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.

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.

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.

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.

Source: Alabama Department of Revenue: Office of Economic Development http://www.ador.state.al.us/Taxincentives/index.html