Alabama DOR Grants Extension to Make PTE Tax Election for 2022 Tax Year

SALT Alert: Alabama Edition

Client Alert

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In 2021, the Alabama Legislature unanimously enacted an elective pass-through entity tax (PTE Tax) as a workaround to the so-called “SALT Cap,” which was part of the Tax Cuts and Jobs Act of 2017. The Alabama Electing Pass-Through Entity Tax Act (Act 2021-1) established a new alternate state income tax applicable only to electing partnerships/LLCs treated as pass-through entities and to S corporations (PTEs). For tax years beginning on or after January 1, 2021, a PTE can elect annually to be taxed at the entity level for Alabama income tax purposes, at the highest marginal individual income tax rate (currently 5%) calculated in accordance with the Subchapter K or Subchapter S rules, as appropriate, and apportioned in accordance with Alabama’s multistate corporation apportionment rules. The PTE Tax flows through as a credit to the entity’s owners. The act granted the Alabama Department of Revenue (ADOR) authority to issue implementing rules.

Importantly, the PTE (following the necessary owner vote) must elect to be subject to the PTE Tax, and that election must be made on or before the original due date of the PTE Tax return, without extensions. ADOR promulgated an administrative rule in February 2022 setting forth the procedures for making the PTE Tax election. As we previously reported, the rule required taxpayers to make the PTE Tax election electronically via ADOR’s My Alabama Taxes (MAT) website. According to the rule, “[i]f the election form is not filed on Form PTE-E through MAT in a timely manner, the election to become an Electing Pass-Through Entity will be denied.”

Unfortunately, a substantial number of taxpayers overlooked this requirement and failed to make a timely election on MAT when filing their 2021 PTE Tax returns, mistakenly assuming that making the required PTE Tax payments and/or timely filing the PTE Tax return was all that was required to make the election. A welcome move recognizing this oversight came in the first year of the PTE Tax’s existence, when ADOR reopened the electronic filing window last summer for certain PTEs to make their 2021 elections – and a number did so. 

Like last year, apparently a significant number of PTEs didn’t timely make the PTE Tax election on MAT for the 2022 tax year. Thankfully, ADOR announced yesterday  that eligible PTEs can make the 2022 election via MAT from July 10, 2023 to the extended due date of the PTE Tax return (September 15, 2023 for calendar year taxpayers). According to the announcement, however, granting the late-filed PTE Tax election is conditioned on the PTE having:

  • timely filed the required entity and member tax returns, as if the election had been properly made for the 2022 tax year;
  • timely made an electing pass-through entity extension payment; or
  • made an entity-level tax payment prior to the due date of the respective return.

The PTE Tax election once made will remain in effect for subsequent years unless and until it is revoked on MAT. Thankfully, ADOR has addressed a number of other important questions in its newly posted FAQs. As the FAQs make clear, the relief does not apply to the 2021 tax year.

Please contact us if you have any questions about the Alabama PTE Tax or ADOR’s welcome relief efforts with respect to the 2022 elections.

Please save the dates for the following state and local tax conferences in Birmingham this fall:

  • September 14, 2023: Council on State Taxation – Southeast Regional State Tax Seminar
    Presenting an update on significant state tax issues for the Southeast: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, South Carolina and Tennessee. More information and a link to register can be found here.
  • November 15-17, 2023: Alabama Federal and State Tax Institute (AFSTI)
    As a result of the merger of the American Institute on Federal Taxation and Federal Tax Clinic, AFSTI will hold its inaugural three-day federal and state tax conference at Regions Field, featuring presentations on recent legislative, administrative and judicial developments in Alabama SALT, as well as national SALT developments. More information and a link to register can be found here.