Alabama Enacts New Job Creation And Investment Tax Credits And Incentives - Corporate Tax

Alabama Governor Robert Bentley has signed legislation, the Alabama Jobs Act, which provides: (i) a jobs creation credit that may be taken against utility taxes and (ii) a capital investment credit that may be taken against income taxes, financial institution excise taxes, insurance premium taxes or utility taxes.¹ Also, Governor Bentley approved related legislation, the Alabama Veterans and Rural Jobs Act, to provide enhanced incentives under the Alabama Jobs Act to companies located in a rural county and to companies that employ veterans.² The new programs, which are part of the "Made in Alabama" jobs incentive package,³ will go into effect on July 3, 2015.

Overview

The legislation replaces Alabama's tax credits for projects of new businesses and business expansions, tariff credit and capital credits for qualified products⁴ by providing incentives in the form of a job creation credit and a capital investment credit.⁵ For a company to receive one or both of these credits, all of the following must occur:

There must be a qualifying project predominantly conducting a specified activity;
The qualifying project must create a certain number of new jobs;
The company proposing the qualifying project must be an approved company;
The approved company and the governor must enter into a project agreement; and
The proof of wages actually paid or capital actually invested must be delivered and certified.⁶

The qualifying project must predominantly conduct an activity specified in the statute:

A wide variety of activity described by certain sections of the North American Industry Classification System (NAICS), including most forms of manufacturing;⁷
Production of biofuel;
Original investigations or application of research findings to create new or significantly improved products or processes;
National or regional headquarters for a company that conducts significant business outside the state;
Commercial enterprises designed to attract visitors such as historical site, museums, amusement parks or conference centers;
A target of the state's economic development efforts under the Accelerate Alabama Strategic Economic Development Plan Alliance; or
A type of activity listed in a permanent Alabama Department of Commerce regulation.⁸

A qualifying project generally must have at least 50 new employees.⁹ However, this minimum job requirement does not apply to chemical manufacturing, data centers, engineering, design, research, or metal/machining technology or toolmaking. Also, for rural counties, the minimum new job requirement is reduced to 25 new employees.¹⁰

In order for a company to be approved, the Secretary of Commerce must make the following findings:

The project is in fact a qualifying project;
The project does not decrease Alabama's exports; and
The amount of tax incentives applied for are less than the anticipated Alabama revenues to be generated by the project.¹¹

Following a determination that these requirements are met, the Secretary of Commerce will recommend to the governor that the company be designated as an approved company.¹² After reviewing this information, the governor must determine whether the company should be approved.¹³ If the governor approves the company, the governor will execute a project agreement with the company that allows it to claim either or both of the incentives.¹⁴ The statute expressly lists the information that must be included in the project agreement.¹⁵ Importantly, the governor has the authority to decrease the amount and duration of the incentives to ensure Alabama anticipated revenues exceed the tax incentives sought.¹⁶

Job Creation Credit

If provided in the project agreement, the company is allowed an annual jobs credit against utility taxes for 10 years that equals three percent of the wages paid to eligible employees during the prior year.¹⁷ For companies located in rural counties, the benefit may be increased to four percent of employee wages.¹⁸ The new program also allows for an additional 0.5 percent credit against employee wages if at least 12 percent of the qualifying employees are military veterans.¹⁹

The project agreement must provide that one of the following methods be used to realize the benefits of the job credit: (i) refund out of utility taxes during the incentive period; or (ii) claimed as a credit against utility taxes actually paid.²⁰ Unused credits may be carried forward for a maximum of five years.

Capital Investment Credit

A project agreement may provide for a capital investment²¹ credit to be taken against state income taxes, financial institution excise taxes, insurance premium taxes, utility taxes, or a combination of these taxes.²² The credit is equal to 1.5 percent of capital invested annually for up to 10 years.²³ For companies located in rural counties, the credit period may be extended to a total of 15 years.²⁴

A project agreement must specify any one or more of the following methods by which the investment credit will be recognized, as long as a credit is not used more than once: (i) claimed as a credit against the taxes that are actually paid;²⁵ (ii) for companies taxed as a flow-through entity, the credit may be allocated among some or all of the owners; or (iii) for the first three years, all or part of the credit may transferred to another person or company provided certain conditions are satisfied.²⁶

Commentary

The Alabama Jobs Act is intended to encourage the creation of jobs and the investment of capital in Alabama. As mentioned above, the benefits associated with this program are negotiated with the state of Alabama and are not available "as of right." If the company meets the baseline criteria, the company is able to initiate negotiations with the Department of Commerce, the agency overseeing the program. However, in order to finalize the negotiation process and receive benefits, the company must receive formal approvals from both the Department of Commerce and the Governor's Office. If approved, the company must enter into a formal agreement with the state of Alabama which will dictate the terms of the incentive award.²⁷ The Alabama Jobs Act programs are not mutually exclusive and may be used in conjunction with each other, subject to negotiation.

Prior to claiming any credit under the Alabama Jobs Act, the approved company must submit annual certifications of the jobs created, wages paid for the new jobs, and the capital investment made to the Department of Commerce.²⁸ Once the credits have been verified by the Department of Commerce, the company will be able to file the necessary paperwork to realize the benefits, which may include tax credits and refunds. Companies should be advised that the Department of Commerce is sanctioned to report to the Department of Revenue any failure of an approved company to meet the jobs, wage or capital investment requirements specified in the project agreement and authorizes the Department of Revenue to assess recapture and interest penalties on an approved company for any unearned portion of the jobs credit or the investment credit.²⁹ Recapture provisions will be outlined in the agreement with the state.³⁰

Footnotes

^{1 Act 27 (H.B. 58), Laws 2015.}

^{2 Act 41 (H.B. 57), Laws 2015.}

^{3 Press Release, Office of Alabama Governor Robert
Bentley, June 16, 2015. Note that the package also includes the
Alabama Reinvestment and Abatements Act. Act 24 (H.B. 59), Laws
2015. This legislation provides incentives for Alabama-based
facilities that are refurbished, upgraded or placed back in
service.}

^{4 HB 58, § 7.}

^{5 ALA. CODE §§ 40-18-370 et
seq.}

^{6 ALA. CODE § 40-18-371.}

^{7 The following NAICS code sections are listed: 1133
(logging); 115111 (cotton ginning); 2121 (coal or anthracite
mining); 22111 (power generation); 221330 (steam and
air-conditioning supply); 31–33 (manufacturing, other than
311811 (retail bakeries)); 423 and 424 (wholesale trade); 482
(railroads); 4862 (pipeline transportation of natural gas); 48691
(pipeline transportation of refined petroleum products); 48699
(other pipeline transportation); 48819 (air transportation
support); 4882 (rail transportation support); 4883 (water
transportation, other than 48833 (navigational services to
shipping)); 493 (warehousing and storage); 511 (publishers); 5121
(motion picture and video production and distribution, other than
51213 (theaters)); 51221 (record production); 517
(telecommunications); 518 (data processing, hosting and related
services (without regard to the premise that data processing and
related services be performed in conjunction with a third party));
51913 (Internet publishing, broadcasting and search portals); 52232
(financial transactions processing, reserve and clearinghouse
activities); 54133 and 54134 (engineering or drafting services if
predominantly in furtherance of another listed activity); 54138
(testing laboratories); 5415 (computer-related services); 541614
(process, physical distribution and logistics consulting services);
5417 (certain research and development); 55 (management of
companies and enterprises (if not for the production of
electricity)); 561422 (telemarketing and other contact centers that
do not originate telephone calls)); 562213 (solid waste combustors
and incinerators); 56291 (remediation services); 56292 (materials
recovery facilities); 611512 (flight training); 927 (space research
and technology); or 92811 (national security).}

^{8 ALA. CODE § 40-18-372(a). However, a qualifying
project may not engage predominantly in farming activities or the
retail sale of tangible personal property or services. Also, it may
not be a shopping center, restaurant, movie theater, bowling alley,
fitness center, miniature golf course, nightclub, gaming facility
or establishment serving the local community.}

^{9 ALA. CODE § 40-18-372(b).}

^{10 ALA. CODE § 40-18-376.1(a), (c).}

^{11 ALA. CODE § 40-18-373(a).}

^{12 ALA. CODE § 40-18-373(b).}

^{13 ALA. CODE § 40-18-373(c).}

^{14 ALA. CODE § 40-18-374.}

^{15 ALA. CODE § 40-18-374(b).}

^{16 ALA. CODE § 40-18-374(c).}

^{17 ALA. CODE § 40-18-375(a).}

^{18 ALA. CODE § 40-18-376.1(d)(1).}

^{19 ALA. CODE § 40-18-376.2(b).}

^{20 ALA. CODE § 40-18-375(b).}

^{21 A "capital investment" is defined as all costs
and expenses incurred by the company in connection with the
acquisition, construction, installation and equipping of a
qualifying project, if the costs are required to be capitalized for
federal income tax purposes. However, for any project involving the
extraction of natural resources, the capital investment does not
include the costs of acquiring land, land recording fees,
architectural or engineering services, environmental studies and
environmental mitigation. ALA. CODE § 40-18-370(2).}

^{22 ALA. CODE § 40-18-376(a).}

^{23 Id.}

^{24 ALA. CODE § 40-18-376.1(d)(2).}

^{25 Unused credits may be carried forward for a maximum of
five years.}

^{26 ALA. CODE § 40-18-376(b).}

^{27 ALA. CODE § 40-18-374.}

^{28 ALA. CODE §§ 40-18-375(b)(1)(b);
40-18-376(b)(1)(b).}

^{29 ALA. CODE § 40-18-378(c).}

^{30 ALA. CODE § 40-18-378(b).}

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