Alabama requires every partnership or LLC taxed as a Subchapter K entity to file an Alabama composite return, Form PTE-C, whenever it has one or more nonresident members during the tax year. The entity pays Alabama income tax on each nonresident member’s share of Alabama-source income at the state’s top marginal rate of 5%. S corporations are not forced onto this track, but they may file a composite return with the Alabama Department of Revenue’s (ADOR) permission.
Who Must File
The mandate sits in Alabama Code 40-18-24.2 and applies to any Subchapter K entity, meaning general partnerships, limited partnerships, LLPs, and LLCs taxed as partnerships. If even one member is a nonresident at any point during the year, the entity must file.1Alabama Legislature. Alabama Code 40-18-24.2 – Taxation of Pass-Through Entities The requirement has applied to taxable years beginning after December 31, 2008.2Alabama Administrative Code. Alabama Administrative Code 810-3-24.2 – Pass Through Entity Composite Returns and QIP Requirements
S corporations fall under a different statute, Alabama Code 40-18-176, which lets ADOR permit an S corporation to file a composite return for its nonresident shareholders rather than compelling it to.3Alabama Legislature. Alabama Code 40-18-176 – Nonresident Shareholder Composite Returns Both entity types file on the same Form PTE-C, which has a checkbox identifying the type.4Alabama Department of Revenue. Form PTE-C 2024 – Nonresident Composite Payment Return
Estates and trusts are not pass-through entities under Section 40-18-24.2, though they can appear as nonresident members on another entity’s composite return.1Alabama Legislature. Alabama Code 40-18-24.2 – Taxation of Pass-Through Entities
Which Nonresident Members Get Included
Under Alabama Revenue Ruling 07-001, a Subchapter K entity’s composite return can cover all of its nonresident partners and owners: individuals, corporations, other flow-through entities, and upper-tier owners in a tiered structure. In tiered ownership, the lower-tier entity has the same composite obligation for nonresident income flowing through the structure.1Alabama Legislature. Alabama Code 40-18-24.2 – Taxation of Pass-Through Entities Indirect owners can be exempted from composite payment only with ADOR’s pre-approval, by submitting Form NRC-Exempt along with Form PTE-R and documentation showing how the income flows.5Cornell Law Institute. Alabama Admin Code 810-3-24.2-.01 – Composite Returns of Pass-Through Entities
Exemptions From Composite Payment
Even a filing entity does not have to remit tax for every nonresident member. Alabama recognizes four situations where a member drops out of the composite payment.
- A member who is otherwise exempt from Alabama income tax can be excluded if the entity attaches a completed Form NRC-Exempt to the return. If the form is missing, the payment is still owed.5Cornell Law Institute. Alabama Admin Code 810-3-24.2-.01 – Composite Returns of Pass-Through Entities
- A qualified investment partnership is exempt if at least 90% of its assets consist of qualifying investment securities and at least 90% of gross income comes from interest, dividends, distributions, and gains on those securities. An authorized officer must certify both tests.1Alabama Legislature. Alabama Code 40-18-24.2 – Taxation of Pass-Through Entities
- A publicly traded partnership taxed federally as a partnership is exempt, provided it makes owner information available to ADOR on reasonable notice.1Alabama Legislature. Alabama Code 40-18-24.2 – Taxation of Pass-Through Entities
- ADOR can determine by regulation or ruling that specific nonresident income is not subject to composite reporting.
Separately, a nonresident member of a qualified investment partnership who does not actively participate in the day-to-day management of that entity owes no Alabama income tax on the interest, dividends, and investment gains passed through.6Alabama Legislature. Alabama Code 40-18-24.3 – Taxation on Distributive Share of Nonresident Member of Qualified Investment Partnership
How the Tax Is Calculated
The entity applies Alabama’s highest individual marginal rate to each participating nonresident member’s share of Alabama-apportioned income. That top rate is 5%, which kicks in on taxable income above $3,000 for single filers and above $6,000 for married joint filers.7Alabama Department of Revenue. Individual Income Tax Because the composite return runs the whole distributive share through the top bracket, the effective rate is 5% for almost every nonresident with meaningful Alabama income.1Alabama Legislature. Alabama Code 40-18-24.2 – Taxation of Pass-Through Entities
The composite return does not allow personal deductions, exemptions, or credits at the member level. For a nonresident whose Alabama income is small enough that the lower brackets or the standard deduction would matter, the composite payment can be higher than what an individual return would produce. Tax remitted on the composite return credits to the member’s Alabama account, so a member who later files individually can claim it and, if appropriate, obtain a refund.
Forms You’ll File With PTE-C
Form PTE-C is the composite return itself, consolidating income, deductions, and tax liability for all participating nonresident members.4Alabama Department of Revenue. Form PTE-C 2024 – Nonresident Composite Payment Return It travels with several supporting documents.
- Schedule PTE-CK1 is the state-level counterpart to the federal Schedule K-1. It shows each nonresident member’s share of Alabama income, deductions, and credits, and each member gets a copy.
- Form NRC-Exempt goes with PTE-C for any member excluded from composite payment because of tax-exempt status. It has to be attached each year the exemption is claimed.8Alabama Department of Revenue. Instructions for Form PTE-C and Schedule PTE-CK1
- Form PTE-V, the Pass-Through Entity Payment Voucher, accompanies any non-electronic payment for the composite return or an estimated installment. It is not used when the entity pays electronically.9Alabama Department of Revenue. Form PTE-V – Pass Through Entity Payment Voucher
Figures on PTE-C should tie to the federal return and to the entity’s Alabama apportionment. Keep documentation on how Alabama-source income was computed, because gaps between estimated payments and the final return can prompt ADOR questions.
Deadlines and Estimated Payments
For an S corporation, the composite return and payment are due by the 15th day of the third month after the taxable year closes, which is March 15 for calendar-year filers. A six-month extension is available for the return, but not for the payment; the full tax has to be paid by the original due date.10Alabama Administrative Code. Alabama Administrative Code 810-3-176 – Composite Returns For a Subchapter K entity, the composite return is due when the entity’s annual return is due with ADOR.1Alabama Legislature. Alabama Code 40-18-24.2 – Taxation of Pass-Through Entities
Calendar-year entities owe quarterly estimated payments on April 15, June 15, September 15, and December 15.9Alabama Department of Revenue. Form PTE-V – Pass Through Entity Payment Voucher Missing a quarterly deadline draws a 10% penalty on the underpayment. ADOR requires most filers to submit electronically through the My Alabama Taxes (MAT) portal, though payments can also be mailed with Form PTE-V.
What the Nonresident Member Still Has to Do
Alabama taxes any income earned within the state, including a nonresident’s share of pass-through income from an entity doing business there.11Alabama Legislature. Alabama Code 40-18-2 – Levied; Persons and Subjects Taxable A nonresident whose only Alabama income is fully reported on the composite return generally has no separate filing obligation for that income.
A nonresident with Alabama income from other sources, such as rental property or a second business, needs to file Form 40NR, Alabama’s nonresident individual return. On that return the member claims credit for composite tax already paid on their behalf, which avoids double taxation. Filing individually also opens up deductions and credits the composite return does not carry, and can sometimes produce a lower total tax.
The Electing Pass-Through Entity Tax Alternative
Since 2021 both S corporations and Subchapter K entities have had a second option: the Alabama Electing Pass-Through Entity (EPTE) tax. The entity elects to pay Alabama income tax at the entity level at the same 5% top rate.12Alabama Legislature. Alabama Code 40-18-24.4 – Alabama Electing Pass-Through Entity Tax Act An entity that makes the election no longer files a composite return for the year, and the two are mutually exclusive.13Alabama Department of Revenue. Electing Pass Through Entities
The point of the election is federal. Because the entity pays the tax, the payment may be deductible as a business expense on the federal return, working around the $10,000 individual state and local tax cap. Each owner then claims a refundable credit on their Alabama individual return for their share of the EPTE tax.13Alabama Department of Revenue. Electing Pass Through Entities Two mechanics worth knowing before electing: net operating losses do not factor into EPTE taxable income, and the entity becomes subject to corporate estimated tax rules.
Penalties for Filing or Paying Late
Alabama imposes separate penalties for filing late and paying late, and they stack. Filing a composite return after the deadline (including any extension) draws a one-time penalty equal to the greater of 10% of the additional tax due or $50. Paying the tax late adds 1% per month on the unpaid balance, capped at 25%.14Alabama Legislature. Alabama Code 40-2A-11 – Civil Penalties Levied in Addition to Other Penalties Provided by Law This is the trap in the extension rule: filing an extension postpones the return but not the payment, so an entity that extends without paying starts accruing 1% per month right away.
Interest runs on any unpaid balance at Alabama’s underpayment rate, which is tied to the federal rate under 26 U.S.C. ยง6621 and was 7% as of January 2025.15Alabama Department of Revenue. Revised Interest Chart – Effective January 1, 2025 Substantially understating taxable income on the composite return can bring a 20% accuracy-related penalty on top of the tax.