Complete Guide to Alabama LLC Taxes in 2025
Alabama presents a unique tax landscape for LLC owners. Unlike many states that simply tax pass-through income at a flat rate, Alabama employs a combination of graduated income tax brackets and a separate Business Privilege Tax (BPT) that applies at the entity level. Understanding both layers is essential for accurately projecting your total Alabama LLC tax burden. This comprehensive guide walks you through every aspect of Alabama LLC taxation for 2025, from formation costs to filing deadlines and available deductions.
How Alabama Taxes LLCs
Alabama follows the federal classification of LLCs for state tax purposes. A single-member LLC is treated as a disregarded entity, meaning the income is reported on the owner's personal Alabama return (Form 40). A multi-member LLC is treated as a partnership and files Alabama Form 65 as an informational return, with each member receiving a Schedule K-1 showing their share of income and deductions.
The LLC income that passes through to individual members is then subject to Alabama's graduated individual income tax. Alabama uses three tax brackets with rates of 2%, 4%, and 5%. While the top rate of 5% kicks in at a relatively low income threshold ($3,000), the overall rate remains competitive compared to many northeastern and western states.
Critically, Alabama also imposes the Business Privilege Tax (BPT) at the entity level. This is sometimes called the "Alabama franchise tax" though it is technically distinct. Every LLC doing business in Alabama must pay this tax regardless of whether it earns a profit. The BPT is calculated at $0.25 per $1,000 of net worth (or the portion of net worth apportioned to Alabama), with a minimum tax of $100 and a maximum of $15,000.
Key Point: Alabama is one of the states that taxes LLCs at both the entity level (Business Privilege Tax) and the member level (income tax). Even if your LLC shows zero profit, you still owe the $100 minimum BPT. Factor this into your annual compliance costs when choosing Alabama as your state of formation.
Alabama Income Tax Brackets for LLC Members
Alabama's individual income tax uses graduated brackets that apply to each member's share of LLC income (after allowable deductions). The brackets are notably narrow, meaning most LLC owners with any meaningful income will pay the top 5% rate on the majority of their earnings.
| Taxable Income (Single) | Tax Rate | Cumulative Tax |
|---|---|---|
| $0 - $500 | 2% | $10 max |
| $501 - $3,000 | 4% | $110 max |
| Over $3,000 | 5% | $110 + 5% of excess |
For married filing jointly, the brackets are slightly wider: 2% on the first $1,000, 4% on $1,001-$6,000, and 5% on everything above $6,000. However, the practical impact is minimal since the top bracket begins at such a low income level. Effectively, most Alabama LLC owners pay approximately 5% on nearly all of their LLC income.
Alabama Business Privilege Tax (BPT)
The Business Privilege Tax is Alabama's entity-level tax that applies to all LLCs regardless of profitability. This tax is often misunderstood by new LLC owners who assume pass-through taxation means no entity-level obligations.
| Net Worth in Alabama | BPT Rate | Tax Amount |
|---|---|---|
| $0 - $400,000 | $0.25 per $1,000 | $100 minimum |
| $400,001 - $60,000,000 | $0.25 per $1,000 | $100 - $15,000 |
| Over $60,000,000 | $0.25 per $1,000 | $15,000 maximum |
The BPT is filed using Alabama Form PPT (Privilege and Pass-Through Entity Tax Return) and is due on the 15th day of the 4th month after the LLC's tax year ends (April 15 for calendar-year LLCs). If your LLC's net worth is $400,000 or less, you simply pay the $100 minimum. For LLCs with net worth between $400,000 and $60 million, the tax is calculated at $0.25 per $1,000 of net worth. The maximum BPT is capped at $15,000, which provides relief for large enterprises.
Federal Taxes for Alabama LLC Owners
In addition to Alabama state taxes, LLC members must pay federal taxes on their share of LLC income. The primary federal obligations include:
- Self-Employment Tax (15.3%): This covers Social Security (12.4% up to the $176,100 wage base in 2025) and Medicare (2.9% on all earnings). An additional 0.9% Medicare surtax applies to earnings above $200,000 for single filers or $250,000 for married filing jointly.
- Federal Income Tax: LLC income is added to your other income and taxed at the applicable federal bracket rates (10% to 37% for 2025).
- Qualified Business Income (QBI) Deduction: Eligible LLC owners may deduct up to 20% of qualified business income under IRC Section 199A, subject to income limitations and specified service trade or business (SSTB) rules.
Tax Tip: Alabama allows a deduction for federal income taxes paid on your state return, which is relatively unusual among states. This means your effective Alabama tax rate is lower than the statutory rate because you can deduct your federal tax liability from your Alabama taxable income. Be sure to take advantage of this deduction -- it can save hundreds or even thousands of dollars.
Alabama's Federal Income Tax Deduction
One of Alabama's most distinctive tax features is that it allows individuals to deduct federal income taxes paid when calculating Alabama taxable income. This is a significant benefit that effectively reduces your state tax burden. Only a handful of states offer this deduction, making it a meaningful advantage for Alabama LLC owners.
For example, if your LLC generates $100,000 in net income and you pay $15,000 in federal income taxes, you can deduct that $15,000 from your Alabama taxable income. This brings your Alabama taxable income down to $85,000, saving you $750 in Alabama state income tax (at the 5% rate).
Note that self-employment taxes are not deductible on the Alabama return -- only federal income taxes. Also, this deduction is limited to the actual federal income tax paid or accrued during the tax year, not including penalties or interest.
Alabama Sales Tax for LLCs
Alabama imposes a 4% state sales tax on the retail sale of tangible personal property and certain services. However, Alabama is unique in that cities and counties can add their own sales taxes without a state-imposed cap, resulting in some of the highest combined rates in the nation. The average combined state and local sales tax rate in Alabama is approximately 9.24%.
LLCs selling taxable goods or services must register with the Alabama Department of Revenue for a sales tax license. Alabama operates on an origin-based sales tax system for in-state sales, meaning you charge the rate where your business is located, not where the buyer is. For remote sellers (out-of-state sellers with Alabama customers), economic nexus thresholds apply -- $250,000 in annual sales to Alabama customers.
Alabama LLC Filing Deadlines
| Filing Type | Deadline | Extension Available |
|---|---|---|
| Single-Member LLC (Form 40) | April 15 | Yes, to October 15 |
| Multi-Member LLC (Form 65) | March 15 | Yes, to September 15 |
| Business Privilege Tax (Form PPT) | April 15 | Yes, automatic with income tax extension |
| S-Corp Election (Form 20S) | March 15 | Yes, to September 15 |
| Estimated Tax Payments | Apr 15, Jun 15, Sep 15, Jan 15 | No extension |
Estimated Tax Payments in Alabama
Alabama requires estimated tax payments from LLC members who expect to owe $500 or more in state income tax after withholding and credits. Payments are made quarterly using Alabama Form 40ES and follow the same schedule as federal estimated payments.
To avoid underpayment penalties, you must pay at least 100% of the prior year's tax liability or 100% of the current year's liability through estimated payments and withholding. Alabama's penalty for underpayment is calculated at an annual rate set by the Department of Revenue (typically around 4-6%).
Alabama Pass-Through Entity Tax (PTET) Election
Alabama enacted a Pass-Through Entity Tax (PTET) election beginning with the 2021 tax year. This allows eligible LLCs taxed as partnerships or S-Corporations to elect to pay Alabama income tax at the entity level at a rate of 5% of the Alabama-source income allocated to qualifying members.
The purpose of this election is to provide a workaround to the federal $10,000 SALT (State and Local Tax) deduction cap. When the LLC pays tax at the entity level, it becomes a deductible business expense for federal purposes, bypassing the SALT cap. Individual members then receive a corresponding credit on their Alabama individual returns to avoid double taxation.
The PTET election must be made annually on the LLC's return. It is irrevocable once made for that tax year. LLC owners in higher income brackets should carefully evaluate whether this election provides a net federal tax benefit, as the savings depend on your marginal federal tax rate and total SALT deductions.
Alabama LLC Formation Costs
Setting up an LLC in Alabama involves several one-time and ongoing costs:
- Certificate of Formation: $208 filing fee ($100 name reservation + $100 filing + $8 processing) with the Alabama Secretary of State. Online filing is available through the Alabama Business Privilege Tax portal.
- County Filing: Alabama uniquely requires LLCs to file a copy of their Certificate of Formation with the county Probate Judge's office in the county where the LLC's registered office is located. Fees vary by county but typically range from $50-$100.
- Registered Agent: Required; can be a member residing in Alabama or a commercial agent ($50-$150/year)
- Operating Agreement: Not legally required but strongly recommended ($0-$500)
- EIN (Federal Tax ID): Free from the IRS
- Business Privilege Tax: $100 minimum per year (ongoing)
- Business Licenses: Alabama requires a general business license ($25+) and potentially city-specific licenses
Alabama vs. Neighboring States for LLC Taxes
| State | Income Tax Rate | Annual/Entity Fee | Special Feature |
|---|---|---|---|
| Alabama | 2-5% graduated | $100 min BPT | Federal tax deduction |
| Florida | 0% (no income tax) | $138.75 annual | 5.5% corporate tax |
| Georgia | 1-5.75% | $50 annual | No entity tax |
| Tennessee | 0% (no income tax) | $300 min franchise | 6.5% excise tax (corps) |
| Mississippi | 0-5% graduated | $25 annual | First $10K exempt |
Alabama Business Incentives and Tax Credits
Alabama offers numerous incentive programs that may benefit LLC owners:
- Jobs Act Incentives: Cash rebates of 3% of payroll for qualifying new jobs. Enhanced incentives for companies in high-impact sectors or economically distressed areas.
- Capital Investment Tax Credit: Up to 5% tax credit on qualifying capital investment for projects that create at least 50 new jobs.
- Alabama Enterprise Zone Credits: Tax credits for businesses operating in designated enterprise zones, including income tax and BPT credits.
- Growing Alabama Credit: Tax credit for contributions to economic development organizations -- useful for reducing BPT liability.
- Small Business Operating Permit Deduction: Small businesses can deduct the cost of operating permits from BPT liability.
- Rural Physician Tax Credit: Available to medical practice LLCs operating in underserved rural areas.
Common Alabama LLC Tax Mistakes
- Forgetting the Business Privilege Tax: Many new LLC owners don't realize Alabama has an entity-level tax. The $100 minimum applies even if your LLC has zero income.
- Missing the county filing requirement: Alabama is one of the few states that requires an LLC formation document to be filed with the county Probate Judge in addition to the Secretary of State.
- Not claiming the federal tax deduction: Alabama's deduction for federal income taxes paid is one of the most valuable features of the state's tax code. Failing to claim it means overpaying state taxes.
- Ignoring estimated tax payments: With a $500 threshold for required estimated payments, many LLC owners are caught off guard by penalties.
- Not evaluating the PTET election: If you're paying more than $10,000 in SALT taxes combined, the entity-level PTET election could produce meaningful federal savings.
- Overlooking local license requirements: Most Alabama cities require a separate business license in addition to state requirements.
Alabama LLC Tax Deductions
Alabama generally conforms to federal taxable income as the starting point for state tax calculations, with its unique addition of the federal income tax deduction. Key deductions for Alabama LLC owners include:
- Federal Income Tax Deduction: Deduct actual federal income taxes paid on your Alabama return -- this is Alabama's most distinctive tax benefit
- Home Office Deduction: Deductible at both federal and state levels using simplified ($5/sq ft up to 300 sq ft) or actual expense method
- Vehicle Expenses: Standard mileage rate of 70 cents per mile for 2025, or actual expenses
- Health Insurance Premiums: Self-employed health insurance deduction available as above-the-line deduction
- Retirement Contributions: SEP-IRA (up to 25% of net self-employment income) or Solo 401(k)
- Business Equipment: Section 179 expensing and bonus depreciation recognized by Alabama
- Professional Services: Accounting, legal, and consulting fees fully deductible
Alabama Conformity Note: Alabama uses federal adjusted gross income as the starting point for calculating state taxable income, with certain Alabama-specific modifications. The most significant modification is the addition of a deduction for federal income taxes paid. Review Alabama Form 40 instructions for the complete list of Alabama additions and subtractions from federal AGI.
Dissolving an Alabama LLC
To dissolve an Alabama LLC, you must file Articles of Dissolution with the Alabama Secretary of State (filing fee: $100). Before filing, settle all debts, distribute remaining assets to members, and file final tax returns -- including a final Alabama Form 40 or Form 65 marked as "final return" and a final Business Privilege Tax return.
You must also notify the county Probate Judge's office where your LLC was originally filed. Cancel your Alabama business license and sales tax permit with the Department of Revenue. File final withholding returns if you had employees. Retain records for at least three years from the final filing date, as Alabama's statute of limitations for tax assessments is generally three years from the date the return was filed.