NOTE: The income tax capital credit program sunset on January 2, 2016. Projects that filed a Form INT with the Alabama Department of Revenue on or before January 2, 2016, have been grandfathered into the program.
The Income Tax Capital Credit has been available since 1995. This legislation is currently codified as Article 7, Chapter 18, Title 40, Code of Alabama 1975. The purpose of this law is to create jobs and to stimulate business and economic growth in the state by providing an income tax capital credit for approved projects.
The capital credit is a credit of up to five percent (5%) of the capital costs of a qualifying project, to be applied to the Alabama income tax liability or financial institution excise tax generated by the project income, each year for 20 years. With the exception of certain projects, this credit cannot be carried forward. Further, this credit cannot be carried back or used to generate a refund to the taxpayer. The credit will follow the income generated by the project and, therefore, will be allowed to "pass-through" entities such as: S-corporations, partnerships, limited liability companies, etc.
The law defines projects in Section 40-18-190(11,12,13). A project consists of new investment at a new site in Alabama, or new investment that will expand the capacity and the number of employees at an existing facility. A company may have any number of projects in Alabama, including projects at the same site, as long as each project meets the statutory requirements for a qualifying project. Particular attention should be paid to record-keeping for an expansion project at an existing facility because the income, number of employees, and wages for the expansion project must be identified separately from the same items at the existing facility.
Under Section 40-18-190(17), a small business addition is an addition to an existing facility of a small business. A small business is a business located in Alabama that has 100 or fewer full-time employees, prior to the date on which the addition is placed in service. A small business addition project's predominant business activity must constitute industrial, warehousing or research activity.
NAICS codes are subject to verification from the Alabama Department of Labor
With the exception of headquarters facility projects, costs incurred under operating leases do not qualify as capital costs. By regulation (810-2-7-.01), replacement equipment cannot be included in the capital costs of a project, unless it is upgraded equipment that increases capacity by 50%, decreases production time by 50%, or performs an additional function.
New employees must meet the statutory definition of new employees, found in Section 40-18-190(10). "New employees" cannot have worked at the site before and cannot have worked for the project entity in Alabama before. Required jobs must be provided by the date that is not later than one (1) year after the project is placed in service, continuing each year thereafter. Required jobs and average base wages for "warehousing activity projects" must be provided by the date that is not later than two (2) years after the project is placed in service and continuing each year thereafter.
Pursuant to Section 40-18-193(a), an investing company's qualifying project must create a net increase in employment. If an investing company places a qualifying project in service within two years of reducing its workforce, 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. The Department may require a two year look back period to determine if the existing employee base decreased prior to or during the commencement of the project. Further, if an investing company places a qualifying project in service within two years of closing a facility, only the number of employees in excess of the number of employees who worked at the existing facility prior to the closure shall be deemed to be new employees for the capital credit.
Section 40-18-193(a) requires the average wages for all new employees at the qualifying project be not less than the base wage requirement no later than one year after the project is placed in service and during each year the capital credit is available with respect to the qualifying project. Section 40-18-190(1) defines the base wage requirements for new employees for purposes of the capital credit. The base wage requirement for a qualifying project is determined based on the date the project's Form INT is filed with the Alabama Department of Revenue and will be the minimum average wage the project must meet throughout the life of the capital credit.
For qualifying projects in which the investing company files a Form INT after November 21, 2009, the base wage requirement is defined as the lesser of a set average hourly wage rate, indexed annually as provided in Section 25-5-68, or the average hourly wage of the county where the qualifying project is located. The indexed wages and county wages are updated every January 1. For these projects, benefits are not included in determining the average wage requirement; however, overtime and bonuses are included.
There is an exception for direct processors of agriculture food products. These wages shall be determined by the local labor market rate. Contact the ADOR Office of Economic Development (334-242-1175) for more information.
For projects that are placed in service after December 31, 2011, and in which a state project agreement has been entered into, certain carry forward and delay of credit provisions are allowed:
Minimum statutory requirements must be met by the first year the project is placed in service and maintained annually thereafter to receive the credit. The project is ineligible for the credit if the requirements are not met by the first year the project is placed in service. After the first year, the law allows a project to fall below minimum employee and wage requirements for up to three of the twenty years of the life of the credit; however, no credit is available in a noncompliance year. After the third noncompliance year, the project is disqualified from the capital credit program.
For qualifying projects in which the investing company files Form INT with the Alabama Department of Revenue after May 22, 2009, if the qualifying project meets the minimum requirements by the first year but fails to meet such requirements in a subsequent year, the investing company shall forfeit a percentage of the capital credits claimed in the prior five years as follows:
By regulation 810-2-7-.01, a multiple phase project is any project which will be completed in stages or phases of investment as determined by the project entity. This type of project will have the option of filing as one project with the capital credit beginning when the last phase is placed in service, or filing each phase as a separate project. If the phases are to be treated as one project, each investment stage must be identified in the project description on the Form INT filed with the Department. Form INT must be filed with the Department before any stages of investment (i.e., assets) are placed in service.
Please note the credit begins when the placed is service date is triggered (i.e., production of revenue starts). If additional assets for the project will be purchased after this date, the project should be filed as a phased project to prevent these capitalized costs from being disallowed for determining the annual capital credit available. The capital credit will not start until the last phase (i.e., assets) of the qualifying project is in service.
The investing company has the option of phasing multiple stages of investment into one project or treating each phase as a separate project. If each phase is treated as a separate project, each phase must independently meet the four requirements for the capital credit and a Form INT must be filed for each project.
Under Section 40-18-193(b), a joint venture is any form of business entity entered into by one or more investing companies in connection with a qualifying project. A project entity must be created by the investing companies in a joint venture to simplify the reporting for income tax purposes. However, in the case of a joint venture, careful attention should be made regarding the method for allocation of income to determine whether the allocation has substantial economic effect.
Questions regarding the applicability of the capital credit and how to qualify should be directed to:
Director of Economic Development
Office of the Commissioner of Revenue
P.O. Box 327001
Montgomery, Alabama 36132-7001
Telephone: 334-242-1175 / Direct Line 334-242-1188