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The Alabama Income Tax law is found in Chapter 18, Title 40, Code of Alabama 1975 . Corporations and other business entities remit 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 the single sales apportionment factor. The single sales factor is the ratio of Alabama sales to overall sales. A brief description of tax incentives available to businesses in Alabama are listed below.
Constitutional Income Tax Limits and Federal Income Tax DeductionsThere are constitutional restrictions in the Alabama Constitution of 1901 that add to the stability of Alabama’s business income tax environment:
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Income Tax Net Operating Loss CarryforwardSection 40-18-35.1, Code of Alabama 1975Corporate income tax law provides for a fifteen-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 fifteen consecutive year period immediately following the year in which the loss arose. Section 40-18-15.1, Code of Alabama 1975For individual income tax filers, taxpayers are allowed to carryback a net operating loss to the two previous tax years. Any remaining amount of net operating loss can be carried forward for up to fifteen years following the loss year. Individual taxpayers are allowed to forego the carryback period by making an election. |
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Enterprise Zone Credit or ExemptionSections 41-23-20 through 41-23-32, Code of Alabama 1975The enterprise zone credit or exemption is offered to encourage economic growth in areas of the state that are considered economically depressed. To qualify for either the credit (Section 5) or the exemption (Section 11), a business must meet detailed requirements within designated Enterprise Zones and meet certain employee qualifications. The Section 5 credit is equal to $2,500 per new permanent employee and the Section 11 exemption is available up to five-years pursuant to an executed contract between the Governor and the qualifying company. Please click here for further information. |
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Basic Skills Education CreditSections 40-18-135 through 40-18-139, Code of Alabama 1975An employer may qualify to receive an income tax credit of 20% 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 includes programs that teach English as a second language. For more information: Adult and Community Education Program |
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Coal CreditSections 40-18-220 through 40-18-221, Code of Alabama 1975For tax years beginning on and after January 1, 1995, every corporation doing business in Alabama as a producer of coal mined in Alabama is offered a credit in the amount of $1 per ton of increased production of coal over the previous year’s production of coal. The credit is based on coal produced after January 1, 1995, for the coal mined in Alabama as certified by the producer of the coal. The amount of the total credit in any one year is calculated as follows:
If a corporation did not produce Alabama coal during calendar year 1994, then the corporation must establish a base year by producing Alabama coal for 12 consecutive months. Base year begins with the first full year of production. Subsequently, the corporation will be eligible for the credit in the amount that is over the base year production. The credit cannot be carried over to future years. A corporation that qualifies for the Coal Credit must have an active My Alabama Tax (MAT) account and must complete the precertification process that is required through MAT before the Coal Credit can be claimed as an offset to tax on an income tax return. Please click here to establish a MAT account. For instructions on how to begin the precertification process for Coal Credit, please click on the FAQ link on top of this page based on your entity type. |
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Full Employment Act of 2011Sections 40-18-290 through 40-18-293, Code of Alabama 1975Section 40-18-293 offers a one-time tax credit of $1,000 for each new job created by small businesses located in Alabama. This Act is effective for tax years beginning on or after January 1, 2011. A small business is defined as a business that employs 50 or fewer employees as of June 9, 2011. The tax credit is available in the tax year in which the newly hired employee completes 12 months of consecutive employment. To be eligible for the credit:
Additional provisions:
An employer that qualifies for the Full Employment Act of 2011 Credit, must have an active My Alabama Tax (MAT) account, and must complete the precertification process that is required through MAT before the Full Employment Act of 2011 Credit can be claimed to offset taxes on their Alabama income or excise tax return. Please click here to establish a MAT account. For instructions on how to begin the precertification process for Full Employment Act of 2011 Credit, please click on the FAQ link on top of this page based on your entity type. |
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Veterans Employment Act – Employer CreditSections 40-18-320 through 40-18-324, Code of Alabama 1975Veterans Employment Act (previously known as the “Heroes for Hire” tax credit) provides a tax credit to qualifying businesses for each unemployed or combat veteran hired for a full-time position paying at least $14 per hour, the majority of the duties of which are at a business location within Alabama. This credit may not be claimed if the credit is claimed under Section 40-18-323 (Veterans Employer Act – Business Start-up Expense Credit). For tax years beginning on or after January 1, 2018, Sections 40-18-320 through 40-18-322, allows for a $2,000 tax credit to a business that meets the requirements for a tax credit under the Full Employment Act of 2011 or the Alabama Small Business and Agribusiness Jobs Act (2016), for each unemployed or combat veteran hired for a full-time position paying at least $14 per hour after March 12, 2018.
A business that qualifies for the Veterans Employment Act – Employer Credit must have an active My Alabama Tax (MAT) account and must complete the precertification process that is required through MAT before the Veterans Employment Act – Employer Credit can be claimed as an offset to tax on an income or excise tax return. Please click here to establish a MAT account. For instructions on how to begin the precertification process for Veterans Employment Act – Employer Credit, please click on the FAQ link on top of this page based on your entity type. |
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Veterans Employment Act – Business Start-up Expense CreditSections 40-18-320 through 40-18-324, Code of Alabama 1975For tax years beginning on or after January 1, 2012, Section 40-18-323 allows a $2,000 nonrefundable credit against the income tax liability associated with one start-up business in which the recently deployed unemployed veteran holds at least 50% ownership interest. The credit is only applicable to business started after April 2, 2012, that is located within Alabama and that shows a net profit of at least $3,000 in the year in which the credit is taken. This credit may not be claimed if the credit has been claimed under Section 40-18-322, Veterans Employment Act – Employer Credit. The credit shall not be claimed until the status of the unemployed veteran has been verified by the Department of Labor. This credit expires December 31, 2023. A business that qualifies for the Veterans Employment Act – Business Start-up Expense Credit must have an active My Alabama Tax (MAT) account and must complete the precertification process that is required through MAT before the Veterans Employment Act – Business Start-up Expense Credit can be claimed as an offset to tax on an income tax return. Please click here to establish a MAT account. For instructions on how to begin the precertification process for Veterans Employment Act – Business Start-up Expense Credit, please click on the FAQ link on top of this page based on your entity type. |
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Qualified Irrigation System/Reservoir System Tax CreditSections 40-18-340 through 40-18-344, Code of Alabama 1975Section 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% up to $10,000 or 10% up to $50,000 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. An eligible taxpayer may claim:
The maximum amounts of the credit allowable are:
The credit must be taken in the year in which the qualified irrigation equipment or the qualified reservoir is placed in service provided the filing prerequisites are met as provided by the Alabama Department of Agriculture. Pursuant to Section 40-18- 342(f), all agriculture trade or business making qualified costs must file an annual informational report with the Alabama Department of Agriculture and Industries prior to claiming an income tax credit. Only qualified irrigations systems or reservoirs for which the agriculture trade or business has filed an annual information report with the Department of Agriculture and Industries are eligible for the tax credit. The credit may be carried forward for five years. For more information: Hassey Brooks 1445 Federal Drive http://agi.alabama.gov/irrigation An agricultural trade or business that qualifies for the Qualified Irrigation System/Reservoir System Tax Credit, must have an active My Alabama Tax (MAT) account, and must complete the precertification process that is required through MAT before the Qualified Irrigation System/Reservoir System Tax Credit can be claimed as an offset to tax on an income tax return. Please click here to establish a MAT account. Once the agricultural trade or business has completed all requirements of the Alabama Department of Agriculture to qualify for this credit, the precertification process for the Qualified Irrigation System/Reservoir System Tax Credit must be completed through MAT. For instructions on how to begin the precertification process for Qualified Irrigation System/Reservoir System Tax Credit, please click on the FAQ link on top of this page based on your entity type. |
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Alabama Accountability Act – Scholarship Granting Organization (SGO) CreditSections16-6D-1 through 16-6D-9, Code of Alabama 1975For tax years beginning on or after January 1, 2013, the Alabama Accountability Credit provides a tax credit for taxpayers that afford 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 three years. Please click here for more information. A Pass Through Entity (Partnership or S-Corporation) that contributes to a Scholarship Granting Organization (SGO) must complete the precertification process through My Alabama Taxes (MAT) before they can pass the Alabama Accountability Act credit through to their members. The SGO must verify the Pass Through Entity’s contribution before the Pass Through Entity can begin the precertification process in MAT. The precertification process does not apply to Individual and Corporate taxpayers that are claiming the Alabama Accountability Act credit as a result of a direct contribution made to an approved SGO. Please click here to establish a MAT account. For instructions on how to begin the precertification process for Alabama Accountability Act – SGO Credit, please click on the FAQ link on top of this page based on your entity type. |
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Career-Technical Dual Enrollment CreditSections 16-60-350 through 16-60-354, Code of Alabama 1975Career-technical dual enrollment credit provides an income tax credit beginning with the tax year January 1, 2015, to taxpayers that make contributions for qualifying educational expenses directly associated with the Career-Technical Dual Enrollment Program. The provisions include:
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Investment CreditSections 40-18-370 through 40-18-383, Code of Alabama 1975Section 40-18-376 provides for an investment credit to qualifying businesses for approved projects that create new jobs in Alabama. The projects are approved by the Department of Commerce in consultation with the Governor. The provisions include:
The investment credit is a discretionary credit that has certain jobs and project requirements set forth by the Department of Commerce that must be met in order to qualify the credit. Please click here for further information. |
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Port CreditSections 40-18-400 through 40-18-403, Code of Alabama 1975Section 40-18-403 provides a discretionary tax credit for businesses that utilize Alabama’s port facilities. The provisions include:
*TEU – Twenty-foot equivalent unit is a measure of volume in units of twenty-foot-long containers. To qualify for the port credit:
The total amount of the tax credit allowed is at the discretion of the Alabama Department of Commerce, and the approved company must enter into a state project agreement. Please click here for further information. |
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Growing Alabama CreditCodification pending pursuant to Act 2021-2Act 2021-2 provides a tax credit to taxpayers that make cash contributions to state and local Economic Development Organizations (EDOs) for qualifying projects that stimulate economic growth. EDOs may also seek funding to create workforce marketing campaigns to attract STEM workers, create technology accelerators, or develop certain agricultural centers. The approved donors receive an income tax credit equal to their contribution and may offset up to 50% of the taxpayer’s income tax liability. The Growing Alabama Credit is not transferrable but may be passed through to the owners of pass-through entities. This credit may be carried forward for up to five years. The credit is set to sunset on July 31, 2023. Please click here for further information. |
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Apprenticeship Tax CreditSections 40-18-420 through 40-18-424, Code of Alabama 1975Section 40-18-422 provides for an income tax credit to employers that hire qualified apprentices who receive classroom or industry-specific instruction and on-the-job training as follows:
Please click here for further information. For more information: Josh Laney |
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2017 Alabama Historic Rehabilitation Tax CreditSections 40-9F-30 through 40-9F-38, Code of Alabama 1975Section 40-9F-32 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. Provisions include:
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Income Tax Capital CreditSections 40-18-190 through 40-18-203, Code of Alabama 1975The income tax capital credit program sunset on January 2, 2016, and is no longer available for new projects. However, projects that filed a Form INT with the Alabama Department of Revenue on or before January 2, 2016, have been grandfathered into the program. Please click here for further information. |
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Alabama Film RebateSections 41-7A-1 through 41-7A-48, Code of Alabama 1975Section 41-7A-43 authorizes the Alabama Film Office to award up to $20 million each year in incentives to qualified production companies for tax years beginning January 1, 2009. Qualified Productions include a wide variety of entertainment content as long as some portion of the project is produced in Alabama. Provisions include:
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Opportunity Zone Investment IncentivesSections 40-18-6.1 and 40-18-8.1, Code of Alabama 1975The Alabama Incentives and Modernization Act provides Alabama taxpayers the same tax benefits available under federal law when they invest in an approved opportunity fund for qualified projects in low-income areas in Alabama that are designated as “Opportunity Zones” (OZ). Under this Act, the Alabama Department of Economic and Community Affairs is authorized to enter into project agreements with “approved” opportunity funds to invest the state funds into the OZ projects. In addition to providing for investments, the project agreements may provide the funds’ investors with a tax credit, the Impact Investment Credit, against state income taxes or financial institution excise taxes if the investment does not meet an agreed-upon rate of return. The total tax credits allocated to “approved” OZ funds cannot exceed $50 million and will not be available for projects if an approved fund has committed to invest in the project prior to August 5, 2019. The state investments will be available until December 31, 2024. For more information: 334-242-5255 |
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Railroad Modernization Act of 2019Sections 37-11C-1 through 37-11C-6, Code of Alabama 1975The Railroad Modernization Act of 2019 provides a refundable income tax credit for tax years beginning on or after December 31, 2019, for eligible taxpayers with qualified railroad reconstruction or replacement expenditures. Railroads that are classified as a Class II or Class III are eligible for the credit. Taxpayers must obtain precertification from the Department of Commerce prior to claiming the credit on their income tax return. The Act imposes an annual credit limit of $3.7 million, with an aggregate cap of $11.1 million over the life of the credit. |