Alabama LLC Taxes

To guarantee that your Alabama limited liability company (LLC) adheres to tax regulations, it's essential to understand the different tax laws at the municipal, state, and federal levels.

This guide explores the key Alabama LLC taxes and offers a thorough guide to the tax filing process for your LLC in the Empire State. 

Schedule a free consultation with an accountant to stay on top of your taxes. 

How is an LLC Taxed in Alabama?

Taxation in Alabama isn’t applied in the same way to all LLCs – instead, it varies depending on a number of factors, such as an LLC’s nature, locality, and tax election.

While LLCs typically benefit from pass-through taxation by default, they can also elect to be taxed as one of the following:

• C Corporations: The LLC is treated as a separate entity to its owners, paying corporate tax rates on its total profit while the owners also pay personal income taxes on any distributions they take.
• S Corporations: In return for paying owners a “reasonable salary,” the LLC’s remaining profits are distributed among members without a need to pay FICA or federal self-employment tax on them.

The following sections go into the various tax responsibilities of your LLC at local, state, and federal levels in Alabama to help you ensure your LLC navigates them effectively.

Alabama Local Taxes

The local laws and tax regulations differ greatly between different localities in Alabama — where there are currently a number of unique taxes in place at a local level.

Below, we delve into the main local taxes and permits for you to be aware of, organizing them into categories based on their nature and scope.

Sales and Use Taxes

This is a group of Alabama taxes that are applied to the sale or use of goods and services. These taxes are generally calculated as a percentage of the price paid by the consumer and then collected by businesses at the point of sale in order to generate revenue for the local and state governments.

In addition to the general statewide sales tax of 4%, there are a number of specific sales taxes levied at a local scale:

• Lodging Tax
• Consumers Use Tax
• Rental Tax
• Sellers Use Tax

Note: Due to the variation in sales and use tax rates between localities, you’ll need to use the Alabama Department of Revenue’s Search by Address tool in order to calculate how much your LLC must collect.

Severance Taxes

This is a special group of taxes imposed on the extraction of natural resources like oil, gas, and minerals within Alabama. There are a number of local severance taxes in Alabama that are applied in addition to state severance taxes in order to compensate the locality for the depletion of these non-renewable resources. 

Some examples of these local severance taxes are imposed in:

• Coosa County: A tax is levied against businesses in this county involved in mining, stripping, or otherwise removing sand, clay, silt, loam, dirt, gravel, rock, sand-gravel, and sand-clay at a rate of $0.25 per ton. 
• Jackson County: A tax levied against producers of coal based in this area at a rate of $0.20 per ton of coal severed.
• Marshall County: Another tax on coal producers, also imposed at a rate of $0.20 per ton of this resource that is removed.

While these severance taxes are commonly collected by The State Department of Revenue, they are always levied at a county level and generate income that is used by the relevant county’s commission.

Recommended Service: Schedule a free consultation with 1-800Accountant to ensure your business remains legally compliant. 

Alabama State Taxes

Every state has its own regulations and rules that dictate how it taxes individuals and businesses. Below, we’ve delved into the most relevant state-level taxes for LLCs in Alabama. 

Income Taxes

This group of taxes refers to the charges imposed by the state on the earnings of individuals and business entities operating within Alabama. Specifically, it includes:

• State Personal Income Tax: A gradual tax rate that ranges from 2% to 5% depending on your business’s adjusted gross income (AGI) and taxpayer category (rules explored in table below).
• State Corporate Income Tax: A flat rate of 6.5% on the total taxable income generated by a corporation from business activity within Alabama.

We’ve broken down the personal Alabama income tax rules in the table below:

Understanding the nuances of your state income taxes is crucial for individuals and corporations as they form a central part of your statewide tax responsibilities.

Sales-Related Taxes

Sales tax refers to the percentage added to the price of tangible goods and services sold within Alabama and paid by consumers. It typically applies to most goods you can touch and take with you (i.e., personal property such as clothes, electronics, and furniture) – though there are a few exemptions, like prescription drugs and newspapers. 

In Alabama, there is no single statewide rate that is applied for sales tax — instead, the following rates are used depending on the type of goods being sold:

• General: 4%
• Food/Grocery: 3%
• Automotive: 2%
• Manufacturing: 1.5%
• Farm Machinery: 1.5%
• Vending Through Vending Machines: 3%
• Vending (Not Machines): 4%
• Amusement: 4%

Since municipalities in Alabama are permitted to charge an additional local rate, the total sales your LLC will need to remit is dictated by the combination of your local area’s rate and the statewide rate — which in some cases can reach up to 10%.

Note: To be able to collect and remit its sales taxes, your LLC must create an account with My Alabama Taxes (MAT).

Alabama Business Privilege Tax

All businesses based in Alabama are required to pay an annual business privilege tax for the right to be able to operate in this state. This state tax is calculated based on a business’s net worth and its capacity to pay according to the following framework:

This tax is limited to a minimum of $50 and a maximum of $15,000 in a taxable year for most businesses. The only exceptions to these limits are financial institutions/insurance companies and family limited liability entities, which have upper limits of $3 million and $500, respectively.

Note: You’ll need to pay this tax when filling out the Alabama Business Privilege Tax Return, which is filed alongside your LLC’s annual report. See our Keep Your LLC Compliant section for more information on this.

Environmental Taxes

This group of taxes refers to the fees and charges levied on activities related to waste management and storage of hazardous materials in Alabama. Principally, this includes: 

• Hazardous Waste Disposal Fee: A fee imposed on businesses to be able to dispose of certain types of waste that varies depending on waste’s toxicity.
• Scrap Tire Fee: A tax of $1 that must be collected from customers after being sold replacement tires (whether new, used, or untread).
• Solid Waste Disposal Fee: A fee ranging from $0.25 per cubic yard to $1 per ton payable by all solid waste disposal facilities with a permit from the Alabama Department of Environment Management.

Severance Taxes

There are a number of statewide severance taxes imposed on the use of a number of different natural resources in Alabama, including:

• Uniform Severance Tax: A tax of $0.10 per ton imposed on the severance of all natural minerals listed as such by the Geological Survey of Alabama. This tax is applied statewide except in the counties of Coosa, Geneva, Lamar, Lee, and Wilcox.
• Forest Products Taxes: Taxes on businesses for harvesting or removing forest products like logs, pulpwood, and poles. The rates vary between $0.065 per ton to $0.205 per ton depending on the type of product and its destination.
• Oil & Gas Production Taxes: Several taxes applied to the businesses involved in the extraction of oil and gas in Alabama. The rates of these taxes vary between 1% and 8% according to the rules laid out on the Alabama Department of Revenue’s website.

Understanding the nuances of these statewide taxes is crucial for individuals and corporations as they form a central part of your LLC’s specific tax responsibilities.

Federal Taxes

Regardless of where your business is located, if you run an LLC in the US, there are a number of federal taxes you’ll need to pay. Below, we’ve explored some of the main types your LLC may be required to pay for federal tax purposes:

Income Tax

By default, the IRS will not treat single and multi-member LLCs as separate entities from you and your partners for federal income tax purposes. What this means is that you’ll need to report your share of your LLC’s profits on your individual tax returns and pay federal income taxes on them at the personal rate of your tax bracket.

Having said that, keep in mind that LLCs can also elect to be taxed as C corps or S corps, which changes how these taxes are levied in different ways.

Self-Employment Tax

In addition to income tax, members of single- and multi-member LLCs are responsible for paying self-employment tax on the share of the business’s profits that they report on their personal tax return at the end of the year.

This tax is levied at a flat rate of 15.3% against businesses with net earnings that exceed $400, though it is applied slightly differently to LLCs that have elected to be taxed as S corps or C corps.

Employment Tax

If your LLC hires any employees, it will need to withhold a portion of their salaries to cover various types of taxes on your employees’ behalf – including Social Security, Medicare (FICA), and payroll taxes.

Furthermore, the members of any LLCs that have elected to be taxed as an S corp will be required to pay employment taxes on their salaries. However, in return for this, the remainder of the business’s profit after these salaries have been distributed will be safe from both self-employment and FICA taxes.

Excise Tax

If your LLC engages in certain types of business (such as the sale of alcohol and tobacco or operating a heavy highway vehicle, among others), it may need to pay federal excise taxes in order to do so legally. Each excise tax comes with its own set of rules, rates, and filing obligations you’ll need to be aware of.

Understanding and fulfilling these federal tax obligations is crucial for keeping your LLC compliant and avoiding unnecessary financial penalties and/or fines.

How to File LLC Taxes in Alabama

Below, we’ve outlined the general process an LLC in Alabama will need to follow in order to file their tax return correctly. Note that the specificities of each step will vary slightly depending on how your LLC is organized and the specific locality it’s based in. 

Step 1: Gather Your Documentation

To ensure accurate tax filing, thorough record-keeping is essential. Begin by collecting your personal information, including:

• You and your partner’s Social Security number, date of birth, and residential address
• The previous year’s tax returns
• Your LLC’s Employer Identification Number (EIN)

Then, you’ll need to gather all documentation related to your business’s income, such as:

• Invoices you’ve issued
• Sales transaction logs
• Electronic payment reports from services like PayPal or Stripe

Lastly, assemble all records pertaining to your business expenses, which should cover:

• Lease receipts for your business premises
• Bills for utilities
• Records of office supplies purchases
• Documentation of business-related travel
• Payroll records for employees

Note: Depending on how your LLC is organized and its tax election, you may need different information for your tax return. 

Step 2: Find The Right Tax Forms

Once you've gathered all necessary documents, the next step is to select the correct tax forms for your LLC based on its organization:

• Single-Member LLCs: The business’s total income and expenses are reported on a Schedule C form, which is attached to the owner’s personal tax return and due by April 15 or the following business day if it lands on a weekend or holiday.
• Multi-Member LLCs: File an information return using Form 1065. Members must fill out a Schedule K-1 showing their individual earnings or losses by March 15 or the next business day.
• C Corporations: File a corporate tax return using Form 1120 by the April 15 deadline or on the next business day if it's a weekend or holiday.
• S Corporations: Use Form 1120-S for the corporate tax return and distribute Schedule K-1 forms to shareholders for reporting their shares of profits or losses. The filing deadline is March 15 or the following business day.

Since state and local taxes will have their own individual forms and requirements, we recommend contacting your municipality or hiring an accountant for guidance.

With the appropriate documentation gathered and the correct tax forms for your business entity on hand, you’ll be ready to fill them out and submit them.

Step 3: File Your Taxes

The majority of businesses choose electronic filing for its speed, enhanced security, and reliability compared to paper filing, which can be slower and more prone to errors. Here’s how it works:

• Federal Tax Returns: The IRS provides two electronic services for tax submission: Free File for businesses with an AGI below $72,000 and Free Fillable Forms for those above the threshold.
• State and Local Tax Returns: Depending on the specific tax, the filing requirements can vary. You can submit your taxes online by creating an account on the My Alabama Taxes (MAT) website.

Note: These electronic filing tools are best suited for those who are already confident in handling their LLC taxes as if filling out a paper form. 

For new business owners, we recommend opting for the expertise of a tax professional in order to ensure both accuracy and compliance in your tax filings. 

Recommended: Schedule a free consultation with 1-800Accountant to stay on top of your taxes. 

Keep Your Alabama LLC Compliant

While LLCs are generally easier to maintain than corporations, there are certain state and local formalities your LLC must satisfy in order to remain compliant. 

Annual Report

Once your LLC has been formed, you’ll need to submit an annual report each year with the Department of Revenue as part of your Business Privilege Tax Return. This is a legal requirement of all businesses for the privilege of doing business in the State of Alabama.

You’ll need to use one of two forms depending on the tax election of your LLC:

• Default Structure: You’ll need to use Form PPT in order to file your annual report if your LLC is structured as a disregarded entity, sole proprietorship, or general partnership.
• C Corps or S Corps: You’ll need to use Form CPT in order to file your annual report if your LLC is structured as a C Corp or an S Corp.

While there is no fee in order to file these documents, you will need to figure out and pay the amount you owe in Business Privilege Taxes — while this number will vary from year to year, it will be $50 at least.

Licensure and Tax Requirements

In Alabama, almost all businesses are required to obtain various licenses and permits at the local, state, and federal levels. Below we’ve broken down three of the most common types your LLC may need:

• Business Privilege Licenses: In Alabama, businesses must obtain a "general business license" from a local Probate Judge or License Commissioner. Additionally, it requires annual registration with the Alabama Department of Revenue (ALDOR). This license is mandatory for any individual or entity conducting business, professional, or job-related activities within the state.
• Sales Tax Permits: Businesses engaged in renting or selling tangible personal property or goods are required to secure a business tax registration, often referred to as a "seller’s permit." This is issued by ALDOR and is a critical step for commercial operations involving physical goods.
• Professional Licenses: Certain professions in Alabama, including lawyers, doctors, and accountants, are subject to specific licensing requirements. These licenses are issued by relevant professional boards, like the Alabama Board of Medical Examiners & Medical Licensure Commission for doctors and the Alabama State Bar for lawyers, ensuring that practitioners meet the state's standards for their respective fields.

Note: For more information on the specific licenses and permits your LLC may need, see the Business and License Division.

Alabama LLC Taxes FAQs