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Income Tax Incentives

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Income Tax Incentives

Alabama law offers several income tax incentives for new, existing, or expanding businesses in Alabama.

Alabama Income Tax law is found in Chapter 18, Title 40, Code of Alabama 1975 . Corporations and other business entities pay Alabama income tax based on the net taxable income derived from business conducted within the state. The amount of net income apportioned to Alabama is determined by applying a four-factor formula of property, payroll, and double-weighted sales to total net income.  Alabama law offers several income tax incentives for new, existing, or expanding businesses in Alabama.

Constitutional Income Tax Limits and Federal Income Tax Deductions

There are constitutional restrictions in the Alabama Constitution of 1901 that add to the stability of Alabama’s business income tax environment:

  • Individual rate of income taxation is limited to no more than 5%. Amendment 25
  • The individual taxpayer is allowed to deduct federal income tax paid from his individual gross income. Amendment 225
  • Corporate rate of income taxation is limited to no more than 6.5%. Amendment 662
  • Corporate taxpayer is allowed to deduct, from its gross apportioned and allocated Alabama income, the full apportioned Alabama amount of federal income taxes paid. Amendment 662

Income Tax Net Operating Loss Carryforward

Corporate income tax law provides for a 15 year carryforward of net operating losses. In computing net income, a corporation is allowed a deduction for the sum of the net operating losses which are carried forward. Each net operating loss may be carried forward and deducted only during the 15 consecutive year period immediately following the year in which it arose. See Section 40-18-35.1, Code of Alabama 1975 .

Income Tax Capital Credit

The income tax capital credit program sunset on January 2, 2016. Projects that filed a Form INT with the Alabama Department of Revenue on or before January 2, 2016, have been grandfathered into the program. Learn more

Income Tax Enterprise Zone Credit or Exemption

The corporate income tax enterprise zone credit or exemption is offered to help encourage economic growth to areas in Alabama that are considered economically depressed.  To qualify for either the credit or the exemption, a business must meet detailed requirements concerning site location and employee qualifications.  The credit is equal to $2,500 per new permanent employee and the exemption is up to a five year exemption pursuant to an executed contract entered into between the Governor and the qualifying company. The enterprise zone tax incentive is available under the Alabama Enterprise Zone Act, Sections 41-23-20 through 41-23-32, Code of Alabama 1975 .

For more information:

Stephanie Rankins, Enterprise Zone Coordinator
401 Adams Avenue
P.O. Box 5690
Montgomery, AL 36103-5690
P: (334) 242-5384
Alabama Department of Economic and Community Affairs
ADECA’s Enterprise Zone Program

Income Tax Education Credit

An employer could qualify to receive an income tax credit of 20 percent of the actual cost of an employer sponsored educational program that enhances basic skills of employees up to and including the twelfth grade functional level.  This concept would include programs which teach English as a second language.  This credit is available under Sections 40-18-135 through 40-18-139, Code of Alabama 1975 .

For more information:

Adult and Community Education Program
Gordon Persons Building, Room 5343
50 North Ripley Street
Montgomery, AL 36130
P: (800) 392-8086
P: (334) 242-8181
Alabama Department of Education

Coal Credit

For the tax years beginning on and after January 1, 1995, every business, whether a C corporation or a pass through entity that is doing business in Alabama, as a producer of coal mined in Alabama, shall be allowed a credit against the tax imposed by Section 40-18-2, in the amount of one dollar ($1) per ton of increased production of coal over the previous year’s production of coal as set out herein below. Such tax credit shall be based on coal produced after January 1, 1995, provided the coal was mined in Alabama as certified by the producer of the coal.

The amount of the total credit in any one year shall be based on the number of tons of Alabama coal produced by the business in the year which exceeds the number of tons of Alabama coal produced by the business in calendar year 1994. In the event a business did not produce Alabama coal during calendar year 1994, such company must establish a base year by producing Alabama coal for 12 consecutive months. Thereafter, such company shall be eligible for the tax credit as specified herein above over the base year production.  This credit is available under Section 40-18-220 through Section 40-18-221, Code of Alabama 1975.

Full Employment Act of 2011 Credit

Small businesses which employ 50 or fewer employees and create new jobs paying more than ten dollars ($10) per hour can qualify for an income tax credit. Employers will receive an income tax credit equal to one thousand dollars ($1,000) and shall be available in the tax year during which the employee has completed 12 months of consecutive employment. The employer must have a net increase in the total number of full time employees in Alabama on the last date of each tax year during which employees are hired for which the employer claims a credit, over the number employed in Alabama as of the last day of the tax year immediately preceding the first employment year. The income tax credit may be claimed for employees who are hired following June 9, 2011. This tax credit shall not exceed the amount of the taxpayer’s state tax liability for which the credit is claimed. This credit is not refundable or transferable.  An Employer is not allowed to receive both a credit under this provision and a credit provided under the Alabama Small Business and Agribusiness Jobs Act Credit.  This credit is available under Sections 40-18-290 through 40-18-293, Code of Alabama 1975.

Alabama Small Business and Agribusiness Jobs Act Credit

Small businesses which employ 75 or fewer employees and creates new jobs paying more than $40,000 annually can qualify for an income tax credit.  Employers will receive an income tax credit equal to fifteen hundred dollars ($1,500) and shall be available in the tax year during which the employee has completed 12 months of consecutive employment.  The employer must have a net increase in the total number of full time employees residing in Alabama on the last date of each tax year during which employees are hired for which the employer claims a credit, over the number employed in Alabama on July 24, 2016. This tax credit is not transferable and shall not exceed the amount of the taxpayer’s state tax liability for which the credit is claimed. Any unused credit can be carried forward three years. This credit is available under Section 40-18-390 through Section 40-18-394, Code of Alabama 1975.

Heroes for Hire Tax Credit Act of 2012 Employer Credit

Sections 40-18-321 and 40-18-322, Code of Alabama 1975, provide qualified employers an additional credit against the Alabama income tax liability in the amount of $1,000 for hiring full time recently deployed and now discharged unemployed veterans. Employees must meet the requirements in either the Full Employment Act of 2011 credit or the Alabama Small Business and Agribusiness Jobs Act Credit in addition to meeting the definition of a recently deployed unemployed veteran.  Additionally, the new hire must be 1) a resident of Alabama at the time of entry into military service or mobilized to active, federal military service while a member of the Alabama National Guard or other reserve unit located in Alabama; 2) received an honorable or general discharge from active, federal military service within the two year period preceding the date of hire; and 3) has certification by the Department of Labor at the time of hire by either collecting or being eligible to collect unemployment benefits or having exhausted his or her unemployment benefits.

Heroes for Hire Tax Credit Act of 2012 Business Start-Up Expense Credit

Section 40-18-323, Code of Alabama 1975, allows for a nonrefundable credit against the income tax liability to recently deployed unemployed veterans in an amount up to $2,000 for expenses associated with one start-up business in which the veteran holds at least 50% ownership interest. The credit is only applicable for businesses: started after April 2, 2012, located within Alabama, and showing a net profit of at least $3,000 for the year in which the credit is taken.

Qualified Irrigation System/Reservoir System Tax Credit

Section 40-18-342, Code of Alabama 1975 provides an income tax credit to any agricultural trade or business for the cost associated with the purchase, installation or conversion related to irrigation systems or the development of irrigation reservoirs and water wells. The credit is equal to 20 percent of the cost of the purchase and installation of any qualified irrigation equipment and any conversion costs related to the conversion of irrigation equipment from fuel to electricity or qualified reservoirs. This credit is limited to only one purchase and installation of qualified irrigation equipment or one qualified reservoir per taxpayer. The credit shall not exceed $10,000 and shall not exceed the income tax liability in any year. Such credit shall be taken in the year in which the qualified irrigation equipment or the qualified reservoir is placed in service.  The credit may be carried forward for 5 years.

Alabama Accountability Credit

Act 2013-64 provides a tax credit for taxpayers that provide educational scholarships to qualifying schools. The credit is equal to 100% of the total contributions made to a scholarship granting organization for educational scholarships during the taxable year for which the credit is claimed up to 50% of the tax liability of the taxpayer. The credit may be carried forward for 3 years.

Dual Enrollment Credit

 Act 2014-147 provides a state income tax credit to businesses that make contributions for qualifying educational expenses directly associated with the Career-Technical Dual Enrollment Program.  The tax credit may be claimed by the taxpayer in an amount equal to 50 percent (50%) of the total contribution or contributions made to the Department of Postsecondary Education during the taxable year for which the credit is claimed, but such credit is not to exceed an amount greater than 50 percent (50%) of the taxpayer’s total Alabama income tax liability, and in no case more than five hundred thousand dollars ($500,000) for any given tax year. A taxpayer may carry forward all or part of a tax credit granted under this act for up to three (3) years.

Rehabilitation, Preservation and Development of Historic Structures Credit

 Act 2017-380 provides an income tax credit against the tax liability of the taxpayer for the rehabilitation, preservation, and development of historic structures. The credit is equal to 25% of the qualified rehabilitation expenditures for certified historic structures. The act also provides a tax credit equal to 10% of the qualified rehabilitation expenditures for qualified pre-1936 non-historic structures. No tax credit claimed for any certified rehabilitation may exceed $5,000,000 for all allowable property types except a certified historic residential structure, and $50,000 for a certified historic residential structure. The entire credit must be claimed by the taxpayer in the taxable year in which the certified rehabilitation is placed in service.  This credit is refundable and transferable but cannot be carried forward.

For more information:

Alabama Historic Commission

Alabama Historic Rehabilitation Tax Credit Program

408 South Perry Street

Montgomery, AL  36130

334-242-3184

http://www.preserveala.org/alabamarehabtaxcredits.aspx

Investment Credit

 Section 40-18-370 through Section 40-18-383, Code of Alabama 1975 provides for an investment credit to certain businesses for approved projects that create new jobs in Alabama. The credit is an amount up to 1.5 percent of a qualified capital investment annually, for a period of 10 years to be applied against the income tax, estimated income taxes, the financial institution excise tax, or the insurance premium tax, with additional offsets of utility gross receipts and utility service use taxes. The investment credit, provided for by the Alabama Jobs Act, may be claimed as a credit against taxes paid with a carryforward for earned but unused amounts to the extent allowed in the project agreement. Any unused portion of this credit may be carried forward for up to five years.

For more information:

Alabama Department of Commerce

401 Adams Avenue

P.O. Box 304106

Montgomery, AL 36130-4106

800-248-0033

Email: contact@madeinalabama.com

http://www.madeinalabama.com/

Port Credit

 Section 40-18-410 through Section 40-18-416, Code of Alabama 1975, establishes a tax credit for businesses that utilize Alabama’s port facilities. The port credit allowable is an amount equal to $50 per TEU, $3 per net ton, or $0.04 per kilogram for air freight, multiplied by the port user’s cargo volume in the 12 month period (for which the Renewal of Alabama Commission has granted approval for the port user to claim the credit) minus the port user’s base cargo volume. To qualify, the port user must ship more than 10 TEUs, more than 75 net tons, or more than 15,000 kilograms for air cargo. Also, the port user must ship more than 105 percent of its cargo volume in the 12 month period preceding the submission of the port credit application to the commission. This credit is nonrefundable, but any unused portion of the credit may be carried forward for up to five years. The total amount of the tax credit is at the discretion of the Alabama Department of Commerce, and the project must enter into a state project agreement.

For more information:

Alabama Department of Commerce

401 Adams Avenue

P.O. Box 304106

Montgomery, AL 36130-4106

800-248-0033

Email: contact@madeinalabama.com

http://www.madeinalabama.com/

Growing Alabama Credit

 Section 40-18-410 through Section 40-18-416, Code of Alabama 1975 authorizes a tax credit to corporations and individuals that make cash contributions to local economic development organizations approved by the Renewal of Alabama Commission. The credit is the amount of the cash contribution made not to exceed 50% of the corporation’s income tax liability for the current year. The corporation’s cash contribution cannot exceed the amounts approved by the commission. This credit does not flow though to owners of pass through entities and is nontransferable.  This credit may be carried forward for up to five years.

For more information:

Alabama Department of Commerce

401 Adams Avenue

P.O. Box 304106

Montgomery, AL 36130-4106

800-248-0033

Email: contact@madeinalabama.com

http://www.madeinalabama.com/

Apprenticeship Tax Credit

 Section 40-18-420 through Section 40-18-424, Code of Alabama 1975 provides for an income tax credit to employers in the amount up to $1,000 per qualifying apprentice.  An employer can claim up to five apprentices, not to exceed $5,000 annually.  This credit is nonrefundable, nontransferable and cannot be carried forward.

For more information:

Frank Chestnut

Apprenticeship Alabama Manager

Alabama Department of Commerce

1 Technology Court

Montgomery, AL  36116

Email: fchestnust@aidt.edu

http://www.apprenticeshipalabama.org/