Close
Close

Alabama increases and expands tax incentives

RFP
Contacts

Mike Eickhoff
Chicago
T +1 312 602 8929

Laura Gourley
San Francisco
T +1 312 602 8019

Luke Shreffler
Pittsburgh
T +1 412 586 3814

Eva Baker
Chicago
T +1 312 602 8425
On June 6, 2019, Alabama Gov. Kay Ivey signed into law H.B. 540, enacting the Alabama Incentives Modernization Act.1 Beginning Aug. 5, 2019, the legislation amends the Alabama Jobs Act to expand eligibility and provide credits to high-tech companies. Also, the legislation exempts capital gains received from selling high-tech companies and provides incentives for opportunity zone fund investments.

Expanded eligibility for Alabama Jobs Act The legislation is designed to increase economic development in rural Alabama by amending the Alabama Jobs Act to expand eligibility for incentives. Under existing law, an approved company with a qualifying project creating at least 50 jobs in most areas or at least 25 jobs in Alabama’s smaller population counties (“Targeted Counties”)2 is eligible to receive certain incentives.3 If an approved company and the governor enter into a project agreement, the company becomes eligible for: (i) a jobs credit against utility tax equal to 3 percent of the wages paid to eligible employees;4 and (ii) a non-refundable investment credit equal to 1.5% of the capital investment.5 The jobs credit may be paid annually for up to 15 years,6 while the investment credit is a non-refundable, one-time credit that may be used to offset:

  • Income taxes or an estimated payment of income tax;
  • Financial institution excise tax;
  • Insurance premium tax or an estimated payment of insurance premium tax;
  • Utility taxes; or
  • Some combination of the above, as long as the same credit is used only once.7

The legislation amends the Jobs Act by both expanding the definition of Targeted Counties to include those with a population of 50,000 or less and creating a second type of county eligible for incentives (“Jumpstart Counties”). Jumpstart Counties are counties that do not qualify as Targeted Counties, have experienced negative population growth over the last five years, and contain no more than two opportunity zones as they existed on June 1, 2019.8

As amended, the job requirement for an eligible project to be located in a Targeted County or Jumpstart County is at least 10 new employees.9 Further, a project will no longer be required to sell a majority of its output or services to businesses less than 50 miles away.10 Instead, projects will be required to involve, directly or indirectly, at least $2 million of capital.11 Projects in Jumpstart Counties are eligible for the enhanced benefits allowable to projects in Targeted Counties.12

New incentives for high-tech companies The legislation further amends the Jobs Act by adding a new statute that provides job and investment credits to technology companies13 with a project agreement providing that Alabama is or will become the company’s headquarters, the place of residence of its top three executives and the place of residence of at least 75% of its employees.14 The Secretary of Commerce must make an additional finding that the qualifying project will increase the economic diversity of, or otherwise benefit, the state. The jobs credit for technology companies includes an additional 2% above the standard credit.15

A new statute provides a tax exemption for the capital gain that a qualified employee16 or qualified investment fund17 receives from the disposition of an ownership interest in a qualified entity (certain technology companies).18 The exemption is applied to: (i) the income tax or the estimated tax payment; and (ii) the financial institution excise tax.19 A “qualified entity” must meet the following requirements:

  • As of Aug. 5, 2019, Alabama is not the company’s headquarters, the place of residence of its top three executives or the place of residence of at least 75% of its employees;
  • The company has at least 100 employees on the disposition date, which is the date the ownership interest is sold or disposed of, triggering a capital gain;20
  • Alabama is the company’s headquarters, the place of residence of its top three executives and the place of residence of at least 75% of its employees for at least three years before and five years after the disposition date; and
  • From the date the company makes Alabama its headquarters, until the date which is five years after the disposition date, the company meets the technology company criteria.21

Incentives for Opportunity Zone fund investment A new statute provides that Internal Revenue Code (IRC) Sec. 1400Z-2 (deferral of capital gains invested in opportunity zones) is applicable to an investment in an approved opportunity fund22 in calculating: (i) the income tax, or estimated income tax payments; and (ii) the financial institution excise tax.23 Also, any approved opportunity fund may enter into a project agreement with the Alabama Department of Economic and Community Affairs (ADECA) to provide the fund’s investors impact investment tax credits against: (i) the income tax, or the estimated income tax payment; and (ii) the financial institution excise tax.24 The impact investment tax credits are allocated annually, but only to the extent that the projects are not producing the returns provided in the project agreement. The qualified fund must receive a fixed portion of any distributions in excess of the amounts stated in the project agreement.25 Unused credits may be carried forward five years. The cumulative credits provided under this law may not exceed $50 million.26 The credits may not be allocated during the first four years of the fund, but credits may be allocated during the fifth year to account for inadequate aggregate returns during the first four years. ADECA may not enter into any project agreements under this provision after Dec. 31, 2024.27

Commentary The legislation’s expansion of the Jobs Act is designed to attract new and expanding businesses to Alabama’s rural and low-growth communities. Also, the legislation provides incentive opportunities for high-tech companies that are growing rapidly, including the ability to avoid capital gains tax when the businesses are sold at a profit. Further, the legislation amends the Jobs Act to increase the population threshold and create a new category of Jumpstart Counties so that more counties are eligible for the incentives, creating more opportunity for expansion in the state. Finally, the legislation adopts the capital gain deferrals for opportunity zone investments provided by the Tax Cuts and Jobs Act (TCJA) through its enactment of IRC Sec. 1400Z-2.28 The legislation also provides incentives for investing in opportunity zone funds by offering impact investment tax credits against income tax and financial institution excise tax if the funds are not producing the returns stated in the project agreements.


 
1 Act 2019-392 (H.B. 540), Laws 2019.
2 Prior to the recent amendments, Targeted Counties were Alabama counties with a population of 25,000 or less. ALA. CODE § 40-18-376.1(a).
3 ALA. CODE §§ 40-18-372(2); 40-18-376.1(c). The minimum job thresholds do not apply to a qualifying project in which the predominant activity involves chemical manufacturing, data centers, engineering, design, research, metal/machining technology or toolmaking.
4 ALA. CODE § 40-18-375(a). If the qualifying project is located in a Targeted County, the credit is 4 percent of the wages paid to the eligible employees during the prior year. ALA. CODE § 40-18-376.1(d).
5 ALA. CODE § 40-18-376.
6 The jobs credit is paid annually up to 10 years for projects in most areas but extends to 15 years if the project is in a Targeted County. ALA. CODE §§ 40-18-375(a); 40-18-376.1(a).
7 ALA. CODE § 40-18-376(a).
8 ALA. CODE § 40-18-376.1(a).
9 ALA. CODE § 40-18-376.1(c). Previously, the job requirement for a Targeted County was at least 25 new employees.
10 ALA. CODE § 40-18-376.1(d)(2).
11 ALA. CODE § 40-18-376.1(c).
12 Meaning that the jobs credit against utility tax is equal to 4 percent of the wages paid to eligible employees, and the jobs credit may be paid annually for up to 15 years. ALA. CODE §§ 40-18-375(a); 40-18-376.1(d)(1), (2).
13 A “technology company” is a company that earns at least 75% of its revenue from any of the following: (i) activities within certain North American Industry Classification System (NAICS) categories; or (ii) use of technology to develop new coding or processes for the creation or delivery of goods or services in the following fields: (a) education, healthcare, energy, agriculture, infrastructure, software, robotics, nutrition, aerospace, automotive or financial services; or (b) science, technology, engineering or mathematics. Alternatively, a “technology company” is a company which, for a fixed term, educates and mentors early-stage technology companies recruited to a location in Alabama, with the goal of accelerating the companies’ development and growth. ALA. CODE § 40-18-376.3(c).
14 ALA. CODE § 40-18-376.3(a).
15 ALA. CODE § 40-18-376.3(b).
16 A “qualified employee” is any employee of a qualified entity who meets all of the following: (i) the employee’s primary residence is not in Alabama on Aug. 5, 2019; (ii) the employee’s primary residence is in Alabama continuously for the period beginning three years prior to the disposition date and continuing for five years after the disposition date; (iii) within three months of the disposition date, the employee ceases employment at the qualified entity; (iv) within nine months of the disposition date, the employee begins employment at or ownership of another company that meets the technology company criteria; and (v) the employee demonstrates that he or she has an educational degree in certain specified areas. ALA. CODE § 40-18-8.1(c)(4).
17 A “qualified investment fund” is any company that meets all of the following: (i) the fund made its investment in the qualified entity after Aug. 5, 2019; and (ii) for a period of five years after the disposition date, the fund invests the money resulting from the disposition in another qualified entity. ALA. CODE § 40-18-8.1(c)(5).
18 ALA. CODE § 40-18-8.1(a).
19 ALA. CODE § 40-18-8.1(b).
20 ALA. CODE § 40-18-8.1(c)(2).
21 ALA. CODE § 40-18-8.1(c)(3).
22 ALA. CODE § 40-18-6.1(f)(2). An “approved opportunity fund” is any fund approved by ADECA that meets all of the following: (i) ADECA determines that the fund has the capacity to improve the state’s low-income opportunity zone communities by approving an application containing certain investment information; (ii) ADECA determines that the fund has committed to deploying a substantial portion of its capital into qualified opportunity zone property in Alabama within certain asset classes; and (iii) the fund commits to investing at least 75% of its committed capital in qualified opportunity zone property located in Alabama. The statute expressly adopts the definition from ALA. CODE § 41-10-47.01(b)(2), but the reference presumably should be ALA. CODE § 41-10-46.01(b)(2).
23 ALA. CODE § 40-18-6.1(a).
24 ALA. CODE § 40-18-6.1(b).
25 ALA. CODE § 40-18-6.1(c).
26 ALA. CODE § 40-18-6.1(d).
27 ALA. CODE § 40-18-6.1(g).
28 P.L. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.



This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.