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Alabama Business Tax – Complete Guide

Alabama is considered as one of the best states for doing business and this includes the lower tax rates and a variety of tax incentive programs. Alabama business tax may exist in different forms for a company planning to or is transacting in this state. The type of business taxes applicable will vary according to the type of entity structure chosen by you and also the type of activity. We have created this article to provide information and guidance on the various taxes applicable in this state, filing taxes using an Alabama business tax Calculator, tax rates, and how different businesses will be taxed.

Alabama Business Tax

Generally speaking, when you start a new company in any state, there will be some form of state, local, and federal taxes applicable. Some of the most common forms of business taxes in the USA include corporate taxes, income tax, estimated taxes, self-employment tax, and withholding taxes. Now, it’s not necessary that the Alabama business tax will include all of these as most states have some form of deviation or the other. Taxes are considered to be an integral part of the annual business compliances in the state of Alabama and hence have to be filed by all entity structures whether domestic or foreign. The tax rates would also vary according to the type of taxes and this necessitates the use of an Alabama business tax Calculator.

What taxes do businesses pay in Alabama?

Alabama has a very pro-business climate and hence has been attracting small business owners, investors as well as medium enterprises. The Alabama business tax climate is also considered quite favorable as the state enjoys one of the lowest corporate income tax rates in the country. According to the 2024 State Business Tax Climate Index Report by Tax Foundation, Alabama has a better tax environment as compared to states like Minnesota, New York, California, and Massachusetts. The ranking of Alabama Corporation taxes is #19 as compared to that of Illinois at 43 and Delaware at 50. Whether you form a C Corporation, S Corporation, a sole proprietorship, or a limited-liability company, the overall tax burden will be lower thanks to several tax credit programs that the state has introduced. Let’s try to understand the different types of taxes applicable to new and existing businesses in this state.

Alabama Individual income tax

One of the most important types of Alabama business tax is the individual income tax applicable in the state. This tax is levied on working individuals as well as owners of certain types of businesses like sole proprietorships. This tax is one of the primary Alabama LLC taxes as it has to be filed by each member. Other pass-through entities and partnerships will also be required to file income taxes using their personal tax returns. The individual tax rate for Alabama State varies from 2 percent to 5 percent and hence is known as graduated individual income tax. A tax rate of 2 percent is applicable to individuals on the first $500 of their taxable income, 4 percent on the next $2,500, and 5 percent on all taxable income above $3,000.

Business Privilege Tax

The Alabama business privilege tax is one of the most important taxes that is applicable to most entities registered in the state or conducting their business in this state. It is levied on legal as well as disregarded entities, domestic, and foreign entities. Hence, this form of tax is also considered as a part of Alabama Corporation taxes or LLC taxes. The taxable income calculations and filing are governed by Alabama Administrative Code, Title 810 – Alabama Department of Revenue, Chapter 810-2-8. The taxable income rate will remain the same for C Corporations and Limited Liability Entities pursuant to AL Admin Code R 810-2-8-.01.

The taxable income used for determining the Alabama business privilege tax rate will take into account the federal taxable income prior to net operating loss and special deductions. You will need an Alabama business tax Calculator for determining the total amount of tax due as the tax calculations will take into account the following:

  • Calculation of the taxpayer’s net worth, which is assets minus the liabilities
  • Apportioning (sourcing) that have a high net worth to Alabama (payroll, sales, and property in Alabama compared to total payroll, sales, and property); and
  • Determine the privilege tax rate to be applied to the taxpayer’s “net worth in Alabama.”

The Alabama business privilege tax rate can range from $.25 to $1.75 for each $1,000 of net worth in Alabama. So, if the taxable income of the taxpayer is less than $1 then the tax rate applicable will be $0.25 per $1,000. Similarly, if the taxable income of the taxpayer is $200,000 or more but less than $500,000 then the rate for this type of Alabama LLC taxes will be $1.25 per $1,000.

Corporate Income Tax

The Alabama corporate income tax is one of the most important taxes in the state and is levied on every corporation that has been organized in this state. It is also imposed on every foreign corporation that is qualified to conduct business in this state. The tax rate for corporate income tax in Alabama is 6.5 percent of the corporation’s taxable income in this state.

Withholding Tax

Withholding tax or tax withholding is referred to the amount of federal income tax that is being withheld from the paycheck of every employee working in a specific company. The amount of Alabama corporate income tax that an employer withholds from the regular pay of their employees is dependent on two factors, which are:

  • The amount earned by the employee
  • The information provided by the employee to their employer on Form W–4

Employers or companies in Alabama are required by state and federal laws to withhold employment taxes from all their employees. Whether you are an employer or an employee, the use of an Alabama business tax calculator along with a tax withholding estimator can be quite helpful in determining the exact amount. You can also refer to the Percentage Method Tables for Income Tax Withholding issued by the Department of the Treasury, Internal Revenue Service (IRS). The amount of tax withheld can vary according to the payroll period and the withholding allowance amounts.

Alabama sales and use tax

The sales and use tax is an important category of Alabama business tax and is applicable to those entities that are selling a product or service within the state. Alabama sales and use tax is an umbrella term that constitutes several other taxes including Alabama LLC taxes or corporate taxes. The Alabama sales and use tax comprises of:

  • Sales tax
  • Consumers tax
  • Sellers use tax
  • Simplified sellers use tax
  • Rental tax
  • Lodgings tax
  • Utility taxes
  • Various other business taxes and fees.

The most important amongst these is the sales tax, which is basically a form of Alabama business privilege tax that is imposed on the retail sale of tangible personal property sold within the state of Alabama. The sales tax is collected by the seller or a business (store, wholesalers etc.) from their customers. This is a type of Alabama Corporation taxes that is due monthly.

The use tax is considered to be a type of excise tax that is levied on tangible personal property, which has been purchased outside Alabama for use, storage, or any other consumption within this state. The use tax rate varies according to the product, service, or facility e.g., tax rate for general merchandise and items is 4 percent of their selling price.

Are you thinking of starting a small business in Alabama?

How are Alabama Businesses Taxed?

Once you register or start a new business in Alabama, you will be required to maintain compliance with all annual state requirements. One such annual requirement is that of filing federal and state taxes. The type of Alabama business tax that your company is required to file will depend on the type of entity structure as well as the business activity. Your company may be required to file multiple state or local business taxes. Let us look at the different types of entities and their tax obligations in this state.

Taxes for an LLC

If you are planning to register a limited-liability company in Alabama then one of the important annual requirements will be filing of federal taxes and Alabama LLC taxes. An LLC is considered to be a pass-through entity and this means that the owners or members will be required to file state income tax on their profits, minus any deductions or state allowances. Since the state has a graduated individual income tax rate hence it will vary from 2 percent to 5 percent. The second most important tax for any LLC is the Alabama business privilege tax. This tax is mandatory for almost all entity structures and the calculation of the same will vary according to the taxpayer’s net worth.

Alabama business tax for a limited liability company will also depend on the business activity. The sales and use tax will vary according to the type of activity while the rates will vary according to the municipality and county where your LLC is based. There are several other Alabama LLC taxes that may be levied on your company and they include self-employment tax, Utility License Tax, Withholding tax, and Utility Service Use Tax among others.

Taxes for a C Corporation

If you are planning to organize a corporation in Alabama then you will be required to file different types of Alabama Corporation taxes as a part of the state’s annual maintenance requirements. The most important amongst these is the Alabama corporate income tax. This tax is levied on all corporations, domestic and foreign. The current tax rate is 6.5 percent of annual net income. Since, the tax rate is applicable on income derived from sources within the state of Alabama; this also includes income from any property located within this state.

Apart from this, a C Corporation will also have to withhold tax from the wages paid to their employees. The employer withholding returns can be filed monthly, quarterly, and annually. There is another important and mandatory tax that will be levied on both domestic and foreign corporations. This is known as the Alabama business privilege tax. It is levied on the C Corp’s federal taxable income as apportioned to Alabama pursuant to Sections 40-14A-21 through 40-14A-29, Code of Alabama 1975. Some of the other Alabama Corporation taxes that you may have to file include Casual Sales Tax, Sales Tax, Use Tax, and Utility Gross Receipts Tax among others.

Taxes for S Corporation

If you have started a limited-liability company or a C Corporation, you can always elect S Corporation status from a purely tax perspective. An S Corporation is not an entity structure but a tax designation issued by the Internal Revenue Service (IRS). You will be required to file Form 20S for any entity to be treated as an S-Corp. This form is basically an S Corporation Information/Tax Return form that has to be filed with the Alabama Department of Revenue. This is one of the primary Alabama Corporation taxes and is considered to be a composite return, which is normally due on the 15th day of the third month following the end of the tax period for an S corporation.

S Corporations are also subjected to Alabama business privilege tax. Apart from this, an S Corporation will be required to file other taxes as applicable for the original company, i.e., an LLC or a C Corporation.

Taxes for a Sole Proprietorship

If you take a decision to form a sole proprietorship in Alabama then you will be required to file an individual income tax return. This has to be filed by the owner on their business profits. Tax has to be reported on the Form 40 (Alabama Individual Income Tax Return). A sole proprietorship will also be required to file Alabama business privilege tax, which is applicable for registered businesses as well as disregarded entities. You can use an Alabama business tax calculator to determine the amount of privilege tax to be filed. A sole trader may be required to file other forms of taxes depending on their location and business activity like sales and use tax as well as self-employment tax.

Taxes for Partnerships

A partnership is considered as a pass-through entity and hence such a business will be required to file Alabama business tax as a part of their annual requirements. The income tax requirements are quite similar to that of a sole proprietorship and single-member LLC’s. Since it is a pass-through entity, individual income tax returns have to be filed based on the income or profits earned through the business. This is also known as Partnership Income Tax and has to be filed using Form 65 (Partnership/Limited Liability Company Return of Income). The due date for this tax return is on or before the 15th day of April following the close of the calendar year. Apart from this, a partnership company may be required to file taxes similar to Alabama LLC taxes like business privilege tax, sales tax, and use tax.

Ready to incorporate your Alabama Company?

Alabama is one of the top states for new businesses in the Southeastern region of the United States. The state has the right business climate, pro-business regulations, and offers several tax credit and business incentive programs. You can choose to register your company as a partnership firm, Limited Liability Company, C Corporation, sole proprietorship, and S Corporation. Once you form a company in this state, it is important to maintain compliance with all annual requirements including filing Alabama business tax returns. IncParadise can provide information and assistance pertaining to filing of state taxes.

IncParadise is one of the top incorporation service providers in Alabama and we can help you to register your LLC or organize a C corporation. IncParadise also offers additional services to fulfill all types of business related requirements like foreign qualification, annual report, and filing DBA among others.

Are you ready to form your company in Alabama?