How Alabama Businesses Can Bypass the SALT Deduction Cap
How Alabama Businesses Can Use the PTE Tax Election to Reduce the Impact of the SALT Cap
Alabama allows qualifying S corporations and partnerships to elect to pay Alabama income tax at the entity level. For some business owners, that can move a state income-tax deduction from the owner's individual return to the pass-through entity and create a valuable federal tax-planning opportunity.
For years, one of the most frustrating federal tax rules for higher-income taxpayers was the limitation on the itemized deduction for state and local taxes, commonly called the SALT deduction.
Alabama responded, like many states, by creating an Electing Pass-Through Entity Tax system. Instead of certain owners paying all of the Alabama income tax associated with pass-through business income personally, an eligible S corporation or partnership can elect to pay Alabama income tax at the entity level.
That distinction can matter because federal rules generally treat qualifying state income tax imposed on and paid by a pass-through entity differently from state income tax claimed as an individual's Schedule A deduction.
First: What Is the SALT Deduction Limitation?
SALT stands for state and local taxes. For individuals who itemize deductions, qualifying state and local income or sales taxes, real-estate taxes and certain personal-property taxes are generally grouped together for purposes of the federal SALT deduction.
The limitation became particularly well known after the Tax Cuts and Jobs Act restricted the deduction to $10,000 for many taxpayers beginning in 2018.
The Familiar $10,000 SALT Cap
For several years, individuals generally faced a $10,000 combined federal itemized-deduction limit for state and local income, sales and property taxes.
That made entity-level pass-through tax elections especially valuable for many business owners.
The Individual SALT Ceiling Is Now Higher
For 2026, the general individual SALT deduction ceiling is $40,400, or $20,200 for married taxpayers filing separately.
The allowable ceiling can be reduced for taxpayers with sufficiently high modified adjusted gross income, subject to the applicable federal floor.
Alabama's PTE Election Did Not Become Irrelevant Just Because the SALT Cap Increased
A higher individual SALT ceiling changes the calculation, but it does not automatically eliminate the potential benefit of an entity-level Alabama tax election. High-income owners, taxpayers already using much of their individual SALT allowance, and businesses with meaningful Alabama taxable income may still have a planning opportunity.
The IRS provides current information about deductible state and local taxes through IRS Tax Topic 503 .
What Is Alabama's Electing Pass-Through Entity Tax?
Alabama allows qualifying pass-through entities to elect to pay Alabama income tax at the entity level.
This generally applies to qualifying Alabama S corporations and Subchapter K entities, including partnerships.
The Alabama Electing Pass-Through Entity tax rate is currently 5%.
The Tax Moves to the Entity Level
Instead of the owners being responsible for paying all Alabama income tax associated with the pass-through income through their individual tax accounts, the electing entity calculates and pays Alabama's Electing PTE tax itself.
Alabama's Department of Revenue provides current rules, filing requirements and frequently asked questions on its Electing Pass-Through Entities page.
How Can Paying the Tax Through the Business Help Federally?
The tax-planning opportunity is based on the distinction between a state income tax paid personally by an owner and a qualifying state income tax imposed on and paid by a pass-through business entity.
The Entity Makes the Alabama Election
The eligible partnership or S corporation elects to be treated as an Alabama Electing Pass-Through Entity for the tax year.
The Entity Calculates Alabama PTE Tax
The electing business calculates the applicable Alabama entity-level income tax under Alabama's PTE rules.
The Business Pays the State Tax
The tax is paid by the pass-through entity rather than simply being paid as an individual state income-tax obligation of each owner.
The Entity-Level Tax Can Reduce Federal Pass-Through Income
Subject to the applicable federal rules, state income tax imposed on and paid by the pass-through entity can generally reduce the entity's federal taxable income before income passes through to the owners.
The Owners Report the Remaining Pass-Through Items
Owners then receive their federal pass-through tax information reflecting the entity's taxable results under the applicable partnership or S corporation rules.
The federal foundation for this treatment is discussed in IRS Notice 2020-75 .
A Simplified Example of the Alabama PTE Strategy
Consider a simplified hypothetical Alabama S corporation. The numbers below are purely illustrative and intentionally ignore many factors that would be included in an actual tax projection.
An Alabama S Corporation Has $300,000 of Taxable Business Income
Assume the company qualifies for the Alabama election and, for illustration, its Alabama Electing PTE tax calculation produces $15,000 of entity-level tax.
State tax associated with the business income may generally be reflected in the owners' individual Alabama tax positions, where the federal individual SALT limitation can become relevant.
The entity pays the qualifying Alabama tax. Subject to federal rules, that entity-level payment can reduce the pass-through entity's federal taxable income.
This Is Not a $15,000 Federal Tax Savings
A deduction and a tax credit are not the same thing. If $15,000 reduces federal taxable income, the actual federal tax benefit depends on the taxpayer's marginal tax rate, other deductions, the Section 199A calculation where applicable, state treatment and the taxpayer's complete return.
How Does an Alabama Business Make the PTE Election?
Alabama changed the election procedure for tax periods beginning on or after January 1, 2025.
The election is now tied directly to the entity's Alabama pass-through return.
| Requirement | Current Alabama Treatment |
|---|---|
| Eligible entities | Qualifying Alabama S corporations and Subchapter K pass-through entities may elect. |
| Tax rate | The Alabama Electing Pass-Through Entity tax rate is 5%. |
| Election method | For tax periods beginning on or after January 1, 2025, the entity checks the Electing PTE box on its timely filed Alabama Form 65 or Form 20S. |
| Annual election | The Electing PTE box must be checked for each year the election is intended to remain in effect. |
| Additional return | An electing entity must file Alabama Form EPT in addition to Form 65 or Form 20S. |
| Approval | Alabama requires the applicable governing-body approval and approval or written consent from owners or shareholders holding more than 50% of voting control. |
| Estimated payments | Electing PTEs with an Alabama income-tax liability above $500 are generally required to make estimated tax payments. |
| Extension | An extension of time to file does not extend the time to pay the Alabama tax due. |
Which Alabama Business Owners May Benefit Most?
An Alabama PTE election is not automatically beneficial for every partnership or S corporation.
The Election May Be Attractive When:
- The entity has meaningful Alabama taxable income.
- Owners are already using much or all of their available individual SALT deduction.
- Owners have sufficiently high income that the federal SALT limitation is still relevant.
- The entity has multiple owners who can benefit from coordinated entity-level planning.
- The business already has reliable bookkeeping and can properly calculate estimated payments.
- Federal tax savings exceed the additional administrative cost.
The Election Is Not Automatically Better When:
- Owners are not affected by the individual SALT limitation.
- The business has losses or minimal taxable income.
- Ownership spans multiple states with complicated resident-credit rules.
- Owners have significantly different tax situations.
- Entity-level deductions affect another valuable federal deduction or limitation.
- Cash-flow needs make estimated entity-level tax payments difficult.
What About the Qualified Business Income Deduction?
One reason a PTE election should be modeled rather than implemented automatically is the relationship between pass-through taxable income and other federal tax calculations.
For taxpayers eligible for the Section 199A qualified business income deduction, reducing pass-through business income through an entity-level state tax deduction can also affect the amount of qualified business income used in the federal calculation.
Do Not Measure the PTE Election in Isolation
The correct analysis compares the federal and Alabama tax result with and without the election, including the SALT limitation, qualified business income deduction, estimated taxes, credits, owner residency and other material items.
What if the Alabama Business Has Nonresident Owners?
Multi-state ownership makes the calculation more complicated. Owners may need to consider whether their home state provides a credit for entity-level tax paid to Alabama and how the Alabama election interacts with resident-state tax rules.
Alabama also provides that an Electing Pass-Through Entity is not required to file the same composite return that would otherwise apply to certain nonresident owners under the state's pass-through rules.
But that does not mean the owner's home-state treatment becomes irrelevant. A multi-state PTE analysis should consider each owner's residency and the credit mechanisms available in the applicable state.
Multi-State Ownership Can Change the Answer
A PTE election that works extremely well for an Alabama resident owner may produce a different result for an owner living in another state. Review the owner-level state consequences before making the election.
Why the Alabama PTE Election Should Be Part of Year-Round Tax Planning
This election is a good example of why tax preparation and tax planning are not the same thing.
Tax preparation reports what already happened. Tax planning asks whether the way transactions are structured can produce a better after-tax result before deadlines pass.
Businesses considering Alabama's PTE election should review projected income, estimated payments, owner distributions, federal taxable income and the owners' individual tax positions during the year.
Calculate the Election Before You Make It
At Azalea City Tax & Accounting, we can compare the projected federal and Alabama tax result with and without the PTE election. The goal is not simply to make an election because it exists. The goal is to determine whether it actually improves the client's total tax position.
Schedule a Tax ConsultationThe Bottom Line for Alabama Business Owners
Alabama's Electing Pass-Through Entity tax was originally especially attractive because the federal individual SALT deduction was restricted to a very low ceiling.
The federal SALT rules have since changed, and the individual deduction ceiling is substantially higher in 2026. That means the PTE election should no longer be marketed as an automatic way for every business owner to “beat” a universal $10,000 limit.
But the strategy remains important.
For qualifying Alabama partnerships and S corporations, paying state income tax at the entity level can still create a federal deduction before income passes through to the owners. For taxpayers who remain affected by the individual SALT limitation, the result can still be meaningful.
The key is to evaluate the entire federal and Alabama tax picture rather than focusing on one deduction in isolation.
Frequently Asked Questions About Alabama's PTE Tax Election
Is the federal SALT deduction still limited to $10,000?
Not generally for 2026. The general federal individual SALT deduction ceiling for 2026 is $40,400, or $20,200 for married taxpayers filing separately, subject to an income-based reduction and the applicable minimum limitation.
What is Alabama's Electing Pass-Through Entity tax rate?
Alabama currently imposes its Electing Pass-Through Entity tax at a 5% rate under the applicable Alabama rules.
What types of Alabama businesses can make the election?
Qualifying Alabama S corporations and qualifying Subchapter K entities, including partnerships, can generally elect Alabama's entity-level pass-through tax treatment.
How is the Alabama PTE election made for 2026?
For tax periods beginning on or after January 1, 2025, an eligible entity generally makes the election by checking the Electing PTE box on its timely filed Alabama Form 65 or Form 20S, including an applicable filing extension. The box must be checked each year the election is intended to apply.
Does an electing business still file its normal Alabama return?
Yes. An electing entity generally files Form EPT in addition to its applicable Alabama Form 65 or Form 20S.
Does an Alabama PTE election create a federal tax credit?
No. The federal benefit generally involves an entity-level deduction that can reduce pass-through taxable income. A deduction reduces taxable income; it is not the same as a dollar-for-dollar federal tax credit.
Is the Alabama PTE election always beneficial?
No. The calculation depends on entity income, owner income, the owner's available SALT deduction, state residency, Section 199A, estimated payments and other tax factors.
Are estimated payments required?
Alabama generally requires estimated tax payments when an Electing Pass-Through Entity has Alabama income-tax liability exceeding $500.
Does an extension give the business more time to pay?
No. An extension of time to file generally does not extend Alabama's payment deadline for tax that is already due.
Should an Alabama S corporation automatically elect PTE taxation?
No. The election should be modeled using the company's projected income and the owners' federal and state tax positions. The fact that an election is available does not mean it produces a tax benefit in every situation.
Do Not Make the Alabama PTE Election Without Running the Numbers.
Alabama's entity-level pass-through tax can still create meaningful federal tax savings for the right business owner. We can model the election against your current income, SALT position, Section 199A deduction, ownership structure and Alabama tax liability to determine whether the election actually improves your total tax result.