Entities subject to Alabama corporate income tax
Alabama imposes a 6.5% corporate income tax on all corporations and entities taxed as corporations for federal income tax purposes that are doing business in Alabama or deriving income from sources within Alabama, including income from property located in Alabama. Every corporation licensed or qualified to transact business in Alabama is required to file an Alabama corporate income tax return (Form 20C). Alabama S corporations that have made a valid federal S election under 26 U.S.C. § 1362 are not subject to the corporate income tax imposed by Ala. Code § 40-18-31.
The tax is imposed on a corporation's taxable income as allocated and apportioned to Alabama. For corporations, "taxable income" means federal taxable income without the benefit of federal net operating losses, plus additions prescribed and less deductions and adjustments allowed by Alabama law.
Source: Ala. Code § 40-18-31, Ala. Code § 40-18-33, Ala. Code § 40-18-160, Alabama Department of Revenue – Corporate Income Filing Requirements
Corporate income tax rate
Alabama imposes a flat corporate income tax rate of 6.5 percent on the taxable income of corporations subject to the tax. This rate applies to both domestic corporations organized under Alabama law and foreign corporations doing business in or deriving income from Alabama sources. The 6.5 percent rate has been in effect for tax years beginning on or after January 1, 2001. Prior to 2001, the rate was 5 percent.
Source: Ala. Code § 40-18-31, Alabama Department of Revenue FAQ
Factor-presence nexus thresholds
Alabama imposes a factor-presence nexus standard on corporations organized outside the state. A corporation has substantial nexus if, during any tax period beginning on or after January 1, 2025, it exceeds any one of these thresholds: $68,000 of property, $68,000 of payroll, $675,000 of sales, or 25 percent of its total property, total payroll, or total sales. The Commissioner reviews the cumulative percentage change in the Consumer Price Index annually and adjusts the dollar thresholds accordingly; adjustments apply to tax periods beginning after the adjustment is made. Corporations whose only activity is solicitation of sales of tangible personal property protected by Public Law 86-272 remain exempt from Alabama income tax even if they exceed these thresholds.
Source: Ala. Code § 40-18-31.2
Apportionment formula
For tax periods beginning on or after January 1, 2021, Alabama apportions all business income using a single sales factor. Business income is apportioned to Alabama by multiplying the income by the sales factor, which is a fraction where the numerator is total sales in Alabama during the tax period and the denominator is total sales everywhere. This single sales factor replaced the prior three-factor formula (property, payroll, and sales with double-weighted sales) that applied to tax years beginning before January 1, 2021.
Source: Ala. Code § 40-27-1, Art. IV.9, Alabama Department of Revenue – Apportionment Factor Update
Corporate income tax return filing due date
For tax years beginning on or after January 1, 2021, Alabama corporate income tax returns are due one month following the due date of the corresponding federal corporate income tax return, including applicable extensions. For example, a calendar-year C-corporation with a federal due date of April 15 must file its Alabama return by May 15. If the due date falls on a Saturday, Sunday, or state holiday, the return is due the following business day.
The one-month extension rule is codified in Ala. Code § 40-18-39.2. This provision was enacted as part of the Small Business Relief and Revitalization Act of 2022 (Act 2022-53, enacted February 22, 2022) and applies retroactively to all tax years beginning on or after January 1, 2021. Under subsection (a)(1) of § 40-18-39.2, a corporate income taxpayer "shall be allowed one month following the due date of the corresponding federal income tax return, including applicable extensions, to file the Alabama corporate income tax return as required by Section 40-18-39."
For tax years beginning on or after January 1, 2020, but prior to January 1, 2021, subsection (a)(2) provides that the Alabama Department of Revenue may, in its discretion, allow a corporate income taxpayer one additional month following the federal due date upon request by the taxpayer and approval by the department. This discretionary extension is not automatic and requires departmental approval.
Payment deadline
The corporation's full tax liability is due on or by the original due date of the return without the benefit of the additional one-month filing extension. Subsection (b) of § 40-18-39.2 states: "The extension provided in subsection (a) shall not allow a taxpayer to defer payment of a corporate income tax liability beyond the original due date provided in Section 40-18-39." The extension applies only to the filing deadline, not to the payment deadline. A corporation that fails to pay the full tax liability by the original due date will owe interest and may owe penalties on the underpayment, even if the return is timely filed within the one-month extended period.
Source: Ala. Code § 40-18-39.2
Corporate net operating loss carryforward rules
Alabama allows corporations subject to the state corporate income tax to carry forward net operating losses (NOLs) for up to 15 consecutive years following the tax year in which the loss arose. Unlike federal law, Alabama does not permit corporations to carry losses back to prior years—NOLs may only be carried forward. A corporation that incurred an Alabama NOL must start by carrying the loss to the earliest subsequent tax year in which it has taxable income, and any remaining NOL is then carried to successive years within the 15-year window.
Definition and computation
For Alabama corporate income tax purposes, a "net operating loss" is the excess of deductions allowed by Chapter 18 of the Alabama Code (other than the NOL deduction itself) over the corporation's gross income during the tax year. Both the gross income and allowable deductions are determined under the Alabama provisions applicable to the year in which the NOL arises, not federal law.
Alabama-only sourcing
The NOL deduction is limited to sources attributable to Alabama. If a corporation apportions income to multiple states, only the Alabama-sourced loss is available for carryforward. The Alabama Department of Revenue FAQ confirms this Alabama-source limitation applies to both individual and corporate NOL carryforwards.
Federal limitation rules incorporated
Alabama incorporates certain federal NOL limitation rules by reference. Under subdivision (6) of Ala. Code § 40-18-35.1, an acquiring corporation subject to the rules of 26 U.S.C. § 381 (carryovers in certain corporate acquisitions), a new loss corporation within the meaning of 26 U.S.C. § 382 (limitations on NOL carryforwards following ownership changes), or a gain corporation with recognized built-in gains under 26 U.S.C. § 384 may only deduct NOLs to the extent allowable under those federal provisions. These federal limitations are applied before any other Alabama limitations.
Historical context—2001 suspension and $600,000 cap
Alabama suspended all corporate NOL deductions for tax years beginning during calendar year 2001 under subdivision (7) of § 40-18-35.1. For tax years beginning on or after January 1, 1985, and before January 1, 1990, Alabama limited the annual NOL deduction to $600,000 per year; this cap no longer applies to current tax years. NOL carryforwards began in Alabama for losses incurred in tax years beginning on or after January 1, 1984, with a 5-year carryforward period for losses arising in 1984, extended to the current 15-year period for losses from 1985 forward.
Contrast with individual taxpayers
Individual taxpayers in Alabama (under Ala. Code § 40-18-15.2) are allowed both a 2-year carryback and a 15-year carryforward for NOLs, but corporations may only carry losses forward. This is a critical planning difference for entities choosing pass-through status versus C corporation treatment.
Source: Ala. Code § 40-18-35.1 Source: Alabama Department of Revenue – NOL Carryforward FAQ
Quarterly estimated tax payment requirements
Alabama corporations subject to corporate income tax must make quarterly estimated tax payments if the corporation's tax liability for the taxable year, less any credits, can reasonably be expected to be $500 or more. This threshold applies to the Alabama corporate income tax computed after allowable credits but before withholding or estimated tax payments already made.
Quarterly due dates
For calendar-year corporations, the four required estimated tax installments are due:
- Payment 1: April 15 (15th day of the 4th month)
- Payment 2: June 15 (15th day of the 6th month)
- Payment 3: September 15 (15th day of the 9th month)
- Payment 4: December 15 (15th day of the 12th month)
For fiscal-year corporations, the installments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. If a due date falls on a Saturday, Sunday, or legal holiday, payments made on the next business day are considered timely.
Amount of each installment
Each required quarterly installment is generally 25 percent of the corporation's "required annual payment." Under Ala. Code § 40-18-80.1, which incorporates federal IRC § 6655 with Alabama modifications, the required annual payment is the lesser of:
- 100 percent of the tax shown on the return for the current taxable year, or
- 100 percent of the tax shown on the corporation's return for the preceding taxable year.
The prior-year safe harbor (option 2) is available only if the corporation filed a return for the preceding year and that year was a 12-month period. Large corporations—those with Alabama taxable income of $1,000,000 or more in any of the three immediately preceding tax years—are subject to additional restrictions under federal IRC § 6655(d)(2) as incorporated by Alabama law: they generally must base estimated payments on 100 percent of the current year's tax and may use the prior-year safe harbor only for the first installment, with a recapture adjustment required in the second installment.
Penalty for underpayment
Corporations that fail to pay the required estimated tax installments by the quarterly due dates are subject to interest on the underpayment. Alabama applies the underpayment rate established by 26 U.S.C. § 6621 to the amount of the underpayment for the period from the installment due date to the earlier of (a) the original return due date (typically the 15th day of the 3rd month following the close of the tax year, not considering the one-month Alabama filing extension under § 40-18-39.2) or (b) the date the underpayment is actually paid. Corporations may file Alabama Form 2220AL to compute the underpayment penalty or to request relief from the penalty if the underpayment was due to casualty, disaster, unusual circumstances, or annualized income.
Federal conformity with Alabama modifications
Alabama Code § 40-18-80.1 adopts the federal estimated tax regime under IRC § 6655 but substitutes Alabama statutes and concepts where federal references appear. For example, "Section 40-18-31" (Alabama's corporate income tax imposition statute) is substituted where IRC § 6655 refers to IRC § 11, and the Alabama Commissioner of Revenue is substituted for the federal Secretary. Certain federal provisions—such as those addressing alternative minimum tax—are ignored for Alabama purposes.
Relationship to filing and payment deadlines
Estimated tax payments do not extend the filing deadline. Alabama corporate returns are due one month after the federal return due date (including federal extensions) under Ala. Code § 40-18-39.2, but the corporation's full tax liability must be satisfied through estimated payments and any extension payment by the original due date (before the one-month Alabama extension) to avoid interest charges. Extension payments of $750 or more must be remitted electronically.
Source: Ala. Code § 40-18-80.1 Source: Alabama Department of Revenue – Corporate Income Estimated Tax Payments Source: Alabama Department of Revenue – Corporate Income Tax FAQ
Federal income tax deduction
Alabama allows corporations subject to the state corporate income tax to deduct federal income taxes paid or accrued during the taxable year from their Alabama taxable income. This deduction is codified in Ala. Code § 40-18-35(a)(2) and is unusual among states—most states do not permit a federal income tax deduction when computing state taxable income.
Amount and timing
The deduction is for federal income tax "paid or accrued" during the taxpayer's taxable year. The deduction follows federal accounting methods: cash-basis taxpayers deduct federal tax when paid, and accrual-basis taxpayers deduct federal tax when accrued. The deduction applies to federal income taxes attributable to Alabama income, not the corporation's worldwide federal income tax liability.
Apportionment for multistate corporations
For corporations earning income from sources both inside and outside Alabama, the federal income tax deduction must be apportioned to reflect only the portion attributable to Alabama income. Under Ala. Code § 40-18-35(a)(2), the deductible portion is determined by the ratio:
> (Alabama taxable income without the FIT deduction) ÷ (Total taxable income everywhere without the FIT deduction) × Total federal income tax
Both the numerator and denominator are computed without the federal income tax deduction itself. The resulting fraction is then multiplied by the corporation's total federal income tax liability to determine the Alabama-deductible amount.
Example from the regulation
Alabama Department of Revenue Regulation 810-3-35-.01 provides detailed computational examples. For a corporation with $100 of Alabama taxable income (before the federal income tax deduction), $300 of total taxable income everywhere (before the deduction), and $60 of total federal income tax paid, the Alabama-deductible federal income tax is ($100 ÷ $300) × $60 = $20.
Treatment of consolidated returns
For corporations filing as members of a federal consolidated group, Alabama requires separate-company calculations. The corporation must determine its federal taxable income on a separate-company basis, then apportion the consolidated group's total federal income tax liability among group members. Regulation 810-3-35-.01 provides that each member is apportioned federal income tax in the ratio of its separate federal taxable income to the total positive federal taxable income of the group (excluding loss members from the denominator).
If the consolidated group's federal income tax liability for the year is zero or the group has a net operating loss, the Alabama taxpayer receives no federal income tax deduction for that year, even if the Alabama member itself had positive taxable income on a separate-company basis.
Interaction with other Alabama deductions and additions
The federal income tax deduction is one of several modifications Alabama makes to federal taxable income under § 40-18-35. Corporations start with federal taxable income, then subtract the federal income tax deduction along with other allowed deductions (such as interest on U.S. obligations under subdivision (a)(3) and interest on Alabama state and local obligations under subdivision (a)(4)). The corporation must also add back certain items under subsection (b), such as related-member interest and intangible expenses.
The statute requires that the federal income tax deduction be computed before apportioning income to Alabama, but the apportionment formula itself requires knowing the Alabama-apportioned income. This creates an iterative calculation in practice: the corporation computes Alabama income without the deduction, applies the apportionment ratio to determine the deductible federal tax, then recomputes Alabama taxable income with the deduction included.
No carryover
The federal income tax deduction is allowed only for amounts paid or accrued in the current year. There is no provision for carrying forward an unused deduction, nor is there a carryback. If the corporation pays or accrues federal income tax attributable to Alabama income in a given year, the deduction is claimed in that year or lost.
Constitutional basis
Amendment 662 to the Alabama Constitution of 1901 permits the corporate income tax deduction for federal income taxes paid. The Alabama Department of Revenue describes this as a tax incentive that allows corporations to "deduct, from its gross apportioned and allocated Alabama income, the full apportioned Alabama amount of federal income taxes paid."
Source: Ala. Code § 40-18-35 Source: Ala. Admin. Code r. 810-3-35-.01 Source: Alabama Department of Revenue – Federal Income Tax Deduction FAQ