North Carolina Tax Reform Enacted (article)

North Carolina Tax Reform Enacted (article)

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On September 18, 2015, Governor Pat McCrory signed House Bill 97, the 2015 Appropriations Act, which includes significant changes to North Carolina law. Some of the more prominent changes include a reduction in the corporate income tax rate, a change in the apportionment formula, new reporting requirements and changes to the franchise tax base. Some changes went into effect January 1 while others are phased in over multiple years.

Corporate Income Tax Rate Reduction

A corporate income tax rate reduction to 3.0 percent will occur if a threshold amount in the “general fund” ($20,975,000,000) is satisfied by taxes collected for the preceding fiscal year. Most recently, the Department of Revenue announced that based on collections in the fiscal year ending June 30, 2015, the rate will be reduced to 4.0 percent (from 5 percent) for tax years beginning on or after January 1, 2016.

Phase-in of a Single Sales Factor Apportionment

North Carolina has historically used an apportionment formula containing a property factor, a payroll factor and a double-weighted sales factor. House Bill 97 phases in a single-sales factor apportionment over three years. Effective for tax years beginning in 2016, the sales factor will be triple-weighted. For tax years beginning on or after January 1, 2017, the sales factor will be quadruple-weighted. Single sales factor apportionment is fully effective for tax years beginning on or after January 1, 2018.

Market-based Sourcing Study and Required Disclosure

H.B. 97 provides that each multistate corporate taxpayer with apportionable income greater than $10 million and a North Carolina apportionment percentage less than 100 percent is required to file an informational return with the North Carolina Department of Revenue showing the calculation of the taxable year 2014 sales factor using market-based sourcing.  The 2014 sales factor is required to be computed based on the market-based provisions outlined in H.B. 97 as well as the model market-sourcing regulations established by the Multistate Tax Commission. The informational report will be due at the time the corporate taxpayer’s income tax return is due for the 2015 taxable year and must include the following:

  • The corporation’s apportionment percentage used on the corporation’s 2014 North Carolina corporate tax return,
  • The corporation’s 2014 apportionment percentage as calculated under the market-based sourcing rules provided in H.B. 97,
  • The corporation’s primary industry code under the North American Industry Classification System, and
  • Any other information prescribed by the Secretary of the Department of Revenue.

A penalty of $5,000 may be assessed for failure to file the information report.

Sales and Use Tax Changes

Effective March 1, 2016, retailers are subject to sales and use tax on the sales price of or gross receipts derived from repair, maintenance, and installation services. Additionally, the exemption for separately stated installation labor is repealed. A retailer does not include a person if:  

  1. The person solely operates as a real property contractor, or
  2. The person’s only business activity is providing repair, maintenance, and installation services where the person’s activities do not otherwise meet the definition of a retail trade. 

“Retail trade” means a trade in which the majority of revenue is from retailing tangible personal property, digital property, or services to consumers. The term specifically includes North American Industry Classification System sectors 44 and 45, buying goods for resale, and rendering services incidental to the sale of merchandise.

Related Member Interest Disallowance

Effective for tax years beginning on or after January 1, 2016, H.B. 97 provides for an additional addback to federal taxable income in the amount of “net interest expense” paid to a related member. “Net interest expense” is defined as the excess of interest paid or accrued by the taxpayer to a related member during the taxable year over the amount of interest from a related member includible in the gross income of the taxpayer for the taxable year. However, a corresponding subtraction has been added for qualified interest expense paid to a related member. “Qualified interest” is the net interest expense paid or accrued to a related member subject to a limitation of 30 percent of the taxpayer’s “adjusted taxable income.”

Franchise Tax Base Changes

Effective for tax years required to be filed on or after January 1, 2017 (the 2016 year report), changes will be made to the calculation of franchise tax due for most taxpayers.  Instead of referencing “issued and outstanding capital stock, surplus and undivided profits” to describe the tax base applicable to Schedule C of the corporate tax return, the new law references “net worth.”  Net worth is defined as total assets less total liabilities, without regard to accumulated depreciation, depletion, or amortization, as adjusted by several modifications. The North Carolina franchise tax rate will remain at $1.50 per $1,000 of taxable value. However, the minimum tax that applies to all taxpayers has been increased from $35 to $200. Additionally, the maximum franchise tax applicable to holding companies has been increased from $75,000 to $150,000.

For information on the North Carolina law changes, contact your local CBIZ MHM tax professional.


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North Carolina Tax Reform Enacted (article)House Bill 97 brought a significant update to North Carolina tax law....2016-01-26T15:36:00-05:00House Bill 97 brought a significant update to North Carolina tax law.