ADOR > Alabama Tax Incentives
> Income Tax Capital Credit
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 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(10,11,12). 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(14), 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.
Headquarters Facility
A headquarters facility is defined in
Section
40-18-190(6). A headquarters facility will serve as either the national, regional,
or state headquarters for an investing company that conducts significant
business operations outside the state of Alabama, and will serve
as the principal office of the principal operating officer of the
qualifying project. The principle operating officer is the person
with chief responsibilities for the daily business operations of the
qualifying project.
If the qualifying project is a headquarters facility, and utilizes
an operating lease, the capital costs may include the net present
value of the minimum mandatory payments required to be made by
the investing company pursuant to the lease. The net present value
shall be computed by using the applicable federal rate for the
month in which the qualifying project is placed in service and for
the term most closely approximating the term of the lease. The
option of including an operating lease as part of capital cost is only
available to headquarters facilities.
STATUTORY REQUIREMENTS FOR THE CAPITAL CREDIT
Business
Activity Requirement
The qualifying project must constitute either
a “headquarters facility” or an “industrial, warehousing, or
research activity” defined in Section
40-18-190(7) as any trade or business described in the 1997 & 2002 North American
Industry Classification System (NAICS), promulgated by the Executive
Office of the President of the United States, Office of Management and Budget
as:
Sectors 31 (other than National Industry 311811),
32, 33 and 42,
Subsector 511,
Industry Groups 5142 and 5415,
Industries 54138 and 54171,
Industry 514191,
or "any process or treatment facility which recycles,
reclaims, or converts materials, which include solids, liquids, or gases,
to a reusable product."
Capital Cost Requirement (Section
40-18-190(12))
Not less than $2,000,000 for new, expansion,
and headquarters facility projects
Not less than $1,000,000 for small business addition
projects
Not less than $500,000 for favored geographic area projects
Employment Requirement (Section
40-18-193(a))
At least 20 new employees at new, expansion,
or headquarters facility projects
At least 15 new employees at small business addition
projects
At least 5 new employees at favored geographic area projects
New employees must meet the statutory definition
of new employees, found in Section
40-18-190(9). “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.
Wage Requirement
For all income tax capital credit projects, Sections
40-18-190(1) and 40-18-193(a)
establish the wage requirement as:
Average hourly wage of not less than eight
dollars ($8) per hour; or
Average hourly compensation, including benefits,
of not less than ten ($10) per hour.
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, Code of Alabama 1975. For more information about the requirements
of Section 41-9-202.1, please contact: Director, 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.
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.
CONTACT US:
Questions
regarding the applicability of the capital credit and how to
qualify should be directed to:
Kelly Graham, Capital Credit Program Administrator
Office of the Commissioner of Revenue
P.O. Box 327001
Montgomery, Alabama 36132-7001
Telephone: 334-242-1175
e-mail: kelly.graham@revenue.alabama.gov