Within the past few weeks, and at the urging of the Alabama Department of Commerce, the Alabama Legislature has added coal mining as a preferred industry for tax incentives in this state. This initiative reflects the state’s interest in helping certain capital intensive, job-creating industries grow in Alabama. For the first time, coal mining companies have potential access to valuable tax incentives for certain qualifying investments in Alabama. The incentives are available for a two-year period beginning March 1, 2012.

Tax Abatements

Businesses described in the 2007 NAICS Code Industry Group 2121 (Coal Mining) are now eligible to receive tax abatements under the Tax Incentive Reform Act of 1992 (Ala. Code Section 40-9B-1 et seq.) and capital credits under Article 7 of Chapter 18 of Title 40 of the Alabama Code (Ala. Code Section 40-18-190 et seq.). Qualifying businesses may receive abatements of sales and use taxes, ad valorem property taxes and mortgage/recording taxes not used for education. Such abatements are awarded by local public governing bodies. Unlike most abatements, only 50% of the state non-educational taxes may be abated for coal mining companies.

Qualifying projects include real and/or personal property acquired in connection with establishing or expanding a coal mining industrial or research enterprise in Alabama. If the project is a new project, there is no minimum cost required for eligibility. However, if the project is an addition to existing industrial development property, the costs of the addition must equal the lesser of 30% of the original cost of the industrial development property or $2,000,000.

Abatements of sales and use taxes apply to purchases of tangible personal property and taxable services incorporated into the project. Abatements of ad valorem property taxes apply to real and personal property incorporated into a qualifying project and not previously placed in service. Such property tax abatements last a maximum of the shorter of 10 years or the economic life of the property.

Capital (Income Tax) Credits

Qualifying businesses may receive capital or Alabama income tax credits against Alabama income tax liability generated by a qualifying project. If eligible, the capital credit equals 5% of the capital costs of the project incurred prior to the date on which the project is placed in service. The credit lasts for a period of 20 years. Notably, for coal companies, the capital credit will be reduced or eliminated for a qualifying project at the point that the capital credits claimed for a qualifying project equals 50% of the project’s capital costs. Also, for coal companies, the cost of acquiring land or the rights in land and the costs of architectural and engineering services do not qualify as eligible capital costs.

For capital credit purposes, project requirements depend on the location of the project. If the project is not located in a favored geographic area, the project must involve capital costs of at least $2,000,000, create 20 new full-time jobs and the new employees must be paid an average hourly wage of the lesser of $15 per hour or the average hourly wage of the county where the qualifying project is located (such figures are indexed annually). If the project is located in a favored geographic area (certain economically depressed areas), the project must involve capital costs of $500,000, create 5 new full-time jobs and the new employees must be paid an average hourly wage of the lesser of $12 per hour or the average hourly wage of the county where the project is located.

Certain communities in the State of Alabama have shown greater interest than others in providing these types of valuable tax incentives.

This alert is for information purposes only and should not be construed as legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information or an explanation about the matters discussed in this alert, please contact one of the attorneys listed above.