Joining a handful of other states with tax credits similar to the federal credit authorized by IRC §45D, Alabama has enacted a New Markets Development Credit to encourage investments in businesses in impoverished and low-income communities (see Act No. 2012-483 (H.B. 257)). The credit, which is effective August 1, 2012, is available against Alabama corporate and personal income, financial institutional excise, and premium taxes. However, it only applies to those areas within the state that qualify as a "low income community" under IRC §45D.
NOTE: Other states with similar credits include Florida, Illinois, Kentucky, Louisiana, Maine, Missouri, and Oregon.
Under the new Alabama law, the purchaser of the "qualified equity investment," or subsequent holder of an investment, earns a vested right to a tax credit equal to 0% of the investment amount for the first year and 8.33% of the investment amount for the next six years (for a total of 50% of the investment amount). There is $10 million limit on investments eligible for the credit. The credit is nonrefundable and may not be sold or transferred; however, unused credits may be carried forward to any of the taxpayer's subsequent taxable years. In addition, tax credits earned by a pass-through entity may be allocated to the owners, and the basis of a qualified equity investment is reduced by the amount of the credit.
A "qualified equity investment" is defined as any equity investment in, or long-term debt security issued by, a qualified community development entity (generally as defined by IRC §45D) that does all of the following:
• Is acquired after August 1, 2012, at its original issuance solely in exchange for cash;
• Has at least 85% of its cash purchase price used by the issuer to make qualified low-income community investments in qualified active low-income community businesses located in Alabama by the first anniversary of the issuance of the qualified equity investment; and
• Is designated by the issuer as a qualified equity investment and is certified by the Alabama Development Office (ADO) as not exceeding the $20 million cumulative credit limit (a qualified community development entity that seeks to have an equity investment or long-term debt security designated as a qualified equity investment eligible for the credit must apply to the ADO for certification).
The credit is subject to recapture if the federal credit under IRC §45D is recaptured or the taxpayer fails to invest at least 85% of the purchase price of the qualified equity investment in qualified active low-income community investments in Alabama within 12 months.
Finally, no landfill or dump – regardless of nature, toxic substance, trash, waste, household, chemical, or otherwise – can qualify for the credit.