How Alabama is Encouraging Businesses

The State of Alabama, a uniquely situated state with direct access to the Gulf of Mexico and four neighbouring states, is home to over five million people. Alabama’s strong arsenal of incentives has led the charge in recruiting companies to the state in recent years. Alabama, which has seen consistent growth in its economy since the turn of the century, is home to numerous businesses across a wide spectrum of industries including manufacturing, defence, automotive, healthcare, banking, insurance, construction, and agriculture. Small businesses, which make up the vast majority of Alabama businesses, employ approximately half of the State’s workforce. This guide to doing business in Alabama will provide a brief overview of the State’s growing infrastructure, strong business environment, favourable tax law, seamless business formation, key industries, and recent trends in real estate.

Infrastructure

Due to the increased migration of companies into the Alabama, the state has invested heavily in infrastructure to support sustained economic growth. Along Alabama’s southern coast lies the Port of Mobile, a deepwater port which consistently ranks as one of the busiest ports in the nation. Since 2000, the Port of Mobile has seen over USD500 million in capital improvements. In March 2022, a USD100 million federal grant was awarded to facilitate capital improvements to the Port of Mobile and the Mobile Downtown Airport. Around the same time, Alabama also launched the A-USA Corridor initiative which seeks to equip the State with the necessary rail and cargo infrastructure to support its growing economy. Notably, the first phase of the A-USA Corridor will link the Port of Mobile with growing economic development sites in and around Birmingham, a key metropolitan area in the central portion of Alabama. More recently, in May 2023, Alabama’s Birmingham Shuttlesworth International Airport broke ground with a USD27 million cargo facility. The new facility is expected to be used as a global logistics hub for both inbound and outbound international cargo flights. To the north lies Huntsville, one of the nation’s fastest growing metropolitan areas. Home to numerous aerospace and defence firms, Huntsville has undergone a series of recent infrastructure revitalisation projects to support its fast-growing economy.

In 2021, the US enacted the federal Infrastructure Investment and Jobs Act which will see approximately USD7 billion of funding awarded to the state for the purpose of improving Alabama’s infrastructure. Notable funding uses will include improvements to roads and bridges, expanded public transportation options, increased access to electric vehicle chargers, improved high-speed internet in rural locations, and improvements and expansions to airports.

Business environment

To assist with the recruitment of expanding businesses to the state, and to compete with neighbouring economies, Alabama offers a host of tax incentives. Three of the State’s most utilised incentives include the Jobs Credit, the Investment Credit, and the Growing Alabama Credit, each of which is briefly addressed below.

To stimulate job creation, the state offers a Jobs Credit for certain qualifying projects. Examples of business activities which are considered “qualifying projects” include manufacturing, transportation, warehousing, engineering, scientific research, aerospace, and national security. Depending on the type of project the company will undertake, a certain minimum number of net new full-time jobs (generally ranging from 10-50) will also need to be achieved. If a company qualifies, the Jobs Credit offers an annual cash rebate for up to ten years in an amount up to 3% of the company’s gross payroll for eligible Alabama residents. The amount of any such credit is increased if, for example, the project is located in a certain geographic area, is undertaken by a technology company, or is undertaken by a minority-owned business.

Alternatively, while similar to the Jobs Credit, the Investment Credit focuses on total capital investment rather than job creation. The company will still need to engage in a “qualifying project.” However, the company will need to invest a certain minimum level of capital depending on the geographic location of the project. If a company qualifies, the Investment Credit offers an annual credit of up to 1.5% of the company’s capital investment for up to ten years (and up to 15 years in the case of certain geographic locations).

The State of Alabama also offers the Growing Alabama Credit. This credit provides a funding mechanism for local economic development boards. In essence, an Alabama taxpayer can make a cash contribution to a local economic development board for certain “qualifying projects” (similar to the requirements discussed previously) and such taxpayer will receive a tax credit equal to the amount of the contribution.

The Jobs Credit, Investment Credit, and Growing Alabama Credit have been instrumental in stimulating economic growth across the state. In addition to any credits and incentives offered by the state, further incentives are often obtained from the local county and/or municipality where a project will be undertaken, which each have their owns rules and requirements regarding incentives.

In April of 2023, Alabama enacted an economic development package – referred to as the “Game Plan” signed into law by Alabama Governor Kay Ivey – aimed at expanding and strengthening Alabama’s current array of tax credits and incentives. The Game Plan includes four distinct bills, each with a unique aim at bolstering the State’s thriving economy. While portions of the Game Plan generally expand the Jobs and Investment Credits previously discussed, the Game Plan also includes the Site Evaluation and Economic Development Strategy Act which seeks to speed up the process of developing rural industrial sites by establishing a fund for the purpose of funding certain site assessment and site development grants. In addition, the Innovation and Small Business Act seeks to transform the state into a hub for innovation and technology companies by offering a credit which supports certain programmes related to technology accelerators and under-represented companies. Lastly, the Game Plan also enacted the Enhancing Transparency Act which requires the state to publicly disclose certain information about organisations receiving incentives.

Taxes

In addition to the federal income tax, the State of Alabama has enacted its own state income tax scheme which applies to individuals and businesses within Alabama. The state requires that income from partnerships, “S corporations”, and other “pass-through” businesses flow through to the individual owners and be included on such owner’s individual return at Alabama’s individual income tax rate. Alternatively, both domestic and foreign corporations are subject to a separate corporate tax. Domestic corporations (ie, corporations incorporated under the laws of the State of Alabama) are required to pay an income tax at the rate of 6.5%. Foreign corporations (ie, a corporation incorporated outside of the State of Alabama) are also required to pay an income tax at the rate of 6.5%, but domestic corporations which do business in multiple states are subject to special apportionment rules which apportion income among the multiple states in which such businesses operate.

In addition to the state income tax, all corporations, limited liability entities, and disregarded entities which do business in Alabama, or are registered to do business in Alabama, are required to pay an annual Business Privilege Tax. Any business entity which is subject to the Business Privilege Tax is liable for such tax for each taxable year during which the entity is in legal existence, regardless of the level of any business activity. In general, the minimum amount and maximum amount of the Business Privilege Tax is USD100 and USD15,000, respectively, and the exact amount is calculated based on a business’s net worth. Beginning in 2023, the minimum amount of the tax decreased to USD50, and in 2024, the minimum amount will be completely phased out.

In 2021, the state enacted the Alabama Electing Pass-Through Entity Tax Act which allows partnerships, S corporations, and other pass-through businesses to elect to pay the Alabama income tax at the entity level (as opposed to flowing through to the individual level, as discussed previously). The result of a proper Alabama Pass-Through Entity election would permit an electing entity to bypass the federal deduction cap on state and local income taxes paid, which is typically capped at USD10,000.

In addition to income taxes on individuals and businesses, the state also imposes various other taxes including property taxes, sales and use taxes, and employment taxes. As a result of Alabama’s income tax, the state imposes one of the nation’s lowest ad valorem (property) taxes (which is lower than those states which do not impose a separate state income tax). Similarly, the state imposes one of the nation’s lowest sales taxes at a rate of 4.0%. Though Alabama imposes its own property taxes and sales tax, counties and municipalities located within the state typically impose a further rate. Lastly, in addition to any potential federal withholdings, Alabama requires state withholdings including the withholding of state income tax, state unemployment tax, and workmen’s compensation insurance. Businesses may also be subject to local occupational fees and taxes.

Business formation and qualification

In 2019, Alabama enacted the new Alabama Business Corporation Law which also amended Alabama’s Limited Liability Company Law. The new laws impact the formation, governance, and operation of both corporations and limited liability companies formed under Alabama law. In June 2023, Alabama also enacted a new Nonprofit Corporation Law which similarly impacts non-profit corporations.

The formation of an Alabama business is relatively straightforward. The two most common Alabama entities are limited liability companies and corporations. Alabama was the 14th state to recognise and allow the formation of Limited Liability Companies in 1993 and the entity statute follows a Hub and Spoke model. Other entity types include non-profit corporations, general partnerships, limited partnerships, limited liability partnerships, benefit corporations, and series limited liability companies.

An Alabama limited liability company is organised in the State of Alabama by the filing of a name reservation and Certificate of Formation with the Alabama Secretary of State. While Alabama law provides certain default rules for the governance and operations of an Alabama limited liability company, state law also permits the members of a limited liability company to negotiate and override several of these rules via a limited liability company agreement. An Alabama limited liability company can be managed either by its members or one or more managers (which need not be members of the company). Alternatively, an Alabama corporation is incorporated in the State of Alabama by the filing of a name reservation and Certificate of Incorporation with the Alabama Secretary of State. While stockholders typically hold the voting rights, an Alabama corporation is usually governed by its board of directors. Corporations and limited liability companies formed in another state but seeking to do business in Alabama are required to file a name reservation and Foreign Application for Registration with the Alabama Secretary of State.

Depending on a business’s underlying operations, certain state and local licences and/or permits may also be required. In addition, businesses are required to file an annual report with the Secretary of State to provide certain information regarding the entity name, principal place of business, and registered agent.

In 2021, the US enacted the Corporate Transparency Act. When the Act, together with its accompanying final regulations, becomes effective on 1 January 2024, certain companies will be required to disclose beneficial ownership information. While several states have adopted this approach and have enacted laws with similar requirements, Alabama has not, as of the time of publication of this article, adopted any such provisions. However, an Alabama business will still be required to comply with the Federal Corporate Transparency Act.

Industries

In the 20th century, Alabama produced one of the world’s premiere steel and iron production industries. Since the turn of the century, Alabama has been shaped by its robust automotive, manufacturing, and defence industries. Home to manufacturing facilities of Honda, Austal, Hyundai, Mercedes-Benz, Dynetics, and Boeing, just to name a few, Alabama has become a top target for companies looking to expand. Huntsville, which is home to the Redstone Arsenal and the Marshall Space Flight Center, has become an ideal location for aerospace and national defence companies. Birmingham is enjoying an expansion in its leadership in world-class healthcare and biotechnology research.

Real estate trends

Effective as of 1 August 2023, the Alabama Property Protection Act places certain limitations on the ownership of Alabama real property by “foreign principals”. The Act applies to multiple foreign countries, but does not, however, apply to individual citizens. The Act defines a “foreign principal” as a government, government official, or political party (including their members) of a “country of concern”. For the purposes of the Act, the countries of concern are China, Iran, Russia, and North Korea. In addition, the types of real property covered by the Act include (i) agriculture and forest property, and (ii) any real property located within ten miles of a military installation or other “critical infrastructure facility” (which includes refineries, electric energy producing facilities, water treatment/wastewater treatment plants, liquid natural gas terminals, telecommunication central switching offices, gas processing plants, seaport facilities, aerospace or spaceport infrastructure, and airports).