February 23, 2021

The Alabama Legislature passed a bill that would exclude from taxation for Alabama state tax purposes certain relief funds authorized under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)[1] and related federal relief legislation. The Alabama Taxpayer Stimulus Freedom Act of 2021 (HB 170, Ala. Act. 2021-1) excludes the following amounts from Alabama state taxable income: (i) Paycheck Protection Program (“PPP”) loans, including cancellation of indebtedness income for PPP loan recipients whose loans are forgiven; (ii) Economic Injury Disaster Loans (“EIDLs”) related to COVID-19; (iii) qualifying disaster relief payments, to the extent excluded from federal taxation under Section 139 of the Internal Revenue Code; and (iv) grants under the Alabama Coronavirus Relief Fund, among others.

Specific to hospitals and other health care providers, the Act unfortunately does not exclude from taxable income amounts received from the HHS Provider Relief Fund, which likely constitutes the largest source of relief funds for many health care providers. Although the Act provides an Alabama state income tax exclusion for qualifying disaster relief payments, HHS and the IRS have issued guidance to the effect that Provider Relief Fund monies are not excludable under Section 139.[2] However, health care providers exempt from taxation under Section 501(c) of the Internal Revenue Code will not be subject to taxation on Provider Relief Fund amounts received, except to the extent such amounts effectively replace amounts that would be unrelated trade or business income that would be taxable under Section 513.[3] Furthermore, in December, HHS clarified in answers to frequently asked questions that payment of income tax liability with respect to the receipt of Provider Relief Fund amounts itself constitutes a qualifying use of Provider Relief Fund monies allowable by HHS.[4] As such, entities that will incur a tax liability for the receipt of Provider Relief Funds can set aside a portion of the funds they received in order to pay the income tax liability with respect to those funds.

Hospitals and health care providers with questions about federal relief funds under the CARES Act are encouraged to consult with their counsel to address appropriate use of funds, reporting requirements, income tax obligations, and related matters.

This Insight is intended only to provide an overview of the matters addressed herein and does not constitute legal advice.  If you have any questions regarding a specific issue, please seek appropriate legal counsel.

[1] Pub. L. 116-136.

[2] IRS, Frequently Asked Questions about Taxation of Provider Relief Fund Payments, IRS (Jul. 6, 2020), https://www.irs.gov/newsroom/frequently-asked-questions-about-taxation-of-provider-relief-payments; CARES Act Provider Relief Fund Frequently Asked Questions, HHS (Jan. 28, 2021), https://www.hhs.gov/sites/default/files/provider-relief-fund-general-distribution-faqs.pdf.

[3] Id.

[4] CARES Act Provider Relief Fund Frequently Asked Questions, HHS (Jan. 28, 2021), https://www.hhs.gov/sites/default/files/provider-relief-fund-general-distribution-faqs.pdf.