How to Make an Alabama PTET Election: Form EPT and the 5% Rate

A Huntsville engineering firm runs as an S corporation and clears about $400,000 of Alabama profit after paying its owner a reasonable salary. The owner itemizes, and between property tax and the state income tax withheld on his wages, he has used up the federal SALT cap before the business income even lands on his return. Every dollar of Alabama tax he pays on that $400,000 is, federally, a dollar he cannot deduct. Alabama's Electing Pass-Through Entity Tax is built for exactly that problem. This owner is theoretical, but the mechanics are the ones I walk Alabama owners through every winter.

What the Electing PTE box actually does

Alabama's Electing Pass-Through Entity Tax, created by Act 2021-1 and amended by Act 2021-423, lets an S corporation or a partnership pay Alabama income tax at the entity level at a flat 5%. That 5% is the same as Alabama's top individual rate, so for a high-income owner the entity tax and the individual tax land in nearly the same place. The election does not create a state tax cut. Its value is federal.

Here is the part most write-ups skip. Alabama business income is taxed at about the same rate whether you pay it yourself or the entity pays the flat 5% on Form EPT. Under IRS Notice 2020-75, the entity-level tax is deductible by the entity as a business expense and is not subject to the federal SALT cap, so the election moves that 5% from a capped itemized deduction to a fully deductible business expense. The federal deduction is the entire point. A few owners talk themselves into the election expecting an Alabama tax cut that is not there, so be clear about the trade before you file.

Who can elect, and the one rate that matters

Any Alabama S corporation as defined in Section 40-18-160, or any Subchapter K entity such as a partnership or multi-member LLC, can elect. The vote or written consent of the members of the governing body and of owners holding more than 50% of the voting control is required to make the election. A single-member LLC taxed as a disregarded entity has nothing to elect, since it files on the owner's return rather than its own.

The flat 5% is the number to watch. Alabama taxes individuals on a graduated scale that tops out at 5% above $3,000 of taxable income for a single filer, so almost all of a profitable owner's business income already sits in that top bracket. The entity rate and the owner's marginal rate are close to identical for anyone with real profit. For a smaller operator still below the 5% bracket, the flat entity rate can run a touch higher than paying the tax personally. Alabama is also one of the few states that lets individuals deduct federal income tax paid, one more reason to run your own numbers rather than assume a clean wash.

How to make the election: the box, Form EPT, and the deadline

This is the part that changed. For tax years beginning on or after January 1, 2025, you make the election by checking the Electing PTE box on a timely filed Form 20S for an S corporation or Form 65 for a partnership, including any extension. The box must be checked every year you want the election in effect. For earlier years the election was made separately on Form PTE-E through the My Alabama Taxes portal, and you may still see that older method described in software and in articles that have not caught up.

The entity also files Form EPT to report and pay the tax, due the fifteenth day of the third month after the tax year closes, which is March 15 for a calendar-year entity. Electing entities are required to pay estimated tax if the tax for the year can reasonably be expected to be $500 or more, so if the entity-level tax will be large, plan on quarterly estimates during the year rather than one lump sum with the return. Two more mechanical points matter. Alabama tax paid under this election cannot be deducted again in figuring Alabama taxable income, and a net operating loss carryforward cannot be used to offset the entity's income. The Alabama Department of Revenue spells out the current election procedure.

How owners claim the credit, with a theoretical S corp

Alabama uses a refundable credit rather than an income exclusion. Each owner still reports their share of the entity's income on their Alabama return, then claims a refundable credit equal to their pro rata or distributive share of the Alabama tax the entity paid. An owner who wants the credit has to file an Alabama return to claim it. That differs from a state like South Carolina, which lets the owner leave the income off the individual return, but the result is the same. The income is taxed once, at the entity level.

Take that Huntsville S corporation with $400,000 of Alabama business income after a reasonable salary, a single resident owner in the 32% federal bracket who has already filled the SALT cap with property and wage-withholding taxes. The Alabama tax is $20,000 either way. The only question is whether that $20,000 is deductible on the federal return. The numbers below are 2026 figures, rounded, and the business is theoretical.

The $6,400 is the federal tax saved on a $20,000 business deduction at a 32% rate. There is a catch worth naming. The entity-level tax reduces the qualified business income that flows to the owner, so the IRC §199A deduction drops by 20% of $20,000, or $4,000, which costs about $1,280 of federal tax back. Net, the owner keeps roughly $5,100. Most online summaries leave that §199A trim out. For a specified service business already phased out of §199A, there is no trim and the full $6,400 stands.

When the Alabama election is not worth it

The 2025 tax law raised the federal SALT cap to $40,400 for 2026, up from the old $10,000, and it only phases down above $505,000 of modified adjusted gross income. A good number of Alabama owners can now deduct their state income tax personally without any election, which shrinks or erases the benefit. Before you check the box, add up your property tax and your personal state income tax and see whether you are actually over the cap. If you are comfortably under it, the election buys you little. I walk through that threshold in detail in the $40,000 SALT cap guide, and the broader mechanics live in the PTET SALT cap workaround explainer.

Two more cautions. A nonresident owner should check how their home state credits the Alabama entity tax, since a few states are stingy about crediting tax paid by the entity rather than the individual. And because the 2025 election now lives on the return itself, a missed box on a timely filed Form 20S or Form 65 is a missed election for the year. If you are still deciding whether an S corporation makes sense at all, start with the federal payroll-tax question using the EntityIQ S-Corp tax calculator, then layer the state election on top once the entity is profitable.

This article is educational and is not legal or tax advice. The figures are 2026 amounts, the business is theoretical, and Alabama adjusts its forms and procedures often. Please confirm the current rules with the Alabama Department of Revenue and a qualified CPA before filing.