PROCEDURES FOR CLAIMING THE CAPITAL CREDIT
Beginning January 21, 2020, the Annual Report for the Capital Credit (Form AR) is required to be submitted online through My Alabama Taxes (MAT). Paper filing of the Annual Report will no longer be accepted after January 21, 2020. Additionally, separate annual reporting procedures are now in place for entities that are organized as pass-through entities and C-corporations.
- Form AR-PTE: All project entities that are organized as pass-through entities must file Form AR-PTE. The new process requires the pass-through entity to submit the AR-PTE through MAT. Once the online submission has been reviewed, the pass-through entity will be notified whether the annual requirements have been met.
NOTE: The new system for processing credits will require the pass-through entity to submit the Form K-RCCs through MAT under the Credit Claim once the Form AR-PTE is approved.
- Form AR-C: All project entities organized as C-Corporations or financial institutions must file Form AR-C. The Form AR-C replaces the Form AR and Form K-RCC; as such, the Alabama income tax liability for the tax year in question must be known and included in the submission of the Form AR-C. Therefore, the Form AR-C should be submitted through MAT at the time of filing of the income tax return. The income tax return must be filed according to the normal filing requirements.
NOTE: All Capital Credit related transactions must go through MAT, and all involved parties must have a MAT account before moving forward in this procedure.
Instructions for Filing Forms AR-C and AR-PTE through MAT
Prerequisites for filing Form AR-PTE and Form AR-C
- Form INT-2 has been submitted to the Alabama Department of Revenue (ADOR) and approved by the Office of Economic Development.
- Executed Accounting Practices Agreement for the project must be on file with the Office of Economic Development.
Procedures for filing Form AR-PTE and Form AR-C
- Login to My Alabama Taxes using your login credentials.
- Once logged in, navigate to the Business Income Tax Account, Financial Inst Excise Tax, or Pass-through Entity under Accounts.
- Choose the Filing period for which you plan to claim the Capital Credit.
- Under the ‘I Want to’ section, click on the ‘Submit a Capital Credit Annual Report’.
- For Corporations and Financial Institutions – Fill out the Annual Report of Project for Capital Credit (Form AR-C) by following the detailed instructions below. Note! The new Form AR-C now includes the information previously provided in the Form K-RCC and must include the Alabama income tax liability (loss) for the tax year in question.
- For Pass-through Entities – Fill out the Annual Report of Project for Capital Credit for pass-through entities (Form AR-PTE). Note! For pass-through entities, Form K-RCC must be filed through MAT once the project is approved by ADOR. Click here for instructions on how to submit the Form K-RCC.
Section 1 – Information only
Please click “Next”
Section 2 – Project Information
Part I – Identification of Project
Complete the required fields as follows:
- Project Number – Enter the 10-digit project number assigned by ADOR.
- Project Name – If the project is doing business as (dba), enter the dba name. If the project entity has more than one qualifying project for the capital credit, include a project name that can identify each project. If the project is a SMLLC that is treated as a disregarded entity for Alabama tax purposes, enter the name of the SMLLC.
- Project’s Placed in Service Date (MM/DD/YYYY) – Enter the date the qualifying project was placed in service as filed on the original Form INT-2 for the project. If the project has been reviewed by ADOR and the placed in-service date was revised, enter the revised placed in-service date here. The capital credit runs for 240 months (12 months x 20 years) as of the date the project was placed in service (as revised if applicable).
- Type of Project – Indicate the type of project for which the project was approved for as filed on the original Form INT and Form INT-2.
- NAICS Code– Enter the North American Industry Classification System (NAICS) code for the project at which the predominant activity conducted will constitute an industrial, warehousing, or research activity as defined in §40-18-190(8) or §40-18-240(4). If the project is a Headquarters Facility, enter 551114 or 00000, whichever Headquarters Facility definition the project was originally qualified.
Part II – Report of Annual Project Status
Complete the required fields as follows:
- Number of employees employed by this project that meet the definition of a “New Employee” – Enter the number of New Employees employed by this project for this tax year filing that meet the definition of a New Employee. “New Employees are those persons who have not previously been employed at the site on which the project is or will be located or by an investing company or companies in the state; will be employed full-time at the qualifying project; and will be subject to the personal income tax imposed by §40-18-2, upon commencement of employment at the qualifying project”. Leased employees do not qualify as New Employees. Jobs for New Employees must be provided beginning with the date, which is no later than 1 year after the project is placed in service and each subsequent year during which the capital credit is available to the qualifying project.
A full-time employee is a person that works no less than 36 hours per week and is a common law employee of the investing company qualifying for the capital credit. A full-time employee does not include seasonal workers. Qualifying projects where the investing company is a party to a Professional Employer Organization Arrangement, the term full-time employee includes a person that works no less than 36 hours per week and is a “covered employee” as defined in §40-25-3(4), Code of Alabama 1975.
The minimum New Employment requirement for a new project or expansion project is 20 jobs. The minimum New Employment requirement for a small business addition is 15 jobs. The minimum New Employment requirement for a project that is located in a favored geographic area is 5 jobs. For Headquarters Facility projects that filed a Form INT on or before May 21, 2009, the minimum New Employment requirement is 20 jobs. For Headquarters Facility projects that filed a Form INT after May 21, 2009, data processing center projects, and warehousing activity projects, the minimum New Employment requirement is 50 jobs. If the New Employee requirement was not met for this tax period, the project entity is not entitled to receive the capital credit for this tax period. See §40-18-194(f) for more information.
- Average hourly wage for all “New Employees” that are included in the number of new employees listed above – Enter average hourly wage of the new employees of the project. §40-18-193(a) requires the average hourly wages for all new employees at the qualifying project to be no 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. For projects whose Form INT was filed after May 22, 2009, the base wage requirement is the lesser of the indexed hourly wage or the average hourly wage of the county where the project is located, excluding benefits. For these projects, the base wage requirement is determined as of the date the Form INT for the project was filed with ADOR and will remain constant throughout the life of the credit.
Projects whose Form INT were filed on or before May 22, 2009, the base wage requirement is either an average hourly wage of no less than $8 per hour or an average total compensation of no less than $10 per hour, including benefits. The above wage requirements do not include employees of direct processors of agriculture food products. These employees’ wages shall be determined by the local labor market or a source established by ADOR if reliable local labor market statistics is not available. If the wage requirement was not met for this tax period, the project entity is not entitled to receive the Capital Credit for this tax period. See §40-18-194(f) for more information.
Note! Each qualifying project must meet and maintain annual statutory employee and wage requirements specific to its type of qualifying project to utilize the Capital Credit as required by §40-18-193. A company shall be considered to have met the employment and wage requirements for the portion of the year following the date upon which such requirements are first met and for each full subsequent year thereafter if the employment requirement is satisfied for at least eleven twelfths (11/12) of each compliance year and the wage requirement is met based on an average determined over each compliance year.
If the project fails to meet the employee or wage requirements in the first year, the project is ineligible for the Capital Credit program. If the project becomes noncompliant in any subsequent year, the investing company will be ineligible to claim the annual credit available in the noncompliance year and shall forfeit a percentage of the Capital Credits claimed in the prior five years. The forfeiture shall equal 100% of the Capital Credits claimed in the year immediately preceding the year in which the investing company fails to maintain the employment and wage requirements, and 20% for each preceding year in the five-year forfeiture period. See §40-18-193, Code of Alabama 1975. An investing company will be disqualified for the remainder of the Capital Credit if the investing company fails to meet the minimum requirements after three noncompliance years (whether or not consecutive) within the 20-year period of the investing company’s Capital Credit.
- Is apportionment method used to determine tax liability? (If loss year, select “No”) – The project entity’s activity in Alabama is represented by the apportionment percentage. The apportionment factor is determined by the method of accounting designated to be used for the project, which is determined in the written agreement signed by ADOR and the Investing Company.
If the project entity is in a loss year, select “No” and complete Section 4 – Income Allocation.
If the apportionment method was designated in the written agreement, select “Yes.”
If the accounting practices agreement allocates the project income based on a separate accounting method other than by apportionment, select “No” and complete Section 4 – Income Allocation. A copy of the separate accounting schedule must be included in the attachments in Section 5- “Upload Attachments” before the Form AR-C/Form AR-PTE can be processed.
Section 3 – Apportionment Factor
All projects are required to have an executed Accounting Practices Agreement in place prior to utilizing the credit indicating how the project income will be determined. Complete the following factors based on the executed Accounting Practices Agreement.
Part I – Project Factor In the appropriate boxes enter the amounts (at cost, unless stated otherwise) of property available for use in the production of business (apportionable) income.
- Furniture and Fixtures
- Machinery and Equipment
- Buildings and Leasehold Improvements
- IDB/IRB Property (at cost) – This is property financed through industrial development boards or by industrial revenue bonds issued by municipalities. All industrial development board property utilized by the taxpayer will be included at its original cost.
- Government Property (at FMV) – All government property (whether local, state, or federal) when made available for use by the taxpayer, will be reported at its current fair market value.
- Less Construction in Progress – The amount to be subtracted if included in the above boxes.
- Annual Rental Expense – In the Beginning of Year boxes, enter the amount of expense for the rental of real or tangible personal property used in the production of business income in Project and Alabama. Annualize for short-period returns. The annual rent expense is multiplied by 8 to determine the capitalized rental value.
Part II – Payroll Factor
- Project Payroll – Enter the amount of salaries, wages, commissions and other compensation related to the production of business income in the project.
- Alabama Payroll – Enter the amount of salaries, wages, commissions and other compensation related to the production of business income in Alabama. (Include officers’ salaries.)
Part III – Payroll Factor
- Destination Sales – Enter the gross receipts from the Project destination sales except sales to the U.S. government. This includes total gross receipts from Project-related sales of tangible property shipped to Alabama from locations within Alabama.
- Origin Sales – Enter the amount of sales shipped from a Project origin to any state or foreign country where the corporation is not taxable. Also enter total sales to the U.S. government shipped from Project.
- Total Gross Receipts from Sales (Alabama) – Enter the total sales for Alabama.
- Dividends – Enter the gross business dividends for the Project and Alabama, if any.
- Interest – Enter the gross business interest income for both the Project and Alabama.
- Rents – Enter the gross business income from rents for both the Project and Alabama.
- Royalties – Enter the gross business income from royalties for both the Project and Alabama.
- Gross Proceeds from Capital and Ordinary Gains – Enter the gross receipts from the sale of disposition of assets used in the business for both the Project and Alabama.
- Other – Enter the amounts of other business gross receipts and identify the nature of such receipts and their location in the federal return.
Select the Accounting Practice Factor Method as dictated in the Executed Accounting Practices Agreement to determine the project apportionment factor.
Section 4 – Income Allocation
Part I – Project Income Calculation
- Total qualified capital costs as reported on Form INT-2, line 6 – enter the capital costs as identified on Form INT-2, line 6 as filed ADOR. If the project costs were revised pursuant to an audit by the ADOR, enter the revised capital cost amount.
- Capital credit amount available – Enter the annual capital credit available for the project entity as calculated on Form INT-2, line 6b (or multiply the total actual project costs from Form INT-2, line 6, by 5%). If the project costs were revised pursuant to an audit by ADOR, enter the revised capital credit available. The capital credit available will remain constant throughout the 20-year life of the qualifying project’s capital credit and will be the maximum amount available for the capital credit for this year. If the current filing year is a part-year, short-year, or a final tax year for the capital credit project, the credit must be prorated. The computation instructions below will ensure that all entities qualifying for the capital credit are allowed the full 240 months (i.e., 20 years x 12 months) of credit.
- Part Year – If the project has been placed in service during this tax year and has not been in service for the entire year (12 months), the credit available for the part year shall be prorated based on a ratio – the numerator of which is the number of days the project has been placed in service and the denominator of which is 365.
- Short Year – If the entity’s income tax return is for a tax period of less than one year, the credit available for the short period shall be prorated based on a ratio – the numerator of which is the number of days in the tax period, and the denominator of which is 365.
- Final Year – If this is the final year of eligibility for the capital credit and during the initial year the credit was prorated due to a part year or a short year, the credit available for the final year shall be prorated based on a ratio – the numerator of which is 365 less the numerator used in the calculation for the first year and the denominator of which is 365.
- Total income apportioned to Alabama – Enter the total income (loss) apportioned to Alabama for the project entity:
- For partnerships/LLCs, this will be line 28, Form 65 for tax return years 2016-2019.
- For S-Corporations, this will be line 27, Form 20S for tax returns 2016-2019.
- For C-Corporations, this will be line 8, Form 20C for tax return years 2016-2019.
- For Financial institutions, this will be line 25, Form ET-1 for tax return years 2018-2019.
- Project apportionment factor – For project’s utilizing the apportionment method, this amount is automatically calculated based on the apportionment factors in Section 3 -Apportionment Factor. For projects utilizing a separate accounting method for determining project income, the apportionment factor is not used.
- Non-business income (loss) allocated to the project in Alabama – Enter any nonbusiness income from the project allocated to Alabama if allocation method is used (please attach computational schedule, if applicable, in Section 5- Upload Attachments). For projects utilizing a separate accounting method for determining project income, this amount should be included in your total project income allocated and apportioned to the project.
- Total project income allocated and apportioned to project – For project’s utilizing the apportionment method, this amount is automatically calculated as follows: Total income apportioned to Alabama multiplied by the project apportionment factor plus any non-business income (loss) allocated to the project in Alabama. For projects utilizing a separate accounting method for determining project income, enter the project income here. A copy of the separate accounting schedule must be included in the attachments, in Section 5- Upload Attachments. The Form AR will not be processed without the separate accounting schedule.
***For Capital Credit Project Entities that are C-Corporations and Financial Institutions, proceed to Part II below. Pass-through entities are not required to follow Part II and can skip directly to Section 4 – Upload Employee Information.
Part II – Capital Credit Computation (for C-Corporations and Financial Institutions only)
- Alabama income before federal income tax deduction – For C-corporations, enter the Alabama Income before Federal Income Tax Deduction from Form 20C. For Financial institutions, enter the Alabama Income before Federal Income Tax Deduction from Form ET-1.
- Project entity’s Alabama income tax liability (from income tax return) – Enter the Alabama income tax liability. For C-Corporations, enter the Alabama Income Tax from Form 20C. For Financial institutions, enter the Financial Institution Excise Tax from Form ET-1. The tax return must be completed before the tax liability can be entered.
- Project entity’s tax liability generated by project income – The project’s tax liability is computed by the following formula: Total project income allocated and apportioned to project divided by Alabama income before federal income tax deduction multiplied by Project entity’s Alabama income tax liability. If the with/without method is used to determine the project’s income tax liability, enter the calculated amount here. You must follow Step 1 and Step 2 below to utilize the with/without method.
- Capital Credit eligible to be applied against project entity’s tax liability – The Capital Credit is the lesser of the annual credit available or the project entity’s tax liability generated by the project income.
Step 1 – If the with/without method is chosen, you must complete two federal income tax returns through the tax liability line. The return to be filed with the Internal Revenue Service should include the income from the project operations. A second return must be completed through the tax liability line but should not include the project income in Alabama. The federal income tax deduction related to the project income in Alabama is the difference in the amount shown on the return to be filed and the second return. If this taxpayer is a member of a group which files a consolidated federal income tax return, the federal income tax attributable to the project is the increase in the federal income tax apportionable to Alabama based on Alabama taxable income with and without project income.
Step 2 – Once you have completed the federal returns, you must complete two Alabama income tax returns through the tax liability line. The return to be filed with the Alabama Department of Revenue should include the income from the project operations. A second return must be completed through the tax liability line but should not include the project income in Alabama. The applicable federal income tax deduction should be indicated from the federal returns completed in Step 1. The Alabama tax liability generated by the project income in Alabama is the difference in the amount shown on the return to be filed and the second return. If this taxpayer is a member of a group which files a consolidated Alabama income tax return, the Alabama income tax attributable to the project is the increase in the Alabama income tax apportionable to Alabama based on Alabama taxable income with and without project income. The second returns should be maintained for audit purposes and are not to be filed with the first return.
Section 4 – Upload Employee Information
A list of all the employees meeting the definition of a New Employee must be submitted to verify that the new employee and average wage requirements have been met for the year. This list should match with the number of employees included in the “Number of employees employed by this project that meet the definition of a New Employee,” under Part II – Report the of Annual Project Status, under Section 2 – Project Information in this Annual Report. The list shall include the name of the employee, the Social Security Number (SSN), date of hire, date of termination (if applicable), total compensation, total hours worked, and average wage of the employee. Total compensation includes overtime and bonuses. If the employee is salaried, enter up to 2080 (depending on the company’s full-time status) for total hours worked. If the employee is hourly, include total number of hours worked, including overtime hours. Average wage is computed by dividing ‘total compensation’ by ‘total hours worked.’
Select “Download Employee and Wage Spreadsheet Template,” enter the required information in the pre-populated columns and save the file. Once saved, use the “Import” tab to upload the table.
Section 5 – Upload Attachments
Attach a copy of the Form INT-2 and any other required attachments with the filing of the Annual Report.
Section 6 – Review
Review the information and submit.
Once the Form AR-C/AR-PTE has been submitted, ADOR will review the form to determine if the project’s annual employee and wage requirements have been met.
- Annual employee and wage requirements have not been met – If the annual employee or wage requirements have not been met, the project entity will receive a web notification of failure to meet and will be ineligible to utilize the capital credit for this tax year.
- Annual employee and wage requirements have been met
- For C-corporations and financial institutions – The Form AR-C will be approved once the return has been reviewed and processed.
- For pass-through entities – A web notification and a letter from ADOR is sent to the project entity stating the Form AR-PTE has been approved. The letter will provide information detailing the procedures on how to claim the credit on the respective returns. For the pass-through project entity, a credit claim request via MAT is now required. To submit the credit claim request, please follow the instructions below.
Instructions on Submitting a Credit Claim Request for the Capital Credit for Pass-Through Entities
The instructions below are for pass-through entities only. C-corporations and financial institutions do not have to complete the following steps.
- Login to My Alabama Taxes using your login credentials.
- Once logged in, navigate to the Pass-through Entity under Accounts and then under the ‘I Want to’ section, click on the ‘Submit a credit claim’.
- Fill in the required fields in the next window:
- Credit type – Capital Credit.
- Project number – Enter the 10-digit project number.
- Filing period – The period in which you are claiming the credit.
- Annual Capital Credit available – The amount of credit available for this tax year under Form AR-PTE, Part IV Project.
- Owner’s information – manually input or import owners’ information, including pro rata share of ownership.
- Tip for entering Owner Information: Entities with numerous partners can select “Download Owner Information Spreadsheet” to enter owner information and percentage of ownership. Once downloaded, save the file. Then use the Import Tab to load the table in the credit claim. For future claims you can modify the spreadsheet as needed (i.e. adding/deleting partners or changing ownership percentage).
- Attachments – attach all Form KRCCs to be distributed to owners of the project. The credit claim will not be processed without the owners’ Form K-RCCs.
Upon submission of the above information, ADOR will review and a web notification is sent to the project entity notifying the approval status of the claim request. If approved, each member of the project entity will receive a letter from the department detailing the procedures on how to claim the credit on their respective returns. Depending on the type of entity, the letter will include the following information:
- A Business Income Tax taxpayer taking the credit must report the credit on Form 20C using Schedule BC to claim the credit against business income taxes due.
- A Financial Institution Excise Taxpayer taking the credit will report the credit on Form ET-1 using Schedule EC to take the credit against financial institution excise taxes due.
- A Pass-Through Entity taxpayer passing the credit to its members must log in to their MAT account, select the “Pass-Through Entity” account type, and under “I Want To” choose “Submit a Credit Claim.” After completing the process through MAT, the credit must be reported on the Schedule PC and on the pass-through members’ Schedule K1(s) when filing the Form 65 or Form 20S.
- A Fiduciary taxpayer can (a) claim the credit by reporting the credit on Form 41 using Schedule FC to take the credit against taxes due by the fiduciary or (b) pass the credit through to their beneficiaries by logging in to their MAT account, selecting the “Fiduciary” account type, and under “I Want To” choose to “Submit a Credit Claim.” After completing the process through MAT, the credit must be reported on Schedule FC and on the beneficiaries’ Schedule K1(s) when filing the Form 41.