United States

Alabama provides overhaul of various credits and incentives

INSIGHT ARTICLE  | 

On June 6, 2019, Gov. Kay Ivey signed House Bill 540, known as the Alabama Incentives Modernization Act, amending the Growing Alabama Credit and Alabama Jobs Act in favor of businesses located in designated rural areas of the state, as well as those in the technology industry. The bill also amends prior legislation regarding the taxability of gains on the sale of ownership interests in certain technology companies by either employees or “qualified investment funds.” Additionally, the state now conforms to federal Opportunity Zones and expands the allocation of funds and tax credits for the Alabama Department of Economic and Community Affairs (ADECA). Finally, the legislation introduces new credit opportunities for insurance companies.

Growing Alabama Credit amendments

The Growing Alabama Credit is amended to broaden the definition of an economic development organization to include any non-profit state and local entity, as determined by the Alabama Department of Commerce. The Renewal of Alabama Commission must approve funding applications submitted by these economic development organizations. Preference is awarded to improvements at industrial sites with at least 1,000 acres of available space. The Commission must also reserve 25% of project credits for rural counties with a population less than 25,000.

Alabama Jobs Act amendments

The bill amends the Alabama Jobs Act definition of “targeted county” to one with a population of 50,000 or less, an increase of the previous amount of 25,000. The bill now defines a “jumpstart county” as a county that does not qualify as a “targeted county,” has experienced negative population growth over the last five years and contains no more than two Opportunity Zones. Qualifying projects in either a “targeted county” or “jumpstart county” must invest at least $2 million and create at least 10 new jobs, a reduction from the prior 25 job requirement. In addition to those amended provisions, the act now provides for the transfer of credits between entities subject to different Alabama taxes, such as the income tax, insurance premium tax and financial institution excise tax (FIET).  The Jobs Act also now allows an additional 2% credit for “qualifying technology companies.” To qualify, companies need to be headquartered in Alabama and the company’s top three executives and 75% of its employees need to be residents of the state.

An additional benefit for “qualifying technology companies” allows the exclusion of gains on the disposition of ownership interest in these qualified entities from state income and financial institutions excise taxes. For this benefit, “qualifying technology companies” must meet the definition provided under the Alabama Jobs Act, as of the effective date of House Bill 540, for a period of at least three years prior to and five years after the disposition date. To qualify, companies must also have at least 100 employees on the disposition date. The gain exclusion is allowed for “qualified investment funds” and “qualified employees.” “Qualified investment funds” need to invest in the qualified entity after the effective date of House Bill 540 and must invest the disposition funds in another qualified entity for a period of five years to be eligible for the exclusion. Qualified employees must primarily reside in Alabama for a period of at least three years prior to and five years after the disposition date. Those employees must also no longer be employed at the qualified entity within three months of the disposition, and must then be working for or own another “qualified technology company” within nine months of the disposition. The state must verify that the employee has an educational degree in a science, technology, engineering, or mathematics field.

Opportunity zone conformity

Alabama now also conforms to federal Opportunity Zones under the provisions of section 1400Z-2, and will provide a temporary deferral of the inclusion in gross income of capital gains that are reinvested in an investment in a state opportunity fund as approved by ADECA.  ADECA may also award fund investors with impact investment tax credits against income tax or financial excise tax liabilities, provided that the fund project is not producing the return on investment as defined by the project agreement. These legislative updates regarding opportunity funds are effective until Dec. 31, 2024.

Credits for insurance companies

Alabama has created two new credits for insurance companies, including the Insurance Offices Facilities Credit and Real Property Investment Credit. The Insurance Offices Facilities Credit allows an offset to the state’s various insurance premium taxes for insurers that own or lease offices in Alabama that are used for insurance operations. The credit is calculated based on the number of full-time employees at the Alabama insurance facility, and may not exceed one percent of taxable premiums. The Real Property Investment Credit is a credit of 0.10 percent of an insurer’s Alabama taxable premiums for each $1,000,000 in value of real property investments made in the state.

Takeaways

The Alabama Incentives Modernization Act is a comprehensive legislative overhaul that seeks to attract new businesses and incentivize the expansion of current businesses in rural areas and high-tech companies throughout the state. In particular, technology companies, insurance companies and companies located in or seeking to relocate to rural areas should be aware of these expanded credit opportunities. Also, any company that is located in an Opportunity Zone may benefit from the state’s revised opportunity fund incentives. Taxpayers should speak with their state and local tax adviser to evaluate eligibility for these credits and incentives.

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