How to Complete and File Alabama Form 65: Partnership Return of Income

Alabama Form 65 is the annual partnership return of income that every partnership and multi-member LLC with Alabama nexus files with the Alabama Department of Revenue. The entity itself owes no income tax on the return. Instead, income flows through to the partners, who report their shares on their own Alabama returns. For calendar-year filers the return is due March 15, and it must include a complete copy of the federal Form 1065 along with an Alabama Schedule K-1 for every partner or member.

Who Has to File

Any partnership or entity treated as a Subchapter K entity under Alabama law files Form 65 if it has substantial nexus with Alabama through property, payroll, or sales in the state.¹ That covers domestic partnerships organized in Alabama, foreign partnerships earning Alabama-source income, and multi-member LLCs that elect partnership treatment federally.²

A nonresident entity triggers the filing requirement if it exceeds any of these factor-presence thresholds during the tax period:

$68,000 of Alabama property
$68,000 of Alabama payroll
$675,000 of Alabama sales
25 percent of total property, payroll, or sales located or occurring in Alabama

These thresholds come from Alabama’s factor-presence nexus statute.³ A partnership with no Alabama office can still have a filing obligation if remote employees or out-of-state sales push it over any one line. Check your position every year, because a change in business volume can move you in or out.

When It’s Due and What Happens If You’re Late

Form 65 is due on the same date as the corresponding federal Form 1065: the 15th day of the third month after the close of the tax year, which is March 15 for calendar-year partnerships.¹

Alabama does not require a separate state extension application. The federal extension is automatically recognized for Alabama as long as you meet all federal requirements, which gives calendar-year filers until September 15.¹ The extension covers filing only. Any tax owed, including composite payments for nonresident partners, continues to accrue penalties and interest after the original due date.

Late filing carries a $50 penalty for each Schedule K-1 that should have been included with the return, and a separate $50-per-K-1 penalty can apply to late electronic filings.⁴ For a partnership with ten partners, that adds up fast.

What to Gather Before You Start

The federal Form 1065 is the backbone of the Alabama return, since Alabama’s income computation pulls directly from federal reporting.⁵ A Form 65 submitted without a complete copy of the federal return, including all federal K-1s, statements, and attachments, is treated as a delinquent return due to improper preparation.⁶

Beyond the federal return, pull together:

Each partner’s full legal name, current address, and Taxpayer Identification Number (SSN or FEIN) for anyone who held an interest at any point during the year.¹
The partnership agreement, so you have ownership percentages and any special allocations.
Apportionment data if you operate in multiple states: Alabama sales and total everywhere sales, plus property and payroll figures relevant to your nexus analysis.
A list of nonresident partners, since the partnership files a composite return on their behalf.

Working Through the Return

Page 1: Entity Information and Ordinary Income

At the top of page 1 check all applicable boxes: Initial Return, Final Return, Amended Return, General Partnership, Limited Partnership, LLC/LLP, and the other entity classifications.⁵ If the partnership is making the Electing Pass-Through Entity election, check that box on a timely filed return. Fill in the entity name, FEIN, Alabama account number, address, and accounting period. Page 1 then walks through the computation of Alabama ordinary income, producing the figure that carries to Schedule K, Line 1.

Schedule C: Apportionment Factor

Multistate partnerships calculate an apportionment percentage on Schedule C using Alabama’s single sales-factor formula: Alabama sales divided by total everywhere sales, expressed to four decimal places.⁵ That percentage carries to Schedule K, where each category of income is multiplied by the factor to arrive at the Alabama-source amount. If the partnership operates entirely within Alabama, the factor is 1.0000.

Schedule K: Partner Distributive Share Items

Schedule K is where every category of income, deduction, and credit that passes through to partners is tracked. For each line, enter the federal amount (adjusted to Alabama basis) in Column A, the apportionment factor from Schedule C in Column B, and the resulting Alabama-apportioned amount in Column C.⁵ Key lines:

Line 1: Alabama ordinary income from page 1, line 31
Line 2: Net rental real estate income or loss
Lines 3a–3c: Other rental income less rental expenses
Line 4: Guaranteed payments
Lines 5–7: Interest, dividends, and royalties
Line 8a: Short-term and long-term capital gains or losses
Line 9: Net Section 1231 gain or loss

One caution for multistate filers: do not use Schedule K to allocate separately stated business income. That allocation happens on Schedule B instead.⁵ Nonbusiness income, such as a gain from selling property unrelated to the partnership’s main operations, is allocated to specific states rather than apportioned by the sales factor.

Schedule K-1: Individual Partner Statements

Prepare an Alabama Schedule K-1 for every person or entity that held any interest in the partnership during the year. Each K-1 reports the partner’s name, address, identification number, and pro rata share of the amounts from Schedule K.¹ Line G carries the partner’s share of ordinary income from Schedule K Line 1, Line H carries the share of rental real estate income from Schedule K Lines 2 and 3c, Line I carries guaranteed payments from Schedule K Line 4, and so on.⁷ The apportionment factor from Schedule C also appears on each K-1, so partners can verify the Alabama-source figures.

Partners use the K-1 to complete their own Alabama individual or corporate returns. Confirm that the K-1 distributive shares add back to the totals on Schedule K. A mismatch is one of the quickest ways to delay processing.

Composite Return for Nonresident Partners

The partnership must file a composite income tax return on Form PTE-C and pay Alabama tax on behalf of its nonresident members.⁸ The tax is figured at the highest Alabama individual rate, currently 5 percent, applied to each nonresident’s distributive share of income apportioned to Alabama.⁴

The composite return and any tax due share the Form 65 deadline, March 15 for calendar-year filers. A nonresident partner included on the composite return can still file an individual Alabama return and claim credit for the tax the partnership paid.⁸ If a partner is itself a pass-through entity, that lower-tier entity has its own composite obligation for its own nonresident members.

The Electing Pass-Through Entity Option

For tax years beginning on or after January 1, 2021, an Alabama partnership can elect to pay income tax at the entity level rather than passing all of it to partners.⁹ The election works around the federal $10,000 SALT deduction cap: entity-level tax reduces non-separately stated income federally, creating a deduction not subject to the cap.

For tax periods beginning on or after January 1, 2025, the election is made by checking the Electing PTE box on a timely filed Form 65, which includes returns filed within the extension period.⁹ Partners then take a credit on their individual Alabama returns for the tax paid at the entity level. Whether the election helps depends on each partner’s federal position, particularly whether they itemize and how close they already are to the SALT cap. Once made, the election applies to all partners, so run the numbers before checking the box.

Submitting the Return

The Department of Revenue encourages electronic filing through the My Alabama Taxes (MAT) portal, which cuts manual entry errors and gives you an immediate confirmation number.⁴

Paper filers mail the completed Form 65 with all attachments to:

Alabama Department of Revenue
Income Tax Administration Division
P.O. Box 327441
Montgomery, AL 36132-7441¹⁰

Tax payments, whether composite tax, Business Privilege Tax, or Electing PTE tax, should be remitted by Electronic Funds Transfer so they post to the correct period. Keep the MAT confirmation receipt or certified-mail tracking number as proof of timely filing.

Amended and Final Returns

To correct errors after filing, submit an amended Form 65 with the “Amended Return” box checked at the top of page 1.⁵ Attach a corrected federal Form 1065 and revised Alabama Schedule K-1s for any partners whose figures changed. Paper amended returns go to the same P.O. Box 327441 address.¹⁰ If the amendment flows from a federal change, whether an IRS audit or an Administrative Adjustment Request under the Bipartisan Budget Act, file promptly and notify each affected partner so they can amend their own Alabama returns.

When a partnership dissolves, file Form 65 for the final short-period or full-year and check the “Final Return” box on page 1.⁵ Attach the corresponding final federal Form 1065 with final K-1s. Any gains or losses from assets sold during wind-down flow through on Schedule K and the K-1s like any other year. A dissolving partnership may still owe a final composite payment for nonresident partners and a final Business Privilege Tax return.

Business Privilege Tax Is Separate

Partnerships operating in Alabama also owe an annual Business Privilege Tax, which is a separate return from Form 65. For taxable years beginning after December 31, 2022, the minimum privilege tax is $50, reduced from the previous $100 minimum, with larger partnerships owing more based on net worth apportioned to Alabama.¹¹ The privilege tax has its own filing schedule, so don’t assume the Form 65 deadline covers it.

1
Legal Information Institute. Alabama Code r. 810-3-28-.01 – Partnership Returns
2
Alabama Department of Revenue. Partnership Income Tax
3
Alabama Legislature. Alabama Code 40-18-31-2 – Factor Presence Nexus
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Alabama Department of Revenue. Pass-Thru Entities: Subchapter K Entities (Partnerships) and S Corporations
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Alabama Department of Revenue. Instructions For Preparation of Alabama Partnership/Limited Liability Company Return of Income
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Alabama Department of Revenue. Instructions For Preparation of Alabama Partnership/Limited Liability Company Return of Income
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Alabama Department of Revenue. Instructions for the Preparation of Alabama Schedule K-1 Form 65
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Alabama Legislature. Alabama Code 40-18-24-2 – Taxation of Pass-Through Entities
9
Alabama Department of Revenue. Electing Pass Through Entities
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Alabama Department of Revenue. What is the mailing address for Form 65?
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Alabama Department of Revenue. Business Privilege Tax