HB390 By Representative Pringle RFD Technology and Research Rd 1 10-MAR-16

SYNOPSIS: Under existing law, there are no economic incentives or tax credits extended to Alabama businesses for qualified research expenses incurred by Alabama companies that spend funds and resources in-house, or pay Alabama research companies to conduct qualified research for new or improved products or services.

This bill would establish the Alabama Innovation Act that would provide for a research and development tax credit to certain Alabama companies modeled on the federal research and development tax credit. The credit would be 25 percent of research at an Alabama research entity, and 10 percent for other research conducted in Alabama. The credit could be taken against the income tax or the financial institution excise tax.

This bill would limit the Alabama Innovation tax credits to no more than twenty-five million dollars ($25,000,000) of credits per year, and no eligible company or business could claim more than 20 percent of the credits available in any year. The credits would be claimed on a first-come, first-served basis.

A BILL TO BE ENTITLED AN ACT

Relating to research and development tax credits; to add Article 17, commencing with Section 40-18-390, to Chapter 18 of Title 40 of the Code of Alabama 1975; to enact the Alabama Innovation Act; to allow a research and development tax credit for qualified research expenses in Alabama in the amount of 25 percent of research at an Alabama research entity, and 10 percent of other research in Alabama; to provide that no more than twenty-five million dollars ($25,000,000) of tax credits would be allowed in any year, and no one taxpayer would be allowed more than 20 percent of the credits available in any year; to provide that earned but unused credits could be carried forward for five years; to require that the tax credit only apply to research falling within certain industries; to provide for the promulgation of rules; and to provide for the coordination between the availability of the federal research credit and the credit created by this act.

BE IT ENACTED BY THE LEGISLATURE OF ALABAMA:

Section 1. This act shall be known and may be cited as the Alabama Innovation Act.

Section 2. Article 17, commencing with Section 40-18-390, is added to Chapter 18 of Title 40 of the Code of Alabama 1975, to read as follows:

Article 17. Alabama Innovation Act.

§40-18-390.

For the purpose of this article, the following words shall have the following meanings:

(1) ALABAMA RESEARCH ENTITY. One or more of the following:

a. A public or private university in the state.

b. A university research foundation affiliated with a public or private university in the state.

c. A public two-year college in the state.

d. A publicly owned hospital in the state.

e. An entity duly formed, domiciled, or qualified to do business in the state that meets each of the following criteria:

1. Is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended.

2. Is predominantly engaged in research and non-commercial development activities undertaken for the purpose of discovering information that is technological or biotechnological in nature, involves a process of experimentation, and the application of which is intended to be used in the development of a new or improved product, service, or treatment.

3. Has its headquarters and principal place of business in the state.

4. Has, or is anticipated to have, at least 75 percent of its property and payroll in Alabama, using the property and payroll factor calculations found in this title.

(2) APPROVED ACTIVITY. The conduct of an activity that is predominantly any one or more of the activities described in subdivision (1) of Section 40-18-372.

(3) CONSORTIUM RESEARCH EXPENSES. Any amount paid or incurred by the taxpayer to any Alabama research entity for qualified research, but not including any expenses for research activities performed outside Alabama.

(4) CONTRACT RESEARCH EXPENSES. Any amount paid or incurred by the taxpayer to any person other than an employee of the taxpayer for qualified research, but not including any of the following:

a. Consortium research expenses.

b. Expenses for research activities performed outside Alabama.

(5) DEPARTMENT. The Alabama Department of Revenue.

(6) IN-HOUSE RESEARCH EXPENSES. The meaning given in 26 U.S.C. § 41(b)(2), but not including wages paid or incurred to employees residing outside Alabama.

(7) QUALIFIED RESEARCH. The meaning given in 26 U.S.C. § 41(d), if conducted in Alabama in pursuit of an approved activity. In applying any terms in 26 U.S.C. § 41, the term shall have the meaning given herein.

§40-18-391.

(a) An innovation tax credit is allowed for qualified research conducted in Alabama. The tax credit shall be in an amount equal to the sum of the following:

(1) Ten percent of the in-house research expenses and contract research expenses for qualified research conducted in Alabama during the taxable year, minus 50 percent of the in-house research expenses and contract research expenses conducted in Alabama, on average, over the three taxable years preceding the taxable year for which the credit is being determined.

(2) Twenty-five percent of the consortium research expenses for qualified research conducted in Alabama during the taxable year, minus 50 percent of the consortium research expenses conducted in Alabama, on average, over the three taxable years preceding the taxable year for which the credit is being determined.

(b) The tax credit may offset the taxes levied by Chapter 16 and this chapter or as an estimated payment of the tax levied by this chapter, but not below zero. In no event shall the credits provided for by this article be allowed to reduce any estimated payment of the taxes levied by this chapter before October 1, 2016.

(c) All other state income tax credits shall be applied prior to the application of the tax credit provided in this section.

§40-18-392.

(a)(1) In any one year, if the innovation tax credit exceeds the amount of tax liability, the taxpayer may carry forward the unused tax credit. A carryforward shall not be allowed for more than five years.

(2) The department shall promulgate rules similar to those used for Section 40-18-15.2 that shall apply to this section.

(b) A taxpayer may assign and convey a tax credit to another entity if substantially all of the assets of the taxpayer are assigned and conveyed in the same transaction. Proof of such transfer shall be submitted to the department.

(c)(1) To the extent a tax credit under this article is used to offset a financial institution excise tax liability, in making the report required by subsection (d) of Section 40-16-6, the financial institution receiving the credit may not take into account the activity for which the tax credit is given.

(2) The Department of Finance shall promulgate rules to ensure that the credit in no case would reduce the distribution for municipalities and counties.

(d) To the extent that the tax credit is utilized by the taxpayer or by a transferee, no deduction for the related expenses shall be allowed.

§40-18-393.

(a) The maximum amount of innovation tax credits all taxpayers shall be allowed under Section 40-18-391 in any one year shall be limited to twenty-five million dollars ($25,000,000), and no taxpayer shall receive an innovation tax credit of more than 20 percent of the maximum amount awarded in a single tax year. The tax credits shall be allocated among various taxpayers using the procedures in this section.

(b) Each taxpayer wishing to claim a tax credit shall file an application with the department showing the amount of tax credit the taxpayer expects in good faith to claim during the tax year. An application may not show an expected claim in excess of 20 percent of the maximum amount awarded in a single tax year. The applications shall be submitted electronically to the department between March 15 and December 31, and the applications shall apply to the tax year that begins during that same calendar year.

(c) As applications are submitted, the department shall approve any applications the department deems sufficient, until the total approved applications represent twenty-five million dollars ($25,000,000) of anticipated tax credits. All applications received on the day that the twenty-five million dollar ($25,000,000) limit is reached shall receive approval for a pro rata share of the credits available at the start of that day. To the extent that the applications are not approved, the portion not approved shall be conditionally denied by the department. Taxpayers may continue to submit applications after the twenty-five million dollar ($25,000,000) cap is reached, and applications that the department deems sufficient shall be conditionally denied but maintained in the order received.

(d) As tax returns for the corresponding tax year are submitted, if they show that approved tax credits are not actually claimed for use in the current or a carryforward year, the department shall approve, in the order they were received, the applications that were conditionally denied until the approved applications represent twenty-five million dollars ($25,000,000) of anticipated tax credits. The department shall notify the benefitting taxpayers and allow them a reasonable period of time to make filings taking advantage of the tax credits.

(e) The calculations required to be made by the department shall be based on the initial returns filed by taxpayers who had tax credits approved. No taxpayer may amend a return to claim an approved innovation tax credit that was not claimed on its initial filed return, unless the amendment is to claim a credit conditionally denied.

§40-18-394.

(a) All filings made by a private party with any department of the state government shall be made using forms promulgated by the department. Any such filing shall be treated as a tax return, subject to penalties imposed by the Department of Revenue.

(b) Nothing in this article shall be construed to make available to any taxpayer any right to the benefits conferred by this article absent strict compliance with this article.

(c) The Department of Commerce and the Department of Revenue are authorized to promulgate rules as necessary to implement and administer this article.

(d) This article shall be construed generally to conform to 26 U.S.C. § 41, except for percentage reductions specified therein. In the event that credits under 26 U.S.C. § 41 are not allowed in any year, the credit provided in this article shall refer to 26 U.S.C. § 41, as it existed on the last day that it was allowed.

Section 3. All laws or parts of laws which conflict with this act are repealed.

Section 4. This act shall become effective on January 1, 2017, following its passage and approval by the Governor, or its otherwise becoming law.

Taxation

Tax Credits

Colleges and Universities

Internal Revenue Service

Financial Institutions

Taxpayers

Revenue Department

Code Added