Alabama’s franchise tax no longer exists under that name. It was repealed effective November 30, 2006, and replaced by the Business Privilege Tax, which is what every Alabama entity actually pays today. The Business Privilege Tax applies to virtually every corporation, LLC, limited partnership, and disregarded entity organized under Alabama law or registered to do business in the state. It is calculated on net worth apportioned to Alabama, at rates from $0.25 to $1.75 per $1,000 depending on the entity’s taxable income. Starting with tax years beginning after December 31, 2023, entities that would owe only the minimum tax are exempt from both the tax and the filing requirement.
Why You Still Hear “Franchise Tax”
The original Alabama franchise tax was a levy on corporate capital stock. When the Alabama Department of Revenue repealed the franchise tax rules in late 2006, the Business Privilege Tax took its place, and the governing law now sits in Chapter 14A of Title 40 of the Alabama Code. Older business filings, formation documents, and out-of-state guides still use the “franchise tax” label. If that is what brought you here, the Business Privilege Tax is the tax you actually need to understand.
Who Owes the Business Privilege Tax
The tax reaches almost every business entity with an Alabama presence.1Alabama Legislature. Alabama Code 40-14A-22 – Levy and Amount of Tax That includes:
- Traditional corporations, professional corporations, joint stock companies, and real estate investment trusts, plus any LLC that has elected to be taxed as a corporation federally.2Alabama Legislature. Alabama Code 40-14A-1 – Definitions
- Multi-member LLCs, limited partnerships, and registered limited liability partnerships (any non-corporate entity taxed under subchapter K).2Alabama Legislature. Alabama Code 40-14A-1 – Definitions
- Single-member LLCs disregarded for federal income tax purposes, and qualified subchapter S subsidiaries.2Alabama Legislature. Alabama Code 40-14A-1 – Definitions
The tax accrues on January 1 of each year for existing entities, and on the date of formation or qualification for new ones. An entity keeps owing the tax every year until it formally dissolves or withdraws from Alabama.1Alabama Legislature. Alabama Code 40-14A-22 – Levy and Amount of Tax Stopping operations does not stop the tax. If your LLC still legally exists, it still owes.
How Much You Owe
The tax has two moving parts. The base is your entity’s net worth apportioned to Alabama. The rate applied to that base depends on your federal taxable income apportioned to Alabama. So income does not get taxed directly; it just determines which bracket your net worth falls under.
The brackets, in effect for all tax years beginning after December 31, 1999, are:1Alabama Legislature. Alabama Code 40-14A-22 – Levy and Amount of Tax
- Taxable income under $1: $0.25 per $1,000 of net worth
- $1 to $199,999: $1.00 per $1,000
- $200,000 to $499,999: $1.25 per $1,000
- $500,000 to $2,499,999: $1.50 per $1,000
- $2,500,000 or more: $1.75 per $1,000
An entity with zero or negative income still owes something, just at the lowest rate. The $0.25 bracket exists for exactly that situation.
Multi-State Apportionment
If your entity operates in more than one state, both net worth and taxable income are apportioned to Alabama based on the share of property, payroll, and sales located here. Most entities use the rules in Chapter 27 of Title 40 (Alabama’s version of UDITPA), with separate rules for financial institutions and insurance companies. An entity that operates only in Alabama uses a 100% factor.
The Minimum Tax Exemption That Changed Everything for Small Entities
Alabama used to require a minimum $100 tax from every entity, no matter how small. That changed in stages. For the tax year beginning after December 31, 2022, the minimum dropped to $50. For tax years beginning after December 31, 2023, any entity whose calculated tax would fall at or below the minimum owes nothing and does not have to file at all.1Alabama Legislature. Alabama Code 40-14A-22 – Levy and Amount of Tax
For 2024 and later years, if your net worth times your applicable rate produces a tax under $100, you can skip the return entirely. If the calculation lands at $100 or above, you file and pay the full calculated amount.
The Ceiling
Most entities cap out at $15,000 per year regardless of size. A much higher $3,000,000 ceiling applies to financial institution groups, insurance companies subject to premium taxes, and certain utilities with property assessed under special rules.1Alabama Legislature. Alabama Code 40-14A-22 – Levy and Amount of Tax
When and How to File
A new entity must file an initial return within two and a half months of forming in Alabama or qualifying to do business here. That first filing goes on Form BPT-IN and includes the tax for the entity’s first year.3Alabama Legislature. Alabama Code 40-14A-29 – Submission of Initial Tax and Report
After that, the annual return is due on the 15th day of the fourth month after your tax year ends. Calendar-year entities file by April 15. Corporations use Form CPT. LLCs, S corporations, and other pass-through entities use Form PPT.
A federal filing extension automatically extends the Alabama filing deadline, but not the payment deadline. You still need to pay the estimated tax by the original due date. Payments can be submitted with Form BPT-V or made electronically, and Alabama requires electronic payment for any single business tax payment of $750 or more.4Alabama Department of Revenue. Business Privilege Tax Payment Voucher Form BPT-V
Penalties and Interest
Late filing and late payment are separate penalties, and they add up on top of each other.
File late and you owe 10% of the tax due or $50, whichever is greater. Pay late and you owe 1% of the unpaid amount for each month or partial month, capped at 25%. Negligence adds another 5% on the portion attributable to it. Fraud brings a 50% penalty on the fraudulent portion.5Alabama Legislature. Alabama Code 40-2A-11 – Penalties and Interest
Interest runs on top of the penalties. Alabama’s underpayment rate for 2026 is 7%, calculated daily.6Alabama Department of Revenue. Quarterly Interest Rates On a $15,000 bill, that is roughly $2.88 a day, and it keeps running until the balance is paid.
If You’ve Stopped Operating, You Still Owe Until You Formally Close
This trips up a lot of Alabama business owners. Closing your doors, ending sales, or letting a business license expire does not end the Business Privilege Tax. The tax keeps accruing every January 1 for as long as the entity legally exists. ALDOR will issue assessments for each year missed, including estimated tax, late-file penalty, late-pay penalty, and interest. Unpaid assessments can turn into liens filed by the Collection Services Division.7Alabama Department of Revenue. How to Close a Business for Business Privilege Tax Purposes
Closing a Domestic Entity
If the entity was formed in Alabama, file Articles of Dissolution with the Alabama Secretary of State. Any delinquent tax or accrued liability owed to ALDOR as of the dissolution date must be paid.7Alabama Department of Revenue. How to Close a Business for Business Privilege Tax Purposes
Withdrawing a Foreign Entity
If the entity was formed in another state but registered to do business in Alabama, first request a Certificate of Compliance from ALDOR, which requires bringing all returns and payments current. Then file a Certificate of Withdrawal with the Secretary of State. The Certificate of Compliance has to be less than six months old when you submit it to the Secretary of State.7Alabama Department of Revenue. How to Close a Business for Business Privilege Tax Purposes Both dissolutions and withdrawals can be filed online or by mail through the Secretary of State.