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Income Tax Capital Credit

Resources

NOTE: 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.

About

The Income Tax Capital Credit is available only to the qualifying projects that have been grandfathered into the program. The capital credit is a credit of up to five percent (5%) of the capital costs of a qualifying project, to be applied to the Alabama income tax liability or financial institution excise tax generated by the project income, each year for 20 years. With the exception of certain projects, this credit cannot be carried forward. Further, this credit cannot be carried back or used to generate a refund to the taxpayer. The credit will follow the income generated by the project and, therefore, will be allowed to “pass-through” entities such as: S-corporations, partnerships, limited liability companies, etc.

Statutory Requirements for the Capital Credit

Business Activity Requirement

  • Industrial, Warehousing or Research Activity – Any trade or business in the 2007 North American Industrial Classification System (NAICS), promulgated by the Executive Office of the President of the United States, Office of Management and Budget as:
    • Sectors 31 (except National Industry 311811), 32, and 33 (manufacturing)
    • Subsector 423 and 424 (merchant wholesalers, goods)
    • 511 (publishing industries (except internet))
    • 927 (space research and technology)
    • Industry Group 2121 (coal mining)
    • 5417 (scientific research and development services)
    • 5415 (computer systems design and related services)
    • 5182 (data processing, hosting, and related services)
    • Industry 11331 (logging)
    • 48691 (pipeline transportation of refined petroleum products)
    • National Industry 115111 (cotton ginning)
    • 517110 (wired telecommunications carriers)
    • 541380 (testing laboratories)
    • 561422 (in bound call centers only)
    • Any process or treatment facility which recycles, reclaims, or converts materials, which include solids, liquids, or gases, to a reusable product
  • Headquarters facilities as defined in NAICS 551114
  • Warehousing activity projects (NAICS Subsector 493, projects which provide logistics services related to the distribution of goods)
  • Data processing centers
  • Renewable energy facilities
  • Research & development facilities
  • Tourism destination attractions
  • Projects owned by utilities that produce electricity from alternative energy resources
  • Projects owned by utilities that produce electricity from hydropower production

NAICS codes are subject to verification from the Alabama Department of Labor.

Capital Cost Requirement Industrial, warehousing or research activity projects (includes any process or treatment facility which recycles, reclaims, or converts materials, which include solids, liquids, or gases, to a reusable product), data processing centers, renewable energy projects, and research & development facilities:

    • $2,000,000 for projects not located in favored geographic areas
    • $500,000 for projects located in favored geographic areas
  • Small business addition: $1,000,000
  • Headquarters facilities: $2,000,000
  • Warehousing activity projects (NAICS 493):
    • $5,000,000 for projects not located in favored geographic areas
    • $1,000,000 for projects located in favored geographic areas

With the exception of headquarters facility projects, costs incurred under operating leases do not qualify as capital costs. By Regulation 810-2-7-.01, replacement equipment cannot be included in the capital costs of a project, unless it is upgraded equipment that increases capacity by 50%, decreases production time by 50%, or performs an additional function.

Employment Requirement 

  • Industrial, warehousing or research activity projects (includes any process or treatment facility which recycles, reclaims, or converts materials, which include solids, liquids, or gases, to a reusable product), renewable energy projects, research & development facilities and projects owned by utilities that produce electricity from hydropower production or alternative energy resources:
    • At least 20 new employees for projects not located in favored geographic areas
    • At least 5 new employees for projects located in favored geographic areas
  • Small business addition: at least 15 new employees
  • Headquarters facilities, data processing centers and warehousing activity projects (NAICS 493): at least 50 new employees

New employees must meet the statutory definition of new employees, found in Section 40-18-190(10). “New employees” cannot have worked at the site before and cannot have worked for the project entity in Alabama before. Required jobs must be provided by the date that is not later than one (1) year after the project is placed in service, continuing each year thereafter. Required jobs and average base wages for “warehousing activity projects” must be provided by the date that is not later than two (2) years after the project is placed in service and continuing each year thereafter.

Pursuant to Section 40-18-193(a), investing company’s qualifying project must create a net increase in employment. If an investing company places a qualifying project in service within two years of reducing its workforce, only the number of employees in excess of the number of employees who worked at the existing facility prior to the reduction shall be deemed to be new employees for the capital credit. The Department may require a two year look back period to determine if the existing employee base decreased prior to or during the commencement of the project. Further, if an investing company places a qualifying project in service within two years of closing a facility, only the number of employees in excess of the number of employees who worked at the existing facility prior to the closure shall be deemed to be new employees for the capital credit.

Wage Requirement

Section 40-18-193(a) requires the average wages for all new employees at the qualifying project be not less than the base wage requirement no later than one year after the project is placed in service and during each year the capital credit is available with respect to the qualifying project. Section 40-18-190(1) defines the base wage requirements for new employees for purposes of the capital credit. The base wage requirement for a qualifying project is determined based on the date the project’s Form INT is filed with the Alabama Department of Revenue and will be the minimum average wage the project must meet throughout the life of the capital credit.

For qualifying projects in which the investing company files a Form INT after November 21, 2009, the base wage requirement is defined as the lesser of a set average hourly wage rate, indexed annually as provided in Section 25-5-68, or the average hourly wage of the county where the qualifying project is located. The indexed wages and county wages are updated every January 1. For these projects, benefits are not included in determining the average wage requirement; however, overtime and bonuses are included.  Projects must meet the lesser of the annual indexed hourly rate for their type of project or the average hourly wage of the county where the qualifying project is located – both of which are determined based on the year the Form INT was filed.

Annual indexed hourly rate for projects located in favored geographic areas, for Form INTs received in a respective calendar year: 2015: $13.07; 2014: $12.97; 2013: $12.69; 2012: $12.44; 2011: $12.18; 2010: $12.00.  Annual indexed hourly rate for all other projects for Form INTs received in a respective calendar year: 2015: $16.33; 2014: $16.20; 2013: $15.85; 2012: $15.55; 2011: $15.23; 2010: $15.00.

There is an exception for direct processors of agriculture food products. These wages shall be determined by the local labor market rate. Contact the ADOR Office of Economic Development (334-242-1175) for more information.

Other Filing Requirements

  • A company must file a report of investment in project (Form INT-2) when the project is placed in service.
  • A company must file an Accounting Practices Agreement with the Department (under Section 40-18-192) before the capital credit can be utilized. This agreement denotes how the income from the project will be determined and is not necessarily the same method used in determining Alabama income.
  • Once the project has been placed in service and the Form INT-2 has been filed and accounting practices agreement has been executed, annual forms must be attached to the income tax return(s) claiming the capital credit. For more information, see the Capital Credit Forms page.

Noncompliance Provisions

Minimum statutory requirements must be met by the first year the project is placed in service and maintained annually thereafter to receive the credit. The project is ineligible for the credit if the requirements are not met by the first year the project is placed in service. After the first year, the law allows a project to fall below minimum employee and wage requirements for up to three of the twenty years of the life of the credit; however, no credit is available in a noncompliance year. After the third noncompliance year, the project is disqualified from the capital credit program.

For qualifying projects in which the investing company files Form INT with the Alabama Department of Revenue after May 22, 2009, if the qualifying project meets the minimum requirements by the first year but fails to meet such requirements in a subsequent year, the investing company shall forfeit a percentage of the capital credits claimed in the prior five years as follows:

  • 100% of the capital credit claimed in the year immediately preceding the year in which the investing company fails to maintain the employment and wage requirements (noncompliance year)
  • 20% of the credits claimed in the 2nd, 3rd, 4th, and 5th years preceding the noncompliance year

Direct questions regarding the applicability of the capital credit and how to qualify to:

Kelly Graham
Director of Economic Development
Office of the Commissioner of Revenue
P.O. Box 327001
Montgomery, Alabama 36132-7001
(334) 242-1175
(334) 242-1188 direct line
kelly.graham@revenue.alabama.gov