Any overpayment of estimated taxes paid by the PTE is currently expected to be refunded or applied to a subsequent year at the PTE level. The election is based on taxable income of the PTE.The taxes paid under the new PTE election will benefit all PTE owners (resident and nonresident) and would be tax deductible for Federal purposes at the PTE level. Composite taxes for nonresident PTE owners are currently treated as distributions to the owner receiving benefit from the tax payment.The overpayment can be refunded or applied to a future year. If the PTE pays an entity level tax of 5%, and the PTE owner’s net tax rate to Alabama is 3.5%, the PTE owner may end up with an overpayment on their Alabama individual tax return. If the election is made, the PTE owners will still report their Alabama K-1 as income on their individual Alabama return and will report a credit for their share of entity level taxes paid by the PTE.With the original enactment of the election, Alabama forgave penalties incurred due to missing the 1 st quarter, but no such exemption applies going forward. If the election is made mid-year, an underpayment of estimated tax penalty should be expected for the missed quarters.PTE owners should adjust (reduce) their individual quarterly estimates accordingly. Because the PTE tax is paid by the entity, not individuals, the entity making the election is required to make quarterly estimated tax payments. Our mission is to administer the States tax laws uniformly, equitably, and efficiently to maximize State revenues to support public services and.A Taxpayer who normally receives a Schedule K-1 reporting $500,000 in income could save between $5,000 and $10,000 in Federal taxes. A variety of factors impact the net savings, including the marginal Federal tax rate of the PTE owners. Tax savings for business owners from the election can be estimated at 1%-2% of their Pass-Through Entity’s Net Income.The entity level tax is 5% of Alabama apportioned taxable income, not Federal income. Multi-state businesses should consider state apportionment when considering the effect of the election.This allows taxpayers to make the election on a profitable entity, and not on a loss entity that wouldn’t receive a benefit under the election.

The election can be made on an entity-by-entity basis.With care, we believe it could be chosen annually. Tax law does not contain a limit on revocation and election. Once made, the election is in effect perpetually, but can be revoked.The election can be made at any time between January 1 st of the tax year and the return filing date without extension (March 15 th for calendar year PTEs).Here are some additional notes about the PTE Election under HB 588:

Alabama income tax brackets 2021