. If (c) above applies, and a determination is made on July 1, 1986, that the S election was invalid for the year ended December 31, 1985, the post-termination transition period begins on July 1, 1986, and ends on October 28, 1986. (2) The term "determination", as used herein, means: (a) A determination as defined in U.S.C. §1313(a); or (b) An agreement between the corporation and the U.S. Secretary of the Treasury that the corporation failed to qualify as an S corporation. Revenue Rule 810-3-172-.01 172-.01-1

(3) The term "S year" means a taxable year for which a corporation is an Alabama S corporation. Author: Verlon Frost, Catherine McCary, Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57, 40-18-172. History: Adopted November 13, 1985. Amended: Filed March 26, 1998; effective April 30,1998. Amended: Filed March 31, 2000, effective May 5, 2000. Rule 810-3-172-.01 Revenue 172-.01-2

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-173 APPLICATION OF INTERNAL REVENUE SERVICE RULES AND REGULATIONS TO ALABAMA S CORPORATIONS AND THEIR SHAREHOLDERS 810-3-173-.01 Applicability Of Federal Rules And Regulations. The Alabama law regarding S corporations is substantially similar to federal law regarding S corporations. Therefore, rules and regulations of the Internal Revenue Service interpreting federal S corporation law will be given due consideration in interpreting Alabama S corporation laws to the extent the federal llaw is not inconsistent with Alabama law. See also Rule 810-3-1.1-.01, Operating Rules. Author: Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-57, 40-18-173. History: Adopted November 13, 1985. Amended: Filed March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-173-.01 173-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-174 TAX IMPOSED ON CERTAIN BUILT-IN GAINS 810-3-174-.01 Effective Date (Repealed 5/5/00). (Repealed) Author: John H. Burgess, Income Tax Division Statutory Authority: Code of Ala. 1975, §15, Act 84-756. History: Adopted November 13, 1985. Repealed: Filed March 31, 2000; effective May 5, 2000. Revenue Rule 810-3-174-.01 174-.01-1

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-174 TAX IMPOSED ON CERTAIN BUILT-IN GAINS 810-3-174-.02 Built-In Gains Tax. (1) For purposes of this rule, the following definitions shall apply: (a) "Net unrealized built-in gain" means the excess of the fair market value of the S corporation's assets when it first became an S corporation over the aggregate adjusted basis of those assets at the same time. (b)1. "Net recognized built-in gain" means, with respect to any taxable year, the lesser of: (i) The amount which would be taxable income of the Alabama S corporation if only recognized built-in gains and losses were taken into account, or (ii) The S corporation's taxable income determined without regard to the dividends received deduction under Section 40-18-35(a)(14), Code of Ala. 1975, and the net operating loss deduction under Sectioen 40-18-35.1, Code of Ala. 1975. 2. For any taxable year, any excess of the amount in paragraph (b)(i) over the amount in (b)(ii) is carried forward to the next taxable year. (c) "Recognized built-in gain" means any gain recognized during the recognition period on the disposition of any asset except for assets not held by the S corporation on the first day of the first S year and for assets on which the gain is attributable to appreciation that occurred after the corporation became an S corporation. (d) "Recognized built-in loss" means any loss during the recognition period on the disposition of any asset except for assets not held on the first day of the first S year and for assets on which the loss is attributable to depreciation that occurred after the corporation became an S corporation. (e) "Recognition period" means a ten-year period beginning with the first day of the S corporation's first tax year. Revenue Rule 810-3-174-.02 174-.02-1

(f) The "first taxable year for which the corporation was an Alabama S corporation" means the first taxable year for which the corporation most recently became an Alabama S corporation. (2) The tax is imposed upon any Alabama S corporation which has a net recognized built-in gain for any taxable year beginning in the recognition period. (a) The tax shall not apply to any Alabama S corporation which has always been an Alabama S corporation. (b) The amount of any net recognized built-in gain taken into account for any taxable year shall not exceed the amount of the net unrealized built-in gain less any net recognized built-in gain for prior taxable years beginning in the recognition period. 1. For example, if an Alabama S corporation has a net unrealized built-in gain of $100,000, and during the first 5 years of the recognition period reports net recognized built-in gain of $70,000, then the maximum amount which can be reported as net recognized built-in gain during the final 5 years of the recognition period is $30,000. (c) The tax is computed by multiplying five percent times the net recognized built-in gain for the taxable year. (d) Any net operating loss carryforward arising in a tax year in which the corporation was a C corporation and which would be deductible except for Section 40-18-168, Code of Ala. 1975, may be used to offset the net recognized built-in gain for the taxable year. For purposes of this paragraph, the net recognized built-in gain shall be treated as taxable income. For tax years beginning prior to January 1, 1990, the maximum amount of net operating loss carryforward deductible in any tax year is $600,000. (e) Section 40-18-174(d)(5), Code of Ala. 1975, specifies that any items of income or deduction properly taken into account for any tax year in the recognition period but which are attributable to periods before the first taxable year for which the corporation was an Alabama S corporation shall be treated as recognized built-in gains or losses for the tax year in which they are properly taken into account. Therefore, "disposition of any asset" referred to in the definitions of "recognized built-in gain" and "recognized built-in loss" includes not only sales or exchanges but also any income recognition event which effectively relinquishes a taxpayer's right to claim or receive income. 1. For example, the term "disposition of any asset" includes the collection of account receivable by a cash Rule 810-3-174-.02 Revenue 174-.02-2

basis taxpayer or the completion of a long-term contract by a taxpayer using the completed contract method of accounting. 2. The amount of net unrealized built-in gain shall be adjusted for amounts treated as recognized built-in gains or losses under this paragraph. (f) If an asset with a built-in gain or loss is exchanged for another asset and the new asset's basis is determined in whole or in part by reference to the basis of the old asset, the net asset will be treated as having been held by the S corporation as of the first day of the first taxable year of the S corporation and as having the same built-in gain or loss as the old asset. (g) If an Alabama S corporation acquires any asset from a C corporation and the basis of the asset in the hands of the S corporation is determined in whole or in part by reference to its basis in the hands of the C corporation, then a tax is imposed on any net recognized built-in gain attributable to any such asset for any tax year beginning in the recognition period. 1. For purposes of subparagraph (g), in computing the amount of the net recognized gain or loss, the day on which the S corporation acquired the asset shall be substituted for the beginning of the first tax year in which the corporation is an S corporation. 2. For purposes of subparagraph (g), the tax shall apply to all Alabama S corporations, including those that have always been Alabama S corporations. (3) Those companies subject to the tax should complete the appropriate schedules of Alabama S corporation Form 20S, which is due on the fifteenth day of the third month following the end of the tax year (See Rule 810-3-42-.01). The tax is due at the same time as the return. (a) An extension will be granted up to a maximum of six months to file the Alabama S corporation income tax return. An extension of time to file the return is not an extension of time for payment of the tax. The amount of tax due must be paid on or before the due date of the return without regard to the extension to file the return. Interest and penalties are due on all taxes not paid on or before the unextended due date. See Rules 810-3-42-.01 and 810-3-39-.02. Author: Tiniko Arrington, Johnnie Simon, Cathy McCary, Charlotte Jordan Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-174. Revenue Rule 810-3-174-.02 174-.02-3

History: Filed July 22, 1992; October 30, 1992. Amended: Filed March 31, 2000; effective May 5, 2000. Amended: Filed April 14, 2017; effective May 29, 2017. Rule 810-3-174-.02 Revenue 174-.02-4

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-175 PASSIVE INVESTMENT INCOME TAX 810-3-175-.01 Passive Investment Income Tax. (1) Definitions - (a) "Passive investment income" means gross receipts from royalties, rents, dividends, interest (excluding installment sales to customers and income of lending and financing companies), annuities, and sales or exchanges of stock or securities to the extent of any gains therefrom. 1. For any tax year in the recognition period, passive investment income shall not include any recognized built- in gain or loss. See Section 40-18-174, Code of Ala. 1975. (b) "Net passive income" means passive investment income less deductions directly connected with the production of such income. (c) "Excess net passive income" means an amount which bears the same ratio to the net passive income as the amount by which the passive investment income exceeds 25 percent of the gross receipts bears to the passive investment income. Therefore, pii = passive investment income for the tax year npi = net passive income for the tax year GR = total gross receipts for the tax year 1. The amount of excess net passive income shall not exceed the S corporation's taxable income for the tax year as determined under Section 40-18-161, Code of Ala. 1975. (2) The tax is imposed upon S corporations which have Alabama accumulated C corporation earnings and profits. If, for the taxable year, such S corporations have passive investment income which constitutes more than 25 percent of gross receipts, then a tax is imposed on the income of the S corporation for that taxable year. Revenue Rule 810-3-175-.01 175-.01-1

(3) The tax is computed by multiplying 5 percent times the Alabama excess net passive income. (4) Those corporations subject to the tax should complete the appropriate schedules of Form 20S, which is due on the fifteenth day of the third month following the end of the tax year. See Rule 810-3-42-.01. The tax is due at the same time as the return. (a) Those corporations subject to the tax should complete the appropriate schedules of Form 20S, which is due on the fifteenth day of the third month following the end of the tax year. See Rule 810-3-42-.01. The tax is due at the same time as the return. An extension will be granted up to a maximum of six months to file the Alabama S corporation income tax return. An extension of time to file the return is not an extension of time for payment of the tax. The amount of tax due must be paid on or before the due date of the return without regard to the extension to file the return. Interest and penalties are due on all taxes not paid on or before the unextended due date. See Rules 810-3-39-.02 and 810-3-42-.01. (5) The Department may waive the excess net passive income tax if the S corporation establishes that it made a good-faith determination at the close of the tax year that it had no C corporation earnings and profits and that it distributed such earnings and profits within a reasonable time after determining that they existed. (a) A request for waiver of the passive investment income tax shall be made in writing to the Department. The request must contain a description of how and on what date the S corporation determined that it had no C corporation earnings and profits at the end of the tax year, a description of how and on what date it was determined that the S corporation had C corporation earnings and profits at the end of the tax year, and a description (including dates) of any steps taken to distribute such earnings and profits. (b) If the earnings and profits have not been distributed, the request must contain a timetable for distribution and an explanation of why such timetable is reasonable. Before the waiver may be granted, all subchapter C earnings and profits must have been distributed. (6) In administering and interpreting this regulation, the Department will consider administrative rulings and decisions in respect to the similar provisions to the Internal Revenue Code and Rules thereunder. Author: Tiniko Arrington, Johnnie Simon, Verlon Frost, Catherine McCary Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-175. Rule 810-3-175-.01 Revenue 175-.01-2

History: Filed July 22, 1992, October 30, 1992. Amended: Filed March 26, 1998; effective April 30, 1998. Amended: Filed March 31, 2000; effective May 5, 2000. Amended: Filed April 14, 2017; effective May 29, 2017. Revenue Rule 810-3-175-.01 175-.01-3

ALABAMA DEPARTMENT OF REVENUE ADMINISTRATIVE CODE CHAPTER 810-3-176 COMPOSITE RETURNS 810-3-176-.01 Composite Returns Of Alabama S Corporations. (1) Definitions: (a) A "composite return" means an information return similar to the federal Schedule K-1 which contains information concerning one or more nonresident shareholder's distributive share of income, deductions, and losses. (b) A "composite payment" means a payment of estimated individual income tax by the Alabama S corporation on behalf of the nonresident shareholders described in the accompanying composite return. The payment shall be considered a loan from the corporation to the shareholder, payable on demand, bearing interest from the date of the loan to the date of its payment, at the minimum applicable federal rate with respect to demand instruments, as provided under 26 U.S.C. §7872. (2) An Alabama S corporation may file a composite return and make composite payments on behalf of nonresident shareholders if there are one or more nonresident shareholders at any time during the taxable year. (a) The composite return may be filed on behalf of some or all nonresident shareholders and must be filed on behalf of nonresident shareholders for whom a Schedule NRA consent agreement has not been filed. (b) Resident shareholders may not be included in a composite return, and composite payments may not be made on behalf of resident shareholders. (c) S corporations which choose to file composite returns or which are required to file composite returns must do so on Form PTE-C. Composite payments must be made on Form PTE-C. (d) In computing the amount of the composite payment, the Alabama S corporation shall multiply each nonresident shareholder's distributive share of income attributed to Alabama by 5%. 1. Each nonresident shareholder's distributive share of income is the sum of the shareholder's deemed distributive share of the Alabama portion of: Revenue Rule 810-3-176-.01 176-.01-1

(i) Separately stated income, loss, deduction, or expense of the Alabama S corporation; provided that no deduction will be allowed for items of loss, deduction or expense which are subject to other limitations on the Alabama individual income tax return Form 40NR - including federal income tax, contributions, investment interest expense, and casualty losses; and (ii) Nonseparately stated income, loss, deduction, or expense of the Alabama S corporation. 2. In computing the amount of the composite payment, a loss for one nonresident shareholder may not be used to offset income or gain of any other nonresident shareholder. 3. In computing the amount of the composite payment, a net operating loss carry forward may not be used to offset income or gain. (3) Composite returns and composite payments are due on the fifteenth day of the third month following the close of the Alabama S corporation's taxable year. (a)1. The entity will be granted a six-month extension of time for filing the composite return. 2. An extension of time granted to file the return pursuant to this section is not an extension of time for payment of tax. The amount of tax due must be paid on or before the due date of the return without regard to the extension to file the composite return. (i) Payment of the tax shall be made via the paper Pass Through Entity Payment Voucher or by Electronic Funds Transfer (EFT). (ii) However, payment must be made via EFT if the payment exceeds $750. Please refer to Rules 810-13-1-.01 and 810-13-1-.03. (iii) Underpayment of tax penalties plus any applicable interest will be imposed as provided by law without regard to any extension granted under this section. (b) Amended composite returns for refund or additional tax due for a taxable year will be accepted up to the extended due date for filing the Alabama S corporation return for the same taxable year. Rule 810-3-176-.01 Revenue 176-.01-2

(c) Refund requests or additional payments made after the extended due date for filing the Alabama S corporation return must be made on Alabama individual income tax Form 40NR by the nonresident shareholder(s). (4) The S corporation is required to file a Schedule NRA consent agreement for each nonresident shareholder that does not participate in the composite filing. (a) A Schedule NRA for each nonresident shareholder shall be due at the same time as the first S corporation return is due. (b) If, during any subsequent taxable year, the Alabama S corporation has any nonresident shareholders for whom a Schedule NRA has not previously been filed, then a Schedule NRA is due for those nonresident shareholders at the same time as the annual return is due for that taxable year. (c) The Alabama S corporation shall include each shareholder for whom a Schedule NRA is not timely filed in a composite return and make a composite payment as specified in paragraphs (2) & (3) above. (d) The consent agreement must be signed by the shareholder, and must contain the following information: 1. The name, address and social security number of the shareholder, 2. A recitation of the agreement to report and pay tax to Alabama on the shareholder's share of the Alabama S corporation income in exchange for the benefits of allowing the corporation to file an Alabama S Corporation return, and 3. An agreement appointing the Alabama resident agent of the corporation and any agent or officer of the corporation present in Alabama as agent of the shareholder for service of process in any matter before the Department relating to the income tax returns of the shareholder and/or the corporation. (e) If the stock is held by multiple owners (such as joint owners), each owner must execute a separate consent agreement. (f) Each nonresident shareholder may designate any other person or firm present in Alabama as agent for service of process, in addition to the agents required to be appointed in subparagraph (d) 3, above. (g) Any nonresident shareholder may, by power-of-attorney, authorize anyone to execute the required consent agreement on behalf of the shareholder. Such power-of-attorney, to be Revenue Rule 810-3-176-.01 176-.01-3

effective, must be filed with the Department on or before the due date (with extensions) of the first return in which a consent agreement is being executed under the power-of- attorney. The power-of-attorney need be filed only once and remains valid until the expiration date specified therein or until notice of revocation, cancellation or modification is received by the Department. Such power-of- attorney may be in any form sufficient to indicate the intent of the parties, and must be notarized or otherwise authenticated before some officer authorized to administer oaths. (h)1. A nonresident is any person who is a legal resident of any state other than Alabama, or of any territory, possession, district, or foreign country. 2. The status as a resident or nonresident will be determined as of the date of any distribution or deemed distribution. Author: Christina Hall; Tiniko Arrington; Catherine McCary, CPA; Ann F. Winborne, CPA; Richard H. Henninger; Ed Cutter, CPA Statutory Authority: Code of Ala. 1975, §§40-2A-7(a)(5), 40-18-176. History: Filed July 22, 1992, October 30, 1992. Amended: Filed March 26, 1998; effective April 30, 1998. Amended: Filed March 31, 2000, effective May 5, 2000. Amended: Filed February 5, 2009; effective March 12, 2009. Amended: Filed February 6, 2018; effective March 23, 2018. Rule 810-3-176-.01 Revenue 176-.01-4