Alabama R&D Tax Credit

Both the federal government and the states want to encourage research and development. Because of this, the federal and many state governments, including Alabama, offer a R&D tax credit incentive for both federal and state taxes on qualified research expenditures.

The Alabama R&D tax credit is:

• Valued at up to 1.5% of qualified research expenditures, for a period of up to 10 years (15 years for investments in certain underrepresented Alabama counties).

• A permanent part of the tax code so can be relied on for business tax planning

• Unlimited – there is no annual limit on the amount of funds that can be claimed for the credit

• Available to be utilized against tax liability for not only income tax, but also financial institution excise tax, insurance premiums tax, utility taxes, and, for utility companies, utility license tax.

Unused amounts of credit for the year are not refundable, but can be carried forward for up to five years.

Does your business qualify for the Alabama Research and Development tax credit?

• Do you conduct business in Alabama? If you currently do business in Alabama, you may be eligible for the Alabama R&D tax credit.

• Is your business an LLC, S corporation, C corporation, or partnership? Sole proprietorships do not qualify for the credit.

• Do you have business expenses that are qualified research expenditures (QRE’s)? For business expenses to qualify for the credit, they must meet the four-part test.

  • Qualified purpose – the expenses must be for creating a new business product or improving on a current one. Note that this product does not have to be something new to the industry in question, but merely to the company conducting the research.

  • Elimination of uncertainty – the company must have a general plan in place for how they are going to go about their inventing or improvement process. This can be gleaned and documented retrospectively with notes, emails, meeting minutes, etc.

  • Process of experimentation – the company must prove that they have tried one or more alternatives in their invention or improvement process. This experimentation does not have to be by traditional white-coated, degree-holding scientists. Anywhere there is experimentation taking place, no matter the employee’s job title, there is potential for research and development.

  • Technological in nature – the research in question must be based on one of the hard sciences, such as the various branches of engineering, chemistry, physics, or computer science.

If your business has expenses that meet all four of these criteria, you can submit proof of the expenditures and their purpose to the Alabama DOR to claim the credit.

Once you have determined that your business is eligible for the Alabama research tax credit, you must file proof of your business’s eligibility with the Alabama Department of Revenue through the My Alabama Taxes online portal. This proof can consist of anything that shows that your business’ research expenditures are qualified, including:

• general ledger detail

• payroll records

• project notes

• lab results

• emails and other business communications.

You must also submit an allocation schedule to demonstrate how your credit will be taken over the lifetime of the credit.

Ready to claim your credit? Call Endeavor Advisors at (512) 503-3080 to get started with the process.