OVERVIEW OF CURRENT BUSINESS PRIVILEGE TAX
Alabama’s business privilege tax is levied against these entities that conduct business in Alabama, or were formed or registered in Alabama:
- entities that provide their owners with limited liability, such as LLCs and limited partnerships; and
- entities that are disregarded for federal income tax purposes, such as single-member LLCs.
To determine the amount of tax due, a taxpayer multiplies its “net worth in Alabama” by the applicable tax rate. Thus, the tax calculation contains three general steps:
- calculating a taxpayer’s net worth (assets minus liabilities);
- apportioning (sourcing) that net worth to Alabama (sales, payroll, and property in Alabama compared to total sales, payroll, and property); and
- determining the tax rate that is to be applied to the taxpayer’s “net worth in Alabama.”
A taxpayer’s “taxable income” as sourced to Alabama determines the tax rate.
CURRENT RATE STRUCTURE
|Rate per $1,000
in AL assets
|Minimum / Maximum|
|At least||Less than||Rate:||Minimum tax for all: $100|
|$0||$1||$0.25||Maximum tax for all: $15,000|
|$1||$200,000||$1.00||Banks & Insurance Cap: $3M|
|More than $2.5 Million||$1.75|
SECOND SPECIAL SESSION PROPOSAL
HB21 by Rep. Mike Hill, R-Columbiana, would eliminate the business privilege tax liability for the smallest businesses and increase the maximum tax and rates for larger businesses.
- leave the tax rate based on federal taxable income.
- raise the maximum amount due for most taxpayers from $15,000 to $30,000. Financial institutions and insurance companies operate under a $3 million cap.
- exempt entities with Alabama taxable net worth of less than $10,000. These 105,792 entities would no longer be required to file a return or pay the tax.
- increase the minimum privilege tax from $100 to $125. The $125 minimum tax would apply to taxpayers that have a net worth of at least $10,000.
- adjust the rate table. It increases the rate in each range of federal taxable income by 24 to 25.14 percent. Graduated rates would apply to higher levels of net worth (See chart).
PROPOSED RATE STRUCTURE CHANGE
|Rate Bracket||Rate per $1,000
in AL assets
|Minimum & Maximum Caps|
|At least||Less than||Rate||% increase||Minimum tax: $125*|
|$0||$1||$0.31||24%||Maximum tax: $30,000|
|$1||$200,000||$1.25||25%||Banks & Insurance Cap: $3M|
|$200,000||$500,000||$1.56||24.8%||Alters how bank minimum|
|$500,000||$2.5 Million||$1.87||24.67%||is calculated|
|More than $2.5 Million||$2.19||25.14%|
* Proposal eliminates minimum tax for businesses with $10,000 or less in Alabama taxable net worth
• Requires corporations to report directly to the Secretary of State. Currently, domestic corporations and foreign corporations that are authorized to transact business in Alabama are required to report certain basic information to the Secretary of State’s office annually. However, the law currently allows a corporation’s filing with the Alabama Department of Revenue concerning business privilege tax to serve as that report. The legislation removes that allowance.
• apply to all business privilege tax returns due after 2015.
• increase net receipts to Alabama’s General Fund by an estimated $22.5 million annually beginning with the 2016 fiscal year, according to the bill’s fiscal note.
Bill summary based on analysis by Jeff Patterson LLC, counsel for the Business Associations’ Tax Coalition.