Alabama Tax Credits Bill
Alabama has passed into law the most impressive set of economic development tax credits in decades. The Act creates two distinct credits which are available to qualifying projects on a discretionary basis: 1) The first is a jobs credit in the amount of up to 3 percent of the previous year’s annual wages of eligible employees.; 2)The second is a capital investment credit in the amount of up to 1.5 percent of qualified annual capital investment. Each credit is available for up to the first 10 years of a project. The Governor has the authority to allow projects to claim one or both credits upon recommendation by the Department of Commerce.
How to Receive the Credits
Several requirements must be met in order to obtain the credits: 1) the project must be a qualifying project. 2) the qualifying project must create jobs for Alabama residents; 3) the company must be approved; 4) the Governor and the approved company must have a project agreement; 5) The approved company must provide proof of the wages paid or investment made, prior to taking the credits.
I. Qualifying Project
A project must be of a certain type which includes national security, electric power generation, pipeline and related industries, motion picture and record production, internet publishing, financial transaction processing, engineering and drafting services, and a variety of other industries.
Projects must also create a “significant” number of new jobs filled by Alabama residents. The Act provides that, absent a finding by the Secretary of Commerce of “extraordinary circumstances,” the requirement will be fulfilled through creation of at least 50 new jobs. Importantly, the requirement of a “significant” number of new jobs can potentially be met by “any number” of new jobs for projects in the chemical manufacturing, data center, engineering, design, research, metal/machining technology, or toolmaking industries.
III. Approved Company
In order to be an approved company, the Secretary of Commerce must find the following: 1) the project is a qualifying project; 2) the project will not decrease Alabama exports; 3) a cost-benefit analysis shows that the benefit to the state, through anticipated tax revenues, exceeds the cost of the project incentives.
IV. Project Agreement
The approved company and the Governor must sign a project agreement which includes, among other items, the following: a) the incentives to be granted and the order in which they will be claimed; b) the capital investment to be made and the time period in which it will be made; c) the number of eligible employees; d) the dates or conditions that start the incentive period; e) the project's incentive period(s) length; f) annual and/or aggregate limitations on the credit amount(s); g) recapture provisions,;and h) whether the project agreement is assignable.
Prior to claiming any credit, the approved company will submit annual certifications of jobs created, wages paid, and capital investment made, as applicable, to the Department of Commerce. The Act provides that these filings will be treated as tax returns and thus subject to the enforcement mechanisms of the Department of Revenue.
The jobs credit is not a credit against income taxes, but it is claimed against the company’s utility taxes paid, and includes a five-year carryforward of unused credit. Alternatively, the company may elect to have the credit applied against utility taxes paid to the state generally (without regard to how much utility tax the company has actually incurred and paid).
The capital investment credit can be claimed against the income tax (or as a credit toward estimated payments of the tax), financial institution excise tax, insurance premium tax (or as a credit toward estimated payments of the tax), utility tax, or some combination thereof.
Importantly, the investment credit is transferable for the first three years of a project. The credit must be sold at a minimum of 85 percent of face value. The transferee is free of recapture obligations unless the transfer was fraudulent.
The credits of the Act replace the existing capital credit, the Made in Alabama Act of 2012 credits, and the tariff credit. Companies that wish to seek the existing capital credit can file Form INT-1 by January 2, 2016 (within six months of the effective date of the Act) to claim it. However, a project electing to proceed under the existing capital credit must forgo incentives under the Act.
The structure of the Act’s incentives means that the construction activity of a project as well as payment of withholding taxes, sales taxes, property taxes, and other taxes and fees will occur before the credit is utilized. This creates a pay-as-you-go system. The Act also provides that the project agreement can place annual and/or aggregate limits on the credits and caps the aggregate outstanding incentives under the Act at $850 million, unless that limit is waived by a joint resolution of both houses of the Alabama Legislature.
The Governor continues to have the final say over whether a company is approved for the credits. The Governor can also reduce incentive amounts and durations so that the economic benefit to the state exceeds their cost.