Alabama imposes various taxes on businesses depending on their structure, size, and industry. The state’s corporate income tax applies to C-corporations, while other entities like S-corporations, LLCs, and sole proprietorships may pass their income through to individual owners for personal tax purposes. Additionally, Alabama businesses must comply with the state sales tax, which is applied to the sale of goods and services, as well as use tax on purchases from out of state. Other important business taxes include franchise taxes, which are levied on certain business types, and unemployment insurance taxes, which fund benefits for workers who lose their jobs. Alabama also offers a range of tax credits and incentives aimed at encouraging economic development, job creation, and investment in the state. Understanding these taxes and how to file them is critical for any business operating in Alabama to stay compliant and take full advantage of available benefits.
Alabama Corporate Income Tax
The corporate income tax in Alabama applies to C-corporations that do business in the state. The tax is levied on the net income earned within Alabama, meaning businesses are taxed on the portion of their income that is derived from activities within the state.
Corporate Income Tax Rate
The Alabama corporate income tax rate is a flat 6.5%. However, Alabama allows businesses to deduct federal income taxes from their taxable income, effectively reducing the overall tax burden for corporations.
Apportionment for Multistate Corporations
For businesses that operate both inside and outside of Alabama, the state uses a single-sales factor apportionment formula to determine how much income is subject to Alabama corporate income tax. This method only takes into account the percentage of a corporation’s total sales made within Alabama, as opposed to other states that may consider payroll or property in their apportionment formulas.
Filing Corporate Income Tax
Businesses must file Form 20C, the Alabama Corporate Income Tax Return, on an annual basis. The due date for corporate income tax returns is the 15th day of the fourth month after the end of the corporation’s fiscal year, typically April 15th for calendar-year filers. Corporations with a tax liability exceeding $500 must also make estimated quarterly payments.
Alabama Sales Tax
Alabama imposes a sales tax on most retail sales of tangible personal property and some services. Unlike some states, Alabama applies its sales tax to a wide range of goods, making it a significant revenue source for the state.
Sales Tax Rates
The statewide sales tax rate in Alabama is 4%, but local municipalities and counties can add their own taxes, often bringing the combined rate to 8% or higher. For example:
- Birmingham has a combined rate of 10%.
- Mobile has a total sales tax rate of 9%.
This combined rate applies to most retail sales, rentals, and leases of tangible property.
Use Tax
In addition to sales tax, Alabama businesses must also pay a use tax on any taxable goods or services purchased from out-of-state vendors where sales tax was not collected. The use tax rate mirrors the sales tax rate.
Filing Sales and Use Tax
Businesses that collect sales tax must file monthly sales tax returns using Form ST-3 through the My Alabama Taxes (MAT) portal. Small businesses with lower sales volumes may file quarterly or annually, depending on their total tax liability. The same form is used for reporting and paying use tax.
Alabama Business Privilege Tax (Franchise Tax)
In Alabama, certain businesses are subject to the business privilege tax, which is essentially a franchise tax levied on businesses for the privilege of operating in the state. This tax applies to:
- Corporations.
- Limited liability companies (LLCs).
- Limited partnerships.
Business Privilege Tax Rates
The tax rate is based on the business’s net worth and can range from $0.25 to $1.75 per $1,000 of net worth, with a minimum annual tax of $100.
Filing Requirements
Businesses must file Form PPT (for pass-through entities) or Form CPT (for corporations) to report and pay the business privilege tax. The return is due 2.5 months after the beginning of the entity’s tax year. For calendar-year filers, this typically means the business privilege tax return is due by March 15th.
Alabama Unemployment Tax
Employers in Alabama are required to pay unemployment insurance (UI) tax to provide benefits to workers who lose their jobs through no fault of their own. The Alabama Department of Labor oversees this program.
Who Must Pay
Any business that pays $1,500 or more in wages in a calendar quarter or has one or more employees working on any day in 20 different weeks during the year is required to pay unemployment taxes.
UI Tax Rates
The unemployment tax rate varies based on the employer’s experience rating, which is determined by the company’s history of layoffs and claims. New employers are assigned a standard rate, while established employers may have rates that fluctuate depending on their history with unemployment claims.
Employers must register with the Alabama Department of Labor to file quarterly unemployment reports and pay unemployment taxes.
Other Industry-Specific Taxes in Alabama
Alabama also imposes a range of industry-specific taxes on businesses in particular sectors. These include:
Lodging Tax: This tax is levied on businesses that provide lodging services, such as hotels and bed-and-breakfasts. The lodging tax rate is 4%, but local municipalities may add additional taxes, often bringing the total rate to 10% or higher.
Tobacco and Alcohol Taxes: Businesses involved in the sale of tobacco and alcoholic beverages are subject to additional excise taxes. For example, the tax on cigarettes is $0.675 per pack.
Severance Tax: Businesses involved in extracting natural resources, such as oil and gas, must pay a severance tax based on the volume of the resources extracted.
Tax Credits and Incentives in Alabama
Alabama offers several tax credits and incentives aimed at promoting business investment, job creation, and economic growth in the state. Some of the most commonly used credits include:
- Alabama Jobs Act Credit: This credit is available to businesses that create at least 50 new jobs in the state. It provides tax abatements on payroll and other taxes for up to 10 years.
- Investment Credit: Businesses that invest in capital projects, such as manufacturing facilities, may be eligible for a credit equal to 1.5% of the capital investment for up to 10 years.
- Enterprise Zone Credit: Businesses that locate in one of Alabama’s enterprise zones and meet job creation criteria may qualify for property and sales tax abatements.
- Renewable Energy Tax Incentives: Alabama offers various tax incentives for businesses involved in renewable energy, including credits for solar and wind energy investments.
How to File and Pay Business Taxes in Alabama?
Businesses in Alabama must register with the Alabama Department of Revenue (ADOR) through the My Alabama Taxes (MAT) system. MAT allows businesses to:
- Register for business tax accounts.
- File tax returns for sales tax, corporate income tax, and other business taxes.
- Pay taxes electronically.
- View tax account balances and transaction history.
Filing deadlines vary depending on the tax type, but most taxes, such as sales tax and business privilege tax, must be filed either monthly or annually, depending on the business’s tax liability.