SUMMARY

    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 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. This credit cannot be carried forward or back (you use it or lose it), and cannot be used to generate a refund to the taxpayer. The capital credit is used only after all other deductions, losses, or credits permitted under Titles 40 and 41 of the Code of Alabama 1975. 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.


TYPES OF CAPITAL CREDIT PROJECTS

New Project or Expansion Project

    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. The law allows more than one project on the same site. A company may have any number of projects in Alabama, as long as each project meets the statutory requirements for a qualifying project.
    For a project which expands an existing facility, the purpose of the expansion must be indicated in the description of the expansion project on the Form INT. Particular attention should be paid to record-keeping for an expansion project, because the income, number of employees, and wages for the expansion project must be identified separately from the same items at the existing facility. Particular attention should be paid to whether the expansion includes replacement equipment, and whether those costs can be included in 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 performs additional functions.

Small Business Addition

    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.

STATUTORY REQUIREMENTS FOR THE CAPITAL CREDIT

Business Activity Requirement

• Industrial, Warehousing or Research Activity - Any trade or business in the 2007 North American Industrial Classification System (NAICS), promulgated by the Executive Office of the President of the United States, Office of Management and Budget as:
• Sectors 31 (except National Industry 311811), 32, and 33 (manufacturing), 
• Subsector 423 and 424 (merchant wholesalers, goods),
• 511 (publishing industries (except internet)),
• 927 (space research and technology),
• Industry Group 5417 (scientific research and development services),
• 5415 (computer systems design and related services), 
• 5182 (data processing, hosting, and related services),
• Industry 11331 (logging),
• 48691 (pipeline transportation of refined petroleum products),
• National Industry 115111 (cotton ginning),
• 517110 (wired telecommunications carriers),
• 541380 (testing laboratories),
• 561422 (in bound call centers only), or
Any process or treatment facility which recycles, reclaims, or converts materials, which include solids, liquids, or gases, to a reusable product;
• Headquarters facilities as defined in NAICS 551114;
• Data processing centers;
• Renewable energy facilities;
• Research & development facilities;
• Projects owned by utilities that produce electricity from alternative energy resources; or
• Projects owned by utilities that produce electricity from hydropower production

Capital Cost Requirement (Section 40-18-190(13))   

• At least $100,000,000 for utility owned projects producing electricity from alternative energy resources
• At least $5,000,000 for utility owner projects producing electricity from hydropower production
• At least $2,000,000 for all projects except utility owned projects, small business additions and projects located in favored geographic areas
• At least $1,000,000 for small business addition projects
• At least $500,000 for projects located in favored geographic areas

Employment Requirement (Section 40-18-193(a))

• At least 50 new employees at headquarters facilities and data processing centers
• At least 20 new employees at all projects except headquarters facilities, data processing centers, small business additions and projects located in favored geographic areas
• At least 15 new employees at small business addition projects
• At least 5 new employees at projects located in favored geographic areas

     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.

     Please Note:  If an investing company reduces its level of employment at an existing facility in this state and within two years following the reduction in its level of employment places a qualifying 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 in employment shall be deemed to be new employees for capital credit purposes.

Wage Requirement

    For all income tax capital credit projects, Section 40-18-190(1) defines the base wage requirement for new employees at the project.  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 by the date which is not 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. 

   For qualifying projects in which the investing company files Form INT with the Alabama Department of Revenue on or before May 22, 2009, the average wages of all new employees at the project must meet either an average hourly wage of not less than eight dollars ($8) per hour, or an average hourly compensation, including benefits, of not less than ten ($10) per hour.

   For qualifying projects in which the investing company files Form INT with the Alabama Department of Revenue after May 22, 2009:

• Projects located in a favored geographic area, the average wage of all new employees must meet the lesser of: 
• $12 per hour, indexed annually as provided in Section 25-5-68, or 
• Average hourly wage of the county where the qualifying project is located. 

• All other projects, the average wage of all new employees must meet the lesser of: 
• $15 per hour, indexed annually as provided in Section 25-5-68, or
• Average hourly wage of the county where the qualifying project is located. 

    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.

Filing Requirements

    Qualifying projects can be set up as either a ‘one step’ project or as a ‘phased’ project.
    A company seeking the capital credit must file a “written statement of intent” (Form INT) with the Department of Revenue prior to the date the project is placed in service, as required by Section 40-18-191.  If the Form INT is not received by the department before the project is placed in service, the project will not qualify for the capital credit.   However, for phased projects, the Form INT must be submitted before the first phase is placed in service and the capital credit cannot be utilized until the last phase is placed in service.     The "written statement of intent" to claim the capital credit must include the "notification acknowledgment letter" from the Director of the Alabama Development Office per Section 41-9-202.1. For more information about the requirements of Section 41-9-202.1, please contact the Director of Alabama Development Office, 334-242-0400.
    A company must file a “report of investment in project’ (Form INT-2) when the project is placed in service.
    A company must file an “Accounting Practices Agreement” with the Department (under Section 40-18-192) before the capital credit can be utilized.  This agreement denotes how the income from the project will be determined and is not necessarily the same method used in determining Alabama income.

Noncompliance Provisions

    Minimum statutory requirements must be met by the first year the project is placed in service and maintained annually thereafter to receive the credit.  Each qualifying project must meet minimum statutory requirements by the first year the project is placed in service or the project becomes ineligible for the credit.  After the first year, minimum requirements must be met to be eligible to receive the annual credit.  However, 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.  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:

• 100% of the capital credit claimed in the year immediately preceding the year in which the investing company fails to maintain the employment and wage requirements (noncompliance year); and
• 20% of the credits claimed in the 2nd, 3rd, 4th, and 5th years preceding the noncompliance year.

OTHER CONSIDERATIONS FOR CAPITAL CREDIT PROJECTS

Multiple Phase Project
    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. However, if each stage is to be treated as a separate project, each phase must independently meet the four requirements (see below) for the capital credit.
    If the phases are to be treated as one project, each investment stage must be identified in the Project description on the statement of intent (Form INT) filed with the Department. Further, the statement of intent must be filed with the Department before any stages of investment are placed in service.

Joint Ventures
    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.

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