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Computation of Taxable Income for Alabama BPT Purposes - June 17, 2009

1. Section 40-14A-1(m), Code of Alabama 1975, defines the term “taxable income”

as follows:

“…In the case of a C corporation, the amount of its federal taxable income. In the

case of an Alabama S corporation, other than a qualified subchapter S subsidiary,

the amount taken into account by its owners pursuant to 26 U.S.C. §1366. In the

case of a limited liability entity, the amounts taken into account by its owners

pursuant to 26 U.S.C. §702. In the case of a real estate investment trust, the real

estate investment trust taxable income determined pursuant to 26 U.S.C. §857. In

the case of a disregarded entity, the amount taken into account by its owner

pursuant to 26 U.S.C. §1361 or §61. In each case, taxable income of the entity

subject to tax shall mean its taxable income for the determination period. In each

case, taxable income shall be apportioned and allocated to Alabama in accordance

with Chapter 18 or in the case of a financial institution, Chapter 16, or in

accordance with Title 27 relating to insurance companies…”

2. To summarize Section 40-14A-1(m) for limited liability entities; taxable income

for a limited liability entity is the total amount that must be taken into account by its

owners pursuant to Internal Revenue Code § 702, which shall be apportioned and

allocated in accordance with the Alabama Multistate Tax Compact (Chapter 27,

Title 40, Code of Alabama 1975). This taxable income amount generally does not

appear on Alabama or federal partnership income tax returns, and must be

computed separately for the Alabama business privilege tax return.

3. Also, to determine the tax rate to use in computing the Alabama business

privilege tax, a limited liability company must follow Alabama regulation number

810-2-8-.01, Taxable Income for Determining the Applicable Privilege Tax Rate,

which states for limited liability entities:

“…The taxable income used to determine the tax rate for the privilege tax shall be the

federal ordinary income or (loss) from trade or business activities plus any items of

income or expenses passed through to the shareholders that were determined pursuant

to 26 U. S. C. §702. This income shall be apportioned in accordance with §40-27-1,

Code of Alabama 1975, and the accompanying rules…”

4. Internal Revenue Code § 702 generally requires the owners to report as income

their distributive share of the separately-stated and nonseparately stated items of

parternship taxable income.

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Computation Of Taxable Income For Alabama Business - Privilege Tax (Bpt) Purposes - Alabama Department Of Revenue Page 2