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 rule.

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