Electing Pass-Through Entity FAQ

What entity types can elect to be treated as an Electing Pass-Through Entity?

For tax years beginning on or after January 1, 2021, any Alabama S corporation, as is defined by §40-18-160, Code of Ala. 1975, and any Subchapter K Entity as is defined by §40-18-1, Code of Ala. 1975, may elect to be taxed as an Electing Pass-Through Entity.

When is a Pass-Through Entity required to make the election for a tax year?

Any time during the tax year before the due date for filing the applicable income tax return, including any extensions which have been granted following the close of that tax year for which the entity elects to be taxed as an Electing Pass-Through Entity.

How does the pass-through entity make an election to be treated as an Electing Pass-Through Entity?

For tax periods beginning on or after January 1, 2025, the Electing Pass-Through Entity must check the Electing PTE box on the timely filed Form 65 or Form 20S, including any extensions which have been granted following the close of that tax year for which the entity elects to be taxed as an Electing Pass-Through Entity.  The Electing PTE box must be checked each year the election is in effect.  Entities making this election are required to file Form EPT, in addition to Form 65 or Form 20S.

The election shall be accomplished by a vote by or written consent of the members of the governing body of the entity as well as a vote by or written consent of the owners/shareholders holding greater than 50 percent of the voting control of the entity, within the time prescribed above.

Can a Pass-Through Entity revoke its election to be treated as an Electing Pass-Through Entity?

The Electing Pass-Through Entity must check the Revoking PTE box on the timely filed Form 65 or Form 20S, including any extensions which have been granted following the close of that tax year for which the entity elects to be taxed as an Electing Pass-Through Entity.

What is the Electing Pass-Through Entity Tax return form and when is it due?
Pass-through entities that file an election to be an Electing Pass-Through Entity must file Form EPT, in addition to Form 65 or 20S, and pay the tax due. The Form EPT is due on the 15th day of the third month after the close of the tax year (i.e., March 15 for calendar year filers).

Can an Electing Pass-Through entity request an extension of time to file its tax return?
If an extension has been granted for federal purposes, the extension is also granted for Alabama purposes; the Federal Form 7004 must be submitted with the Form 65/20S. The extension only applies to filing a return; no extensions are granted for payment of taxes due.

Are Pass-Through Entities that elect to pay the Electing Pass-Through Entity Tax required to make estimated tax payments?
Yes, Electing Pass-Through Entities that have an Alabama income tax liability in excess of $500 must pay estimated tax. An Electing Pass-Through Entity shall be subject to the provisions of §40-18-80.1, Code of Ala. 1975, (estimated tax for corporations). The required estimated quarterly payments will be 25 percent of the “required annual payment.”  The required annual payment generally means 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.

Except as noted below, this safe-harbor rule will apply to Electing PTEs making estimated payments only when an entity is transitioning to an Electing Pass-Through Entity (§810-3-36-.01, Code of Ala. 1975). The following calculations should be used for the required annual payment:

PTEs (other than S-Corporations): Calculate the total of lines 1 through 17 in the Alabama column on Schedule K from the PTEs Form 65, then multiply this total by 5 percent.

Please Note: If a Subchapter K entity has a loss for the prior year, the current year EPT liability is used to compute the estimated payments.

S-Corporations: Calculate the total of lines 1 through 17 in the Alabama column on Schedule K from the S-Corporation’s Form 20S, then multiply this total by 5 percent.

Please Note: If an electing S-Corporation reported a loss on lines 1-17,  the safe-harbor rule will not apply.

When are estimated tax payments due?

Estimate tax due dates for calendar year filers:
Payment 1 – April 15
Payment 2 – June 15
Payment 3 – September 15
Payment 4 – December 15
 
Estimate tax due dates for fiscal year filers:
Will be due on the 15th day of the fourth, sixth, ninth, and 12th months of the fiscal year. 

Will an entity be penalized if estimated tax payments are not made?

Estimated tax payments not paid by each quarterly due date will be subject to interest on the underpayment – determined by applying the underpayment rate established by 26 U.S.C. §6621 (as provided by Alabama Code Section 40-18-80.1) to the underpayment for the period of underpayment. In addition, the 10 percent penalty provided for in Alabama Code Section 40-2A-11 applies to estimated tax payments not paid by the quarterly due date.

How do I make an estimated tax payment?

Submit estimated tax payments made by check with the form PTE-V and mail to the address provided on this form. Please Note: §41-1-20, Code of Ala. 1975 requires all single tax payments of $750 or more to be made electronically. 

Electronic Payment Options Available:

• ACH Debit– Taxpayers making e-payments via ACH Debit must have a Sign On ID and Access Code to log in to My Alabama Taxes. Pre-registration is not necessary to make a payment on an invoice or assessment.
• ACH Credit– Taxpayers making e-payments via ACH Credit must be pre-approved by ALDOR. To register, complete and submit Form EFT: EFT Authorization Agreement Form .

What if a PTE makes estimated payments and ultimately does not make the election to be an Electing PTE for this tax year?

A refund may be requested by the entity. To request a refund, use the form PTE-C and list the amount of estimate payments made on line 5b.    

Are guaranteed payments included in the calculation of taxable income?
Yes, taxable income includes guaranteed payments. 

Can an electing Pass-Through Entity claim a net operating loss?
No, Pursuant to Sections 40-18-24 and 40-18-161, Code of Ala. 1975, NOLs are not considered in the calculation of net income.

Can an owner, member, partner, or shareholder take a credit for taxes paid by the Electing Pass-Through Entity?
The owner, member, partner, or shareholder of an electing pass-through entity shall be entitled to a refundable credit in an amount equal to its pro rata or distributive share of the Alabama income tax paid by the electing pass-through entity with respect to the corresponding tax year.

Can an Electing Pass-Through Entity exclude income attributable to certain owners, i.e. tax-exempt owners, when calculating tax due? 
No, an Electing Pass-Through Entity’s taxable income is calculated in accordance with the provisions of §40-18-162, Code of Ala. 1975, as appropriate, and apportioned in accordance with the provisions of §40-18-27, Code of Ala. 1975.

Do owner’s member, partner, or shareholders of an Electing Pass-Through Entity have a filing requirement? Act 2021-423 does not create a filing obligation for any member of an Electing Pass-Through Entity who would not otherwise have a filing obligation. Note, however, that a member seeking to claim the credit for taxes paid by the Electing Pass-Through Entity will have to file a return and report its distributive share of the income of the entity.

Can an Electing Pass-Through Entity claim tax incentive credits?

The 2017 Alabama Historic Rehabilitation Tax Credit and the Railroad Modernization Act Credit must be claimed at the Electing Pass-Through Entity level and will not be passed through to the partners of the entity. 

ALDOR requires the use of Schedule EPT-C when claiming tax credits. The schedule allows the taxpayer to compute the total amount of tax credits allowable. The amounts entered on the Schedule EPT-C will carry over to the Form EPT, page 1. Many credits now must be claimed on the taxpayer’s My Alabama Taxes account to receive the credit and the Schedule EPT-C attached to Form EPT. For more information on credits, please visit ALDOR’s Tax Incentives page and see instructions for Schedule EPT-C.

Can an Electing Pass-Through Entity pass through tax Incentive credits to its members?  

All credits except the 2017 Alabama Historic Rehabilitation Tax Credit, the Railroad Modernization Act Credit and the 2025 Rural Hospital Investment Program Tax Credit shall pass through to and may be claimed by an eligible taxpayer. The Electing Pass-Through Entity would complete Schedule PC. The amounts entered on the Schedule PC will carry over to the Schedule K and K-1s. Many credits now must be claimed on the taxpayer’s My Alabama Taxes account to receive the credit and the Schedule PC attached to Form 65 or 20S.  For more information on credits, please visit ALDOR’s Tax Incentives page and see instructions for Schedule PC.

Will an Electing Pass-Through Entity still be required to file a composite return, PTE-C, on behalf of nonresident members? No, if an entity elects to be treated as an Electing Pass-Through Entity, the composite return is not required. If an election is not made, partnerships are required to make a composite payment in accordance with §40-18-24.2, Code of Ala. 1975.

Can a taxpayer transfer an overpayment from a composite return (Form PTE-C) to an Electing Pass-Through Entity’s account?
Yes, an overpayment from the prior year’s composite return can be transferred to an Electing Pass-Through Entity’s account.

Can a Pass-Through Entity with all resident owners elect to be an Electing Pass-Through Entity? Yes, any Alabama S corporation, as is defined by §40-18-160, Code of Ala. 1975, and any Subchapter K Entity as is defined by §40-18-1, Code of Ala. 1975, may elect to be taxed as an Electing Pass-Through Entity.