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Alabama Tax Credits

Income Tax Capital Credit Title 40, Chapter 18, Article 190 through 203

Intending to create jobs and stimulate business and economic growth, Alabama provides income tax capital credits for approved projects. The credit is up to 5% of the capital costs of a qualifying project and is used to offset the Alabama tax liability or excise tax generated by the project income each year for up to 20 years. Generally, with a few exceptions, this credit cannot be carried forward and can never be applied to prior periods causing a tax refund.

 

A qualifying project must be a new investment at a new site in the state or that will expand the capacity and the number of employees at an existing facility. A company may have multiple qualifying projects, even multiple projects at the same site as long as it meets the statutory qualifying requirements for each project. However, attention should be given to maintaining adequate records to document the income, number of employees and wages separately, especially within the same facility.

 

An additional small business, defined as having full time employees of 100 or less, prior to the addition being placed in service also qualifies.

 

Required business activities must also must be met to qualify for this credit. Generally, the North American Industrial Classification System (NAICS) dictate which industry activities qualify as indicated in the following categories (1-23):

  1. Codes beginning with 31, 32, and 33 Sectors, manufacturing, except 311811,
  2. Merchant wholesalers, good or subsectors 423 and 424,
  3. Publishing excluding internet, subsector 511,
  4. Space research and technology, subsector 927,
  5. Coal mining, subsector 2121,
  6. Scientific research and development, subsector 5417,
  7. ​Computer systems design, subsector 54115,
  8. Data processing, hosting, subsector 5182,
  9. Logging, industry 11331,
  10. Pipeline or petroleum refinement, industry 48691,
  11. Cotton gin, industry 115111,
  12. Telecommunications, industry 517110,
  13. Testing labs, industry 541380,
  14. Call centers, inbound, industry 561422,
  15. Any process that recycles, reclaims or converts solids, liquids, gases, etc. to a reusable product,
  16. Headquarter facilities industry 551114,
  17. Warehousing activity projects, subsector 493, logistic and goods distribution,
  18. Data processing centers
  19. Renewable energy,
  20. Research and development,
  21. Tourism destinations,
  22. Utility projects that produce electricity from alternative resources, or
  23. Utility projects that produce electricity using hydropower. 


After the required business activities test, there are minimum investment requirements, minimum job creation requirements and minimum average base wage requirements. These requirements vary based on whether or not the project is located in a favored geographic area, See List. Favored geographic areas require less investment amounts, fewer jobs to be created and less average base wage. In some cases, the entire county is considered a favored geographic area. However, in many counties only certain enterprise zones within the counties are favored geographic areas. The below table explains the differences afforded to each category (1-23) above for investment and minimum job requirements:


                                             Minimum Investment                    Minimum No. Jobs

Category                     ​Favored           Regular                  Favored     Regular

1-15, 18-20                 $   500,000      $  2,000,000                  5                20

Small Business                    $1,000,000                                         15

    16                                       $2,000,000                                         50

    17                            $1,000,000      $  5,000,000                 5                20

    21                            $5,000,000      $20,000,000                20               50

    22                                   $100,000,000                                5                20

    23                                       $5,000,000                                5                20

*Small Business is defined earlier in this section and overrides other requirements if the company meets this definition.


​The new jobs definition requires a net increase in jobs not later than one year after the project is placed in service for most industries, except warehousing activity. Warehousing activity can delay calculating new jobs added up to two years after the project is placed in service. The employees working on the project must have not worked for the entity/company in Alabama prior to the project being placed in service. See Section 40-18-190(10). Should a company reduce workforce within two years prior to placing a project in service, only the number of employees in excess of the number of employees who worked at the existing facility prior to the reduction shall be deemed to be new employees for the capital credit.


​Finally, the average wages for all jobs created for the project cannot be less than the base wage requirement no later than one year after the project is placed in to service and during each future year the company claims the capital credit on their tax return. The average hourly wage is calculated annually, updated on January 1 and does not include benefits, only includes base wage, overtime and bonuses. See 2015 Wages by County. For projects located in favored geographical areas, the annual indexed hourly wage is $13.07 or the average hourly wage of the county where the project is located, which ever is less. For all other project locations, the annual indexed hourly rate is $16.33 or the average hourly wage of the county where the project is located, which ever is less. The applicable average hourly wage calculation becomes the target base wage requirement for the project.


If the company passes all the requirements, they may take the appropriate annual tax credit on their income tax return. Our firm is available to advise companies expanding to Alabama and complete all the required forms annually.


Property Tax & Sales Tax Abatements Chapter 9B, Title 40

Alabama cities, counties, and public industrial authorities have the ability to abate the following taxes:

  1. State sales and use taxes,
  2. Non-educational county and city sales and use taxes,
  3. Non-educational state, county and city property taxes (up to 10 years except for data processing centers),
  4. Mortgage and recording taxes.

A project must meet certain qualifications and follow proper procedures spelled out in laws and regulations to receive these abatements.


For Data Processing Centers, the laws and rules differ as follows:

  • Maximum abatement period is 10 years after the date the property becomes owned as defined for federal income tax purposes. The maximum investment for this abatement is $200 thousand within the 10 year period.
  • Maximum abatement peiod is 20 years after the date the property becomes owned as defined for federal income tax purposes with a required investment between $200 thousand and $400 thousand during this period.
  • Maximum abatement period is 30 years using the same criteria above if the investment is over $200 thousand for the first 10 years and investment exceeds $400 within 20 years from commencement of the project. 

Data processing centers are also eligible for abatement of state and non-educational local sales and use taxes associated with with constructing and equipping a project for an extended time based on the above criterion.


Required business activities must also must be met to qualify for this credit. Generally, the North American Industrial Classification System (NAICS) dictate which industry activities qualify as indicated in  categories (1-23) from the previous section and the additional activities specified below:

  • NAICS Subsector 493 (warehousing and storage), Industry Number 488310 (port and harbor operations), or Industry Number 488320 (marine cargo handling as part of the Alabama State Port Authority.
  • Any underground natural gas storage facility which is located in the Gulf Opportunity Zone developed from existing geologic reservoirs.


​The warehousing and utility activities are the only projects that have thresholds or limiting investment amounts. Warehousing projects can be $1 million or more in favorable geographic areas. However, the minimal investment for other geographic areas is $5 million. Utility activities that produce electricity from alternative energy resources must invest at least $100 million unless they are using hydropower production, which only requires a minimal investment of $5 million.


​An additional investment by a company expanding current facilities must be the lesser of $2 million or 30% of the original facilities investment.


Again, cities and counties have the ability to abate the following:

  • Non-educational city and county sales and use taxes;
  • Non-educational state, city and county property taxes up to 20 years;
  • Mortgage and recording taxes.


Business Privilege Tax Incentives Chapter 98, Title 40

​In Alabama, corporations and limited liability entities pay for the privilege to operate there. The base of the tax is the taxpayer's net worth tax apportioned to Alabama. The tax accrues at the date of organization, or beginning to do business, qualification, and it is due in 30 days thereafter. The tax for existing entities accrues as of January 1 and every tax year, and is due March 15.

 

This Business Privilege tax is gradual and based on the the company's federal taxable income apportioned to Alabama. Rates range from $0.25 to $1.75 for each $1,000 of net worth in Alabama with a $100 minimum. The total cap is $15,000 for most business entities. The exception is for insurance or financial institutions. Their maximum tax is $3 million.


There are Business Privilege Tax deductions for the following and related explanations:

  • Pollution Control Equipment purchases can be deducted from the Alabama net worth at the net amount used for facilities located in Alabama and the equipment should be primarily used to control, reduce or eliminate air, ground, water pollution or radiological hazards.
  • Air Carrier Hub equipment can also be deducted as long as the amounts is spent for real and tangible personal property, equipment, facilities, and components. Such equipment must reside and be used in Alabama.