Alabama § 40-18-24.2 - Taxation of Pass-Through Entities.

§ 40-18-24.2. Taxation of Pass-Through Entities.

(a) For purposes of this section and Section 40-18-24.3, the following terms shall have the following meanings:

(1) MEMBER. An individual, estate, trust or business trust as defined in Section 40-18-1, a corporation as defined in Section 40-18-1, or Subchapter K entity as defined in Section 40-18-1, that is a partner in a general, limited, limited liability, or limited liability limited partnership, or a member of a limited liability company.

(2) NONRESIDENT. a. An individual who is not a resident of or domiciled in this state during the applicable tax year.

b. A nonresident trust as defined in Section 40-18-1.

c. A nonresident estate as defined in Section 40-18-1.

d. A foreign corporation as defined in Section 40-18-1, not commercially domiciled in this state during the applicable tax year.

e. A Subchapter K entity or business trust that is created or organized under the laws of a jurisdiction other than this state and that is not commercially domiciled in this state.

(3) PASS-THROUGH ENTITY. A partnership or other entity classified as a Subchapter K entity under Section 40-18-1. Neither estates nor trusts, including business trusts, are included in this definition or subject to this section except in their capacity as a nonresident member, as herein defined, of a pass-through entity or lower-tier pass-through entity.

(4) QUALIFIED INVESTMENT PARTNERSHIP. A partnership or other entity classified as a Subchapter K entity, or a business trust as defined in Section 40-18-1, that meets all of the following requirements for the applicable tax period:

a. No less than 90 percent of the cost of the entity’s total assets consists of qualifying investment securities and office facilities and tangible personal property reasonably necessary to carry on its activities in this state as an investment partnership.

b. No less than 90 percent of its gross income consists of interest, dividends, distributions, and gains and losses from the sale or exchange of qualifying investment securities, and management fees paid by its members.

c. An authorized officer, partner, member, or manager of the entity files on behalf of the entity a certification that it meets the above two criteria with respect to the tax period covered by the certification, in a form and at the time prescribed by the Department of Revenue.

(5) QUALIFYING INVESTMENT SECURITIES. Except as provided in Section 40-18-24.3, includes all of the following:

a. Common stock, including preferred or debt securities convertible into common stock; and preferred stock, including debt securities convertible into preferred stock.

b. Bonds, debentures, and other debt securities.

c. Deposits and any other obligations of banks and other financial institutions.

d. Stock and bond index securities, future contracts, derivative securities, warrants or options on securities, and other similar financial securities and instruments.

e. Interests in a Subchapter K entity that itself qualifies as a qualified investment partnership.

f. Other similar or related financial or investments contracts, instruments, or securities.

(b)(1) Except as provided in subsection (c), a pass-through entity shall file with the Department of Revenue, at the time the entity’s annual return is required to be filed with the Department of Revenue for each taxable year, a composite income tax return on behalf of its nonresident members and shall report and pay the income tax imposed by this chapter at the highest applicable marginal rate provided in Section 40-18-5 on the nonresident members’ distributive shares of the income of the pass-through entity apportioned and allocated at the entity level to this state under Chapter 27 of this title.

(2) A nonresident member that has been included in a composite income tax return filed pursuant to this section may file its own Alabama income tax return and shall receive credit for Alabama income tax paid on the member’s behalf by the pass-through entity.

(3) The Department of Revenue may enter into agreements to permit the filing of annual composite income tax returns on behalf of one or more nonresident owners of pass-through entities who are not defined as nonresident members above, or of other forms of business entities the income of which is taxable at the owner level.

(c)(1) The pass-through entity shall be liable to the State of Alabama for the payment of the tax required to be remitted under this section, together with applicable interest and penalties, but shall not be liable to any such member for any amount withheld from distributions to or the distributive share of such member and remitted in compliance with this section. A member of a pass-through entity that is itself a pass-through entity, a lower-tier pass-through entity, shall be subject to the same requirement to file a composite income tax return with respect to the distributive share of the apportioned and allocated income of the lower-tier pass-through entity. The Department of Revenue shall apply the Alabama income tax remitted by a pass-through entity on behalf of the lower-tier pass-through entity to the remittance obligation imposed by this subsection on the lower-tier pass-through entity.

(2) A pass-through entity, at the time of payment pursuant to this section, shall deliver to the Department of Revenue a return on a form prescribed by the department showing the total amounts paid or credited to its nonresident members, the amounts of income tax remitted in accordance with this section, if any, and any other information the department may reasonably require. A pass-through entity shall furnish to its nonresident members annually, but not later than the 15th day of the third month after the end of its taxable year, a record of the amount of Alabama income tax remitted on behalf of such member, on a form prescribed by the department.

(3) Notwithstanding subsection (b), a pass-through entity shall not be required to remit Alabama income tax on behalf of a nonresident member if any of the following applies:

a. The Department of Revenue determines by regulation or ruling that the nonresident member’s income should not be subject to composite return reporting, such as a member that is exempt from Alabama income tax.

b. The pass-through entity is a qualified investment partnership, or a publicly traded partnership as defined by 26 U.S.C. §7704(b) that is treated as a partnership for federal income tax purposes, which provides for inspection by the Department of Revenue upon reasonable notice a list of the names of each of its nonresident owners or unit holders together with their addresses, taxpayer identification numbers, and other information reasonably requested by the department.