Taxes on Business Income in Alabama
Alabama has two types of income-based taxes that affect small businesses: the privilege tax and the corporate income tax. The privilege tax applies to all business forms. In addition, you will be liable for personal income tax on any income passed through from your business to you.
Privilege Tax in Alabama
Alabama's privilege tax is imposed annually on all corporations, limited liability entities, and disregarded entities doing business in Alabama or organized under Alabama laws. Limited liability companies (LLCs) electing to be taxed as corporations for federal income tax also are subject to the Alabama privilege tax on corporations.
The tax accrues January 1 each tax year or from the date of eligibility to do business in Alabama. Taxpayers are liable for the privilege tax for each year beginning before dissolution or withdrawal or forfeiture of qualification to do business in the state.
The minimum privilege tax imposed is $100 and the maximum is generally $15,000 for 2011 and 2012. The tax is based on a business's Alabama net worth at the following rates:
|Taxable Income ||Tax Rate per $1,000 of Net Worth |
|$0, but less than $1 ||$0.25 |
|$1, but less than $200,000 ||$1.00 |
|$200,000, but less than $500,000 ||$1.25 |
|$500,000, but less than $2,500,000 ||$1.50 |
|$2,500,000 and over ||$1.75 |
Filing dates and forms. Corporation and S corporation returns are due 2.5 months after the beginning of the taxpayer's tax year. Thus, the deadline for calendar year corporations is March 15. For limited liability entities, the return is due 3.5 months after the beginning of the taxpayer's taxable year. The deadline for calendar year entities is April 15.
Type of Entity Determines How Business Income is Taxed
In Alabama, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.
Corporations. Domestic (corporations organized in Alabama) and foreign corporations (corporations organized in a state other than Alabama), are both subject to an Alabama income tax. Your corporation is subject to tax if it's:
- domiciled in Alabama or licensed or qualified to transact business in Alabama
- doing business in Alabama or deriving income from sources in Alabama, including income from property in Alabama
- acting in a fiduciary capacity
If your corporation is an Alabama domestic corporation, the corporation pays tax at the rate of 6.5 percent of net income. Foreign corporations in Alabama pay tax at the rate of 6.5 percent of the net income derived from property situated and business transacted in the state.
If you are a multistate business whose only activities in Alabama consist of sales and do not include owning or renting realty or personal property and whose gross sales volume for the tax year does not exceed $100,000, you may elect to pay an income tax at the rate of 0.25 percent of such sales volume.
S corporations. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.
Alabama honors the federal S corporation election. The law extends this favorable tax treatment to state corporate income tax liability and S corporations will not be subject to the corporate income tax.
Partnerships. If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Alabama taxable adjusted gross income their distributive share of partnership income.
Limited liability companies (LLCs). Alabama law recognizes businesses operating as limited liability companies (LLCs). By default, domestic and foreign LLCs in Alabama are classified as partnerships for Alabama tax purposes. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Alabama taxable adjusted gross income their distributive share of LLC income.
However, if a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Alabama tax purposes.