Alabama Composite Return Filing Requirements

An Alabama composite tax return provides a simplified method for a pass-through entity, like a partnership or S corporation, to handle state income tax for its nonresident owners. The business can file a single tax return and remit payment on behalf of these owners, consolidating numerous individual filings into one submission. This process streamlines compliance and relieves the owner of filing a separate Alabama income tax return, provided they have no other income sourced to the state.

Eligibility for Filing a Composite Return

Composite return filing is available to pass-through entities, including partnerships, S corporations, and limited liability companies (LLCs) taxed as such. To be eligible, these entities must have one or more owners who are not residents of Alabama during the tax year.

A pass-through entity is generally required to make composite payments for its nonresident owners. An owner can be excluded by filing a nonresident agreement (Schedule NRA), which certifies they will file their own Alabama tax return. This allows them to claim deductions or credits not available on the composite return, but if the owner fails to pay the tax, the liability reverts to the entity.

Alabama residents who are owners in the entity must file their own individual state income tax returns. Additionally, tax-exempt entities may not require payments made on their behalf but must still be disclosed on the return.

Required Information and Forms

The central document for this process is Form PTE-C, the Alabama Pass-Through Entity Composite Payment Return. This form is used to report the collective income of participating nonresident owners and to calculate the total tax due. It must include information for every nonresident owner, even those for whom a payment is not required.

To complete Form PTE-C, the filer needs the entity’s legal name, physical address, and Federal Employer Identification Number (FEIN). For each nonresident owner included in the return, the filer needs their full name, address, Social Security Number or other Taxpayer Identification Number, ownership percentage, and their distributive share of Alabama-source income. This information is detailed on Schedule CPA, which accompanies Form PTE-C.

The calculation of the tax liability is performed at the individual owner level and then aggregated. The entity applies a flat tax rate of 5 percent to each participating nonresident owner’s share of Alabama income. The income or loss of one owner cannot be used to offset the income or loss of another owner when computing the total payment. The sum of these individual tax amounts constitutes the total composite payment due.

The Filing and Payment Process

The entity must submit Form PTE-C and the full tax payment together. Returns can be filed electronically through the My Alabama Taxes (MAT) portal or approved software. Electronic filing is mandatory for tax preparers who file 25 or more composite returns in a given season, while paper returns can be mailed to the address specified by the Alabama Department of Revenue.

Payment must be made when the return is filed. Electronic payment is required for any tax payment of $750 or more and can be made through the MAT system. If filing by mail, a check or money order for the total tax liability should be included. The due date for the return and payment is the 15th day of the third month following the close of the entity’s taxable year.

An entity can obtain an extension to file the composite return, which moves the submission deadline. However, an extension of time to file does not extend the time to pay the tax. The total estimated composite tax liability must still be paid by the original due date to avoid penalties and interest. Any request for an extension must be properly filed before the original deadline.

Interplay with the Electing Pass-Through Entity Tax

The composite return should be distinguished from a separate tax election in Alabama known as the Electing Pass-Through Entity Tax (PTE-E). Under the PTE-E, the entity itself chooses to be taxed on its Alabama-source income. This mechanism was created as a workaround to the federal limitation on state and local tax (SALT) deductions for individuals.

The two filings serve different functions. The composite return, using Form PTE-C, is a payment made by the entity on behalf of its nonresident owners, and those owners are then considered to have met their Alabama filing obligations. In contrast, the electing pass-through entity tax, filed using Form PTE-E, is a tax paid directly by the entity on its own income.

Owners of an entity making the PTE-E election, both resident and nonresident, receive a tax credit on their individual returns for their share of the tax paid by the entity. The decision to file a composite return is separate from the decision to make the PTE-E election. An entity cannot make both elections for the same income.