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Electing Pass Through Entities

Updated Temporary Guidance for Electing Pass-Through Entities under Acts 2021-1 and 2021-423 (Updated June 14, 2021)

On Feb. 12, Governor Kay Ivey signed into law the Alabama Electing Pass-Through Entity Tax Act (Act 2021-1) which, beginning with the 2021 tax year, allows Alabama S-Corporations and Subchapter K entities (pass-through entities or PTEs) to elect to pay Alabama income tax at the entity level. Entities making this election (Electing PTEs) must notify ALDOR at any time during the tax year but no later than the 15th day of the third month following the close of that tax year for which the entity elects to be taxed as an Electing PTE. Entities making this election, including those that anticipate making this election for the 2021 tax year, may be required to begin making estimated payments on April 15, 2021.

General Guidance for Electing PTEs and Members
  1. 1. If a pass-through entity elects to file and pay tax at the entity level, will it also be required to file a composite return and make composite payments for nonresident members/owners/partners? ADOR has the authority under Section 40-18-24.2(c)(3) to adopt rules to exempt an Electing PTE from the composite payment requirement for non-resident members. ALDOR plans to pursue adoption of a rule to this effect prior to the 2021 filing season.
  1. Will nonresident members/owners/partners of an Electing PTE be required to file an Alabama nonresident individual tax return to report their distributive share of the income and the credit for the distributive share of taxes paid at the entity level? Act 2021-423 does not create a filing obligation for any member of an Electing PTE who would not otherwise have a filing obligation. Note, however, that a member seeking to claim the credit for taxes paid by the Electing PTE will have to file a return and report its distributive share of the income of the entity.
Estimated Payments for Electing PTEs

The following temporary guidance is intended to help Electing PTEs determine whether, when, and how estimated payments should be made. Additional guidance regarding the election process, returns, and related matters will be issued prior to the 2021 filing season. 

  1. Under what circumstance will estimated payments be due for the 2021 tax year?

If a PTE anticipates making the election for tax year 2021 and its estimated Alabama tax liability is expected to be $500 or more, the PTE will be required to make estimated tax payments.

 

  1. What are the due dates for estimated tax payments for the 2021 tax year?

Estimate tax due dates for calendar year filers:

Payment 1 – April 15, 2021

Payment 2 – June 15, 2021

Payment 3 – September 15, 2021

Payment 4 – December 15, 2021

Estimate tax due dates for fiscal year filers:

Will be due on the fifteenth day of the fourth, sixth, ninth, and twelfth months of the fiscal year.

 

  1. How do I calculate the amount of estimated quarterly tax payments due for the 2021 tax year?

The required estimated quarterly payments will be 25% of the “required annual payment.”   The required annual payment generally means the lessor of 100 percent of the tax shown on the return for the taxable year or 100 percent of the tax shown on the return for the preceding tax year.

Except as noted below, this safe-harbor rule will apply to Electing PTEs making estimated payments for the 2021 tax year using the following calculations for the required annual payment:

PTEs (other than S-Corporations): Calculate the total of lines 1 through 17 in the Alabama column on Schedule K from the PTEs 2020 Form 65; then multiply this total by 5%.

S-Corporations: Calculate the total of lines 1 through 17 in the Alabama column on Schedule K from the S-Corporation’s 2020 Form 20S; then multiply this total by 5%.

Please Note: If an electing S-Corporation reported a loss on lines 1-17 in 2020, the safe-harbor rule will not apply.

 

  1. How can I pay the Electing PTE’s estimated tax installments?

Estimated tax payments made by check should be submitted with the form PTE-V and mailed to the address provided on this form.

Electronic payments can be made via ACH draft through My Alabama Taxes (MAT) and do not require the form PTE-V. Once logged into MAT, navigate to Pass-Through Entity under Accounts, click the Filing Period Link, and in the I Want To section, click the Make a Payment link.

Please Note:  Section 41-1-20, Code of Alabama 1975 requires all single tax payments of $750 or more to be made electronically.

 

  1. What if a PTE makes estimated payments and does ultimately  not make the election to be an Electing PTE for this tax year?

A refund may be requested by the entity. To request a refund, use the form PTE-C and list the amount of estimate payments made on line 5b.    

 

Temporary Guidance for Waiver of Estimated Payment Penalties

Act 2021-423 was signed into law by Governor Ivey on May 14, 2021.  The act provides that members of an Electing PTE are required to report their share of the income from the Electing PTE and in turn will be entitled to a refundable credit in an amount equal to their pro rata or distributive share of the Alabama income tax paid by the electing pass-through entity. To the extent that the retroactive effect of these provisions may have resulted in Electing PTEs and their members underpaying or failing to make the estimated tax payment due on April 15, 2021, the act authorizes the Department to waive any estimated tax penalties and interest associated with the underpayment.

The temporary guidance provided below is designed to address questions regarding the waiver of penalties authorized by Act 2021-423. The Department will issue more comprehensive guidance as needed on this subject ahead of the 2021 tax filing season, as well as guidance regarding the calculation of the credit for taxes paid by Electing PTEs, reporting of the credit by the entity and members, and related matters.

  1. General Guidance for All Taxpayers – If the underpayment is $500 or less, no penalty will be incurred. If the underpayment is in excess of $500, taxpayers may or may not be subject to a penalty. However, if the underpayment is due to the retroactive effect of the reporting provisions of Act 2021-423, taxpayers will be eligible for a waiver of any related penalty. More detailed information is provided below for specific taxpayers seeking a waiver of the penalty.

Please Note: The procedure for obtaining penalty relief may vary based on the organizational structure and filing status of the taxpayer seeking the relief.  As a result, it is important to review the guidance below that corresponds to the status and organizational structure of the taxpayer seeking relief.

FAQs:

When should I request a waiver of penalties?

Requests for waivers of penalties associated with estimated payments should be submitted at the time the taxpayer files its annual income tax or financial institution excise tax return using the penalty waiver request form (Form PWR) along with the estimated penalty forms identified below. The updated forms will be released in conjunction with the release of other forms for the 2021 filing season and will be available on the Department website at www.revenue.alabama.gov.

 

What information should I include when submitting Form PWR?

The following information should be included in the explanation section on the form:

  • A reference to the provisions of Act 2021-423, along with the name and FEIN of the electing pass through entity.
  • The amount of estimated tax penalties as calculated by the taxpayer on Form 2210AL, 2220AL, or 2220E, as applicable.
  • Any additional information relating to the taxpayer’s circumstances, such as a change in the entity’s decision regarding the pass-through entity election.

 

  1. Guidance for Individual Members/Owners/Partners – If the first quarter estimate was not made or was underpaid, no penalty will be incurred if the underpayment is made-up by the due date of the second quarter estimate payment. If the underpayment is not made-up by this time and the taxpayer is billed for a penalty, a waiver may be requested by submitting the 2021 Form PWR. Form PWR should be mailed separately from the return to the address on the form.

Please Note: The 2021 Form 2210AL should be used to calculate the penalty. The 2021 Form 2210AL should be submitted with the 2021 individual income tax return.

FAQs:

If an individual has an underpayment attributable to the provisions of Act 2021-423 and other unrelated reasons, how should this be handled when computing the estimated tax penalty?

The individual should complete Form 2210AL to calculate the penalty based on the entire underpayment. The penalty waiver only applies to the portion of the underpayment that is attributable to the provisions of Act 2021-423. In the explanation section of Form PWR, the individual should include the amount of underpayment and penalty attributable to the provisions of Act 2021-423.

 

If an individual made-up the first quarter underpayment by the second quarter due date, does the individual need to file Form 2210 AL and/or Form PWR?

No.

 

  1. Guidance for Corporation Members/Owners/Partners  – If the underpayment is in excess of $500, the corporation will need to file Form 2220 AL and submit it with the applicable corporate income tax return form. A penalty waiver may be requested by submitting 2021 Form PWR.  Form PWR should be mailed separately from the return to the address on the form.

Please Note: The Form 2220AL contains a K1 exception checkbox that should be checked if the corporation’s primary source of taxable income is from a K1. Corporations that meet the criteria for the K1 exception will not be required to compute a penalty, nor will they be billed a penalty.

 

  1. Guidance for Financial Institution Members/Owners/Partners – If the underpayment is in excess of $500, the financial institution will need to file the 2022 Form 2220E with the applicable financial institution excise tax form. A penalty waiver may be requested by submitting the 2022 Form PWR. Form PWR should be mailed separately from the return to the address on the form.

 

  1. Guidance for Electing Pass Through Entities – If the underpayment is in excess of $500, the electing pass through entity will need to file the 2021 Form 2220AL and submit it with the electing pass through entity form. A penalty waiver may be requested by submitting the 2021 Form PWR. Form PWR should be mailed separately from the return to the address on the form.

FAQs:

If an electing pass through entity did not make the first quarter estimate payment or has an underpayment that was made-up by the second quarter due date, does the electing pass through entity need to file Form 2220AL?

Yes, Form 2220AL and the Form PWR should be filed.