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
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Income Tax Net Operating Loss Carryforward
Corporate 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.
For 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. |
Enterprise Zone Credit or Exemption
The 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 (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 up to a five-year exemption pursuant to an executed contract entered into between the Governor and the qualifying company. Please click here for further information. |
Basic Skills Education Credit
An 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
Gordon Persons Building, Room 5343
50 North Ripley Street
Montgomery, AL 36130
P: 800-392-8086
P: 334-242-8181 |
Coal Credit
For tax years beginning on and after January 1, 1995, every business that is 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:
| The number of tons of Alabama coal produced by the business in current tax year |
| (MINUS) |
| The number of tons of Alabama coal produced by the business in base year |
| (EQUALS) |
| The Amount of coal credit allowable in current tax year |
If a company did not produce Alabama coal during calendar year 1994, then the company 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 company will be eligible for the credit in the amount that is over the base year production. The coal credit cannot be carried over to future years.
A business 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.
Click here to establish a MAT account.
Click here to begin the precertification process for the Coal Credit. |
Full Employment Act of 2011
Section 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:
- The new employee must be hired after June 9, 2011.
- The wages for the new job must be more than $10 per hour.
- The total number of full-time employees in Alabama on the last day of each tax year during which employees are hired must exceed the number of employees in Alabama as of the last day of the tax year immediately preceding the first employment year.
Additional provisions:
- The credit is not refundable or transferrable but is available to owners of pass-through entities on a pro rata basis.
- This credit is not available to employers who claim the credit provided under the Alabama Small Business and Agribusiness Jobs Act Credit. However, both credits can be claimed by the same employer as long as both credits are not taken for the same employee.
- The credit is allowed for income tax and for financial institution’s excise tax.
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 as an offset to tax on an Alabama income or excise tax return.
Click here to establish a MAT account.
Click here to begin the precertification process for the Full Employment Act of 2011 Credit. |
Veterans Employment Act – Employer Credit
Veterans 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, 2012, Section 40-18-321, provides a tax credit in the amount of $1,000 to qualifying businesses in addition to the tax credit allowed under the Full Employment Act of 2011 or the Alabama Small Business and Agribusiness Jobs Act (2016), if all requirements are met.
- The additional credit will be available in the tax year during which the newly hired employee has completed twelve consecutive months of employment.
- The tax credit is only available in the first year during which the newly hired unemployed or combat veteran has completed the twelve consecutive months of
- Recently deployed unemployed veteran is an individual who was a resident of Alabama at the time of entry into military service or was mobilized to active, federal military service while a member of the Alabama National Guard or other reserve unit located in Alabama, regardless of the resident’s home of record; received an honorable or general discharge from active federal military service within the two year period preceding the date of hire; has a certificate by the Department of Labor at the time of hire of, either collecting or being eligible to collect unemployment benefits or having exhausted his or her unemployment benefits.
- For tax years beginning on or after January 1, 2018, Sections 40-18-320 through 40-18-322, were revised to allow 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.
- The credit applies to individual and corporate income taxes or the state portion of the financial institution excise tax.
- The additional credit shall be available in the tax year during which the employee has completed twelve months of consecutive employment.
- A combat veteran is defined as a member of the Armed Forces of the United States who served in a United States Department of Defense designated combat zone and was a resident of the State of Alabama at the time of his or her service.
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.
Click here to establish a MAT account.
Click here to begin the precertification process for the Veterans Employment Act – Employer Credit. |
Veterans Employment Act – Business Start-up Expense Credit
For 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.
Click here to establish a MAT account.
Click here to begin the precertification process for the Veterans Employment Act – Business Start-up Expense Credit. |
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% 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:
- One credit for qualifying equipment purchased and installed or a reservoir for all tax years beginning on or after January 1, 2012 until tax year ending December 31, 2017
- One tax credit for qualifying equipment purchased and installed or one qualified reservoir for all tax years beginning on or after January 1, 2018 until tax year ending December 31, 2022; and
- One credit for qualifying equipment purchased and installed or one qualified reservoir for all tax years beginning on or after January 1, 2023 and afterwards.
The maximum amounts of the credit allowable are:
- $10,000 for tax years 2012 through 2017
- $50,000 for tax years 2018 through 2022; and
- $10,000 for the 2023 tax year and subsequent years.
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 5 years.
For more information:
Hassey Brooks
334-240-3877
1445 Federal Drive
Montgomery, AL 36107
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.
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, click here to begin the precertification process for the Qualified Irrigation System/Reservoir System Tax Credit. |
Alabama Accountability Act – Scholarship Granting Organization (SGO) Credit
For 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.
Beginning 1/1/2020, any Pass Through Entity (Partnership or S-Corporation) that contributes to a Scholarship Granting Organization (SGO) must complete the precertification process that is required through My Alabama Taxes (MAT) before they can pass an 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 NEW 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.
Click here to establish a MAT account.
Click here to begin the precertification process for the Alabama Accountability Act Credit. |
Career-Technical Dual Enrollment Credit
Career-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:
- The tax credit equal to 50% of the total contribution(s) made to the Department of Postsecondary Education during the taxable year for which the credit is claimed.
- The credit may not exceed 50% of the taxpayer’s total Alabama income tax liability, and more than $500,000 for any given tax year.
- The credit may be carried forward, in part or in full, for up to three years.
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Investment Credit
Section 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:
- Tax credit of up to 1.5% annually of the qualified capital investment for a qualifying project for up to ten years.
- For investments in targeted or jumpstart counties [this will have a link to Commerce’s definition and map for targeted and jumpstart counties], the investment credit is available for an additional five years.
- The credit can be applied against the Alabama income tax liability, financial Institutions excise tax or the insurance premium tax with additional offsets for utility taxes paid.
- Any unused portion of this credit may be carried forward for up to five years and may be transferrable for the first three years at the discretion of the Governor.
- The credit can be transferred or sold, at 85% or more of face value for the first three years. Transferability is at the discretion of the Governor and must be approved at the time the project agreement is executed.
The investment credit 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. |
Port Credit
Section 40-18-403 provides a tax credit for businesses that utilize Alabama’s port facilities.
The provisions include:
- One-time tax credit of up to $50 per TEU*, $3 per net ton of bulk cargo, or $0.04 per net kilogram for air cargo.
- The credit can be applied against Alabama income tax liability.
- The credit is not refundable or transferrable but may be carried forward for 5 years.
- New distribution or warehouse shippers investing at least $20 million and creating at least 75 net new jobs are eligible to receive up to $100 per TEU over a 3-year period if entering into a project agreement with the state.
*TEU – Twenty-foot equivalent unit is a measure of volume in units of twenty-foot long containers.
To qualify for the port credit:
- The port user must be engaged in manufacturing, warehousing or distribution of goods.
- The port user must ship more than 10 TEUs, more than 75 net tons, or more than 15,000 kilograms for air cargo.
- The port user must increase the shipping of its cargo volume by more than 105% over the prior year and must be approved by the Renewal of Alabama Commission.
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. |
Growing Alabama Credit
Section 40-18-413 provides a tax credit to corporations and individuals that make cash contributions to state and local Economic Development Organizations (EDOs) for qualifying projects that stimulate economic growth in:
- Industrial sites, industrial and research parks
- Inland ports and intermodal facilities
- STEM marketing and accelerator programs
- Agricultural center
EDOs may also seek funding to create workforce marketing campaigns to attract STEM workers, create technology accelerators, or develop certain agricultural centers.
The contributors 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 does not flow through to the owners of pass-through entities and is nontransferable. This credit may be carried forward for up to five years. The credit was effective July 3,2016 and is set to sunset on fiscal year 2020. Please click here for further information. |
Alabama Small Business and Agribusiness Jobs Act Credit
Section 40-18-392 provides a one-time income tax credit to qualifying small businesses that create new jobs paying more than $40,000 annually. A small business employer is defined as a business organization duly formed, organized, or qualified to do business in the state, with its headquarters or principal place of business in the state, and having 75 or fewer employees during the tax year in which the tax credit is claimed. The income tax credit equals $1,500 for each qualified new employee and is available in the tax year during which the employee has completed twelve months of consecutive employment.
To be eligible for the credit:
- The new employee must be hired after July 25, 2016, and only applies to tax years beginning on or after January 1, 2016.
- The total number of full-time employees residing in Alabama on the last date of each tax year during which employees are hired must be greater than the number of employees in Alabama on July 25, 2016, less any employees for which a credit has been previously claimed.
- The number of qualifying new employees cannot exceed the number of employees at the end of the year minus the number of employees at the beginning of the tax year.
Additional provisions:
- The credit cannot exceed the amount of the taxpayer’s state tax liability for any tax year.
- The tax credit is not transferable but is available to owners of pass-through entities on a pro rata basis.
- Unused credit can be carried forward for up to three years.
- An employer may claim this credit or a credit under the Full Employment Act of 2011, as long as both credits are not claimed on the same employee.
- The credit is available for income tax and financial institution’s excise tax.
This tax credit expired on January 1, 2019; however, any unused portion of the credit may be carried forward for up to 3 years.
An employer that qualifies for the Alabama Small Business and Agribusiness Jobs Act Credit, must have an active My Alabama Tax (MAT) account, and must complete the precertification process that is required through MAT before the Alabama Small Business and Agribusiness Jobs Act Credit can be claimed as an offset to tax on an Alabama income or excise tax return.
Click here to establish a MAT account.
Click here to begin the precertification process for the Alabama Small Business and Agribusiness Jobs Act Credit. |
Apprenticeship Tax Credit
Section 40-18-422 provides for an income tax credit to employers as follows:
- For tax years beginning on or after January 1, 2017 through January 1, 2019 – $1,000 per qualifying apprentice for up to 5 apprentices employed.
- For tax years beginning on or after January 1, 2020 through Dec 31, 2025 – $1,250 per qualifying apprentice for up to 10 apprentices employed. An additional credit of up to $500 is available for apprentices who are eighteen years old or younger and meet the certain youth registered or industry recognized apprenticeship criteria.
- The credit is not available for an individual apprentice for more than 4 taxable years.
- This credit is nonrefundable, nontransferable, and cannot be carried forward.
Please click here for further information.
For more information:
Josh Laney
Director, Alabama Office of Apprenticeship
706-326-1324
Josh.Laney@commerce.alabama.gov
http://www.apprenticeshipalabama.org/ |
2017 Alabama Historic Rehabilitation Tax Credit
Section 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; limited to a maximum tax credit claimed for any certified rehabilitation of $5,000,000, or $50,000 for any certified historic residential structure.
Provisions include:
- The entire credit must be claimed by the taxpayer in the taxable year in which the certified rehabilitation is placed in service and the credit must be claimed at the entity level.
- This credit is refundable and cannot be carried forward.
- The credit is transferable once at the entity level.
- Available for tax years 2018-2022.
Please click here for further information. |
Income Tax Capital Credit
The 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. |
Alabama Film Rebate
Section 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:
- An income tax rebate equaling 25% of certain production expenditures on the project that are incurred in Alabama plus 35% of the payroll paid to Alabama residents.
- The rebate may be used to offset any Alabama income tax liability of the Qualified Production Company for the tax year during which such expenditures were paid or incurred.
- If the amount of the Rebate exceeds the Qualified Production Company’s Alabama income tax liability the excess is refundable. Please click here for further information.
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Opportunity Zone Investment Incentives
Codification pending
The Alabama Incentives and Modernization Act (Act 2019-392) 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:
Ashley Toole
334-242-5258
Alabama Department of Economic and Community Affairs |
Railroad Modernization Act of 2019
Codification pending
The Railroad Modernization Act of 2019 (Act 2019-459) creates a refundable income tax credit beginning with tax years 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 $3.7M, with an aggregate cap of $11.1M over the life of the credit. |
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