2020 Personal Taxes Law Changes

This subdivision was amended by the 2019 General Assembly to increase the amount of the North Carolina standard deduction for each filing status for taxable years beginning on or after January 1, 2020 to the following:

(Effective for taxable years beginning on or after January 1, 2020; SB 557, s. 1.(a), S.L. 2019-246.)

This sub-subdivision was amended to decouple North Carolina from the temporary increase in the charitable contribution deduction limit for qualified charitable contributions allowed under section 170 of the Internal Revenue Code (“Code”) for tax year 2020.

For tax year 2020, Section 2205 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) amended section 170 of the Code to temporarily increase the charitable deduction limit for qualified contributions from a maximum of 60% of an individual’s adjusted gross income (“AGI”) to 100% of AGI. For federal income tax purposes, an individual who claims itemized deductions for tax year 2020 may deduct qualified contributions of up to 100% of the individual’s AGI.

For purposes of the charitable contribution deduction allowed under G.S. 105-153.5(a)(2), the General Assembly adopted the Code as of January 1, 2020, which excludes the provisions of the CARES Act. Consequently, an individual who claims North Carolina itemized deductions for tax year 2020 may only deduct qualified contributions up to 60% of the individual’s AGI.

(Effective June 30, 2020; H1080, s. 1.(d), S.L. 2020-58.)

The Further Consolidated Appropriations Act (“FCAA”), enacted by Congress in December 2019, extended through tax year 2020, the federal provision that allows an individual an itemized deduction for mortgage insurance premiums paid or accrued by treating those premiums as qualified residence interest. North Carolina has historically decoupled from this provision of the Internal Revenue Code (“Code”).

Sub-subdivision b. was amended to extend the provision originally enacted effective for taxable years beginning on or after January 1, 2014, that caused North Carolina to decouple from the Code with respect to mortgage insurance premiums. As amended, an individual is not allowed a North Carolina itemized deduction for mortgage insurance premiums paid or accrued during the year and treated as qualified residence interest under the Code for tax years 2014 through 2020.

(Effective June 30, 2020; H1080, s. 1.(e), S.L. 2020-58.)

The Further Consolidated Appropriations Act (“FCAA”), enacted by Congress in December 2019, reduced the medical and dental expense deduction threshold from 10% of adjusted gross income (“AGI”) to 7.5% of AGI for tax years 2019 and 2020.

G.S. 105-153.5(a)(2)(c) provides that an individual is allowed a North Carolina itemized deduction for medical and dental expenses for the amount allowed as a deduction under section 213 of the Internal Revenue Code (“Code”) for that taxable year. On June 30, 2020, the 2020 General Assembly updated North Carolina’s reference to the Code to include federal tax provisions enacted as of May 1, 2020. As part of that update, the reference to section 213 of the Code was updated from January1, 2019 to May 1, 2020. As enacted, this change allows taxpayers who elect to deduct North Carolina itemized deductions to deduct qualifying medical and dental expenses that exceed 7.5% of AGI for tax years 2019 and 2020.

(Effective June 30, 2020; H1080, s. 1.(a), S.L. 2020-58.)

In 2009, federal law allowed certain taxpayers to elect to defer reporting cancellation of debt income in 2009 and 2010, and instead report the income on the federal return ratably over a five-year period beginning in 2014. The 2009 General Assembly chose not to adopt this provision of federal law. Instead, North Carolina law required an addition to federal taxable income in 2009 and 2010 for any amount of income deferred under Internal Revenue Code section 108(i)(1) and provided for a future deduction from federal taxable income for the amount deferred for federal tax purposes ratably over a five-year period beginning in 2014.

The 2020 General Assembly repealed this subdivision because there is no longer a need for the deduction.

(Effective June 30, 2020; H1080, s. 4.2, S.L. 2020-58.)

The General Assembly enacted S.L. 2020-97, which provided various forms of state tax relief to taxpayers affected by the COVID-19 pandemic. As part of this law, the General Assembly created the Extra Credit Grant program to be administered by the Department of Revenue (“Department”). As enacted, the Department was required to provide a one-time grant of $335 to eligible individuals as determined under Section 4.12(d) of S.L. 2020-97.

In addition, G.S. 105-153.5(b) was amended to add new subdivision (14), which provides an individual with a new North Carolina income tax deduction equal to the amount of the grant received during the tax year to the extent the individual includes the grant amount in the computation of adjusted gross income.

(Effective for taxable years beginning on or after January 1, 2020, and expires for taxable years beginning on or after January 1, 2021; H1105, s. 1.4.(a), S.L. 2020-97.)

The Tax Cuts and Jobs Act (“TCJA”), the Further Consolidated Appropriations Act (“FCAA”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (collectively, “federal tax provisions”) made significant changes to the federal individual income tax. To the extent North Carolina follows the Internal Revenue Code (“Code”) as enacted as of May 1, 2020, these provisions apply to North Carolina for purposes of calculating an individual’s income tax liability.

The General Assembly made extensive changes to subsection (c2) to decouple North Carolina from several federal tax provisions. These changes are as follows:

Cancellation of Qualified Principal Residence Indebtedness
The FCAA retroactively extended through tax year 2020 the exclusion from gross income for the discharge of qualified principal residence indebtedness under section 108 of the Code. The General Assembly chose not to adopt this provision of the Code. Instead, for North Carolina tax purposes, the cancelation of qualified principal residence debt is included in the calculation of North Carolina taxable income for tax years 2014 through 2020.

As enacted, subdivision (1) of subsection (c2) requires an individual, for tax years 2014 through 2020, to add to AGI, the amount of qualified principal residence debt discharged during the tax year excluded from federal gross income under section 108 of the Code.

Qualified Tuition and Related Expenses
The FCAA retroactively extended through tax year 2020 the deduction in arriving at adjusted gross income (“AGI”) for qualified tuition and related expenses under section 222 of the Code. The General Assembly chose not to adopt this provision of the Code. Instead, for North Carolina tax purposes, qualified tuition and related expenses are included in the calculation of North Carolina taxable income for tax years 2014 through 2020.

As enacted, subdivision (2) of subsection (c2) requires an individual to add to AGI income for tax year 2014 through 2020, the amount of qualified tuition and related expenses deducted during the tax year in calculating AGI under section 222 of the Code.

NOL Carryback Incurred in Tax Years 2018, 2019, and 2020
The TCJA generally eliminated net operating loss (“NOL”) carrybacks and permitted NOLs to be carried forward indefinitely. The CARES Act changed those rules temporarily by permitting NOLs incurred in 2018, 2019, and 2020, to be carried back for five years preceding the tax year of the loss, unless the individual elects to waive the carryback period.

The General Assembly chose not to adopt this provision of the Code. Instead, for North Carolina tax purposes, an NOL incurred in 2018, 2019, and 2020 carried back for federal tax purposes must be added to AGI for tax years 2013 and 2019.

As enacted, subdivision (8) of subsection (c2) requires an individual, for tax years 2013, 2014, 2015, 2016, or 2017, to add to AGI the amount of any 2018 NOL deducted and absorbed on a federal tax return under section 172 of the Code.

As enacted, subdivision (9) of subsection (c2) requires an individual, for taxable years 2014, 2015, 2016, 2017, or 2018, to add to AGI the amount of any 2019 NOL deducted and absorbed on a federal tax return under section 172 of the Code.

As enacted, subdivision (10) of subsection (c2) requires an individual, for taxable years 2015, 2016, 2017, 2018, or 2019, to add to AGI the amount of any 2020 NOL deducted and absorbed on a federal tax return under section 172 of the Code.

As enacted, subdivision (11) of subsection (c2) requires an individual, for taxable years 2013, 2014, 2015, 2016, 2017, 2018, or 2019, to add to AGI the amount of any 2018, 2019, or 2020 NOL carried back and deducted on a federal tax return pursuant to section 2303(b) of the CARES Act, but not absorbed in that year and carried forward to a subsequent year.

As enacted, subdivision (14) of subsection (c2) provides a deduction from AGI for the amount of NOL carryback deduction required to be added to a AGI under G.S. 105- 153.5(c2) (8), (9), or (10). An individual may deduct 20% of the amount added to AGI in tax years 2013 through 2019 in each of the first five taxable years beginning on or after January 1, 2021.

Note: The addition under G.S. 105-153.5(c2) (8), (9), or (10) is not required for farming losses carried back by the individual under the provisions` of section 172(b)(1)(B) of the Code. Moreover, the addition under G.S. 105-153.5(c2)(11) is not required if the individual is required to add the unabsorbed NOL to AGI pursuant to G.S. 105-153.5(c)(6).

Excess Business Loss Limitation for Tax Years 2018, 2019, and 2020
The TCJA amended section 461 of the Code to add subsection (l), which eliminated the ability of an individual to deduct trade or business losses greater than $250,000 ($500,000 for individuals filing a joint return) in any year that begins after December 31, 2017. The amount of business loss exceeding the 461(l) limitation is referred to as an “Excess Business Loss.” The CARES Act retroactively eliminated the excess business loss limitation for tax year 2018 and 2019 and deferred the effective date of the excess business loss limitation to tax years beginning on or after January 1, 2021. Thus, for federal income tax purposes, an individual can fully deduct their business losses for tax years 2018 through 2020.

The General Assembly chose not to adopt this provision of the Code. Instead, for North Carolina tax purposes, the excess business loss disallowance rules for individuals as defined in section 461(l) of the Code, pre-Cares Act, continue to apply.

As enacted, subdivision (12) of subsection (c2) requires an individual, for taxable years 2018, 2019, and 2020, to add to AGI an amount equal to the individual’s excess business loss, as defined under the provisions of section 461(l) of the Code as enacted as of January 1, 2019.

As enacted, subdivision (15) of subsection (c2) provides a deduction from AGI for the amount of excess business losses required to be added to AGI under G.S. 105- 153.5(c2)(12). An individual may deduct 20% of the amount added to an individual’s AGI in tax years 2018 through 2020, in each of the first five taxable years beginning on or after January 1, 2021.

Note: The addition under G.S. 105-153.5(c2) (12) is not required to the extent an individual’s excess business loss was added to AGI under G.S. 105-153.5(c2) (8), (9), or (10). Moreover, federal law provides Qualified Improvement Property (“QIP”) placed in service after 2017 now generally qualifies for 100% bonus depreciation under the CARES Act. North Carolina requires an individual to add back federal bonus depreciation in accordance with G.S. 105-153.6. QIP bonus depreciation should not be included in the calculation of the individual’s excess business loss to the extent the QIP bonus deprecation resulted in an addition to AGI pursuant to G.S. 105-153.6(a).

NOL Carryforward Limitation for Tax Years 2018, 2019, and 2020
The TCJA amended section 172 of the Code to impose a new 80% NOL limitation starting with NOLs generated after January 1, 2018. Under the provisions of the TCJA, a taxpayer’s NOL carryforward deduction was limited to 80% of federal taxable income without regard to the NOL deduction.

The CARES Act temporarily removed the 80% NOL limitation for tax years 2018, 2019, and 2020, reinstating the limitation for tax years beginning after December 31, 2020. Thus, for federal income tax purposes, for tax years 2019 and 2020, an individual can utilize 100% of an NOL carryforward from years 2018 or 2019 to offset federal taxable income.

The General Assembly chose not to adopt this provision of the Code. Instead, for North Carolina tax purposes, an NOL carryforward deduction taken in tax years 2019 or 2020, resulting from an NOL incurred in tax years 2018 or 2019, must be added to AGI to the extent that the federal deduction exceeds the amount allowed under the provisions of section 172 of the Code as enacted as of January 1, 2019 (i.e. pre-CARES Act).

As enacted, subdivision (13) of subsection (c2) requires an individual to add to AGI the amount by which the individual’s NOL carryforward deduction for an NOL arising in 2018, 2019, or 2020, exceeds the amount allowed under the provisions of section 172(a)(2)(B) of the Code, as enacted as of January 1, 2019.

As enacted, subdivision (16) of subsection (c2) provides a deduction from AGI for the amount of the 80% NOL carryforward deduction limitation required to be added to AGI under G.S. 105-153.5(c2) (13). An individual may deduct 20% of the amount added to an individual’s AGI in tax years 2019 and 2020, in each of the first five taxable years beginning on or after January 1, 2021.

Business Interest Expense Limitation
The TCJA amended section 163(j) of the Code to provide certain limits on the amount of business interest expense an individual could deduct in a taxable year. Under the TCJA, the amount of business interest expenses deductible in a tax year cannot exceed the sum of: (1) the taxpayer’s business interest income for the tax year, (2) 30% of the taxpayer’s adjusted taxable income (“ATI”) for the year, and (3) the taxpayer’s floor plan financing interest expense for the year. The CARES Act temporarily increased the limit on the amount of business interest expenses deductible from 30% of a taxpayer’s ATI to 50% of a taxpayer’s ATI for tax years 2019 and 2020.

The General Assembly chose not to adopt this provision of the Code. Instead, for North Carolina tax purposes, the business interest expense deduction remains at 30% of an individual’s ATI, (i.e. pre-CARES Act).

As enacted, subdivision (17) of subsection (c2) requires an individual, for tax years 2019 and 2020, to add to AGI an amount equal to the amount by which the individual’s interest expense deduction under section 163(j) of the Code exceeds the interest expense deduction that would have been allowed under section 163(j) of the Code as enacted as of January 1, 2020.

Employer Payments of Student Loans
The CARES Act excluded certain employer payments of student loans under section 127(c) of the Code from gross income for tax year 2020. The General Assembly chose not to adopt this provision of the Code. Instead, employer payments of a student loan under section 127(c) of the Code are included in North Carolina taxable income for tax year 2020.

As enacted, subdivision (18) of subsection (c2) requires an individual to add to AGI the amount excluded from gross income for payment by an employer, whether paid to the taxpayer or to a lender, of principal or interest on any qualified education loan, as defined in section 221(d)(1) of the Code, incurred by the taxpayer for education of the taxpayer.

Above-the-Line Deduction for Qualified Charitable Contributions
The CARES Act allows an eligible individual who does not itemize federal deductions in tax year 2020, to deduct $300 of qualified charitable contributions as an adjustment in determining AGI, (i.e., an “above-the-line” deduction). To qualify for the deduction, the contribution must be: (1) a cash contribution, (2) made to a qualifying organization as determined under the Code, and (3) made during the calendar year 2020.

The General Assembly chose not to adopt this provision of the Code. Instead, the amount of the “above-the-line deduction” taken on the federal return for qualified charitable contributions under the CARES Act must be added back to AGI for tax year 2020.

As enacted, subdivision (19) of subsection (c2) requires an individual to add to AGI the amount of qualified contributions excluded from AGI under section 62(a)(22) of the Code.

Payment Protection Program Loan Forgiveness and Expenses
The CARES Act allows an eligible individual to exclude the amount of a forgiven Payment Protection Program (“PPP”) loan from gross income. The General Assembly adopted this provision of the Code. Thus, for federal and state income tax purposes, the amount of a forgiven PPP loan is not includable in taxable income.

Importantly, the Internal Revenue Service (“IRS”) issued Notice 2020-32 to provide guidance to taxpayers regarding expenses paid using the proceeds of a PPP loan. According to the notice, business expenses that would normally be deductible in computing federal taxable income may not be deductible if the taxpayer uses funds from a forgiven loan to pay such expenses. The General Assembly adopted the position of the IRS by amending subdivision (c2) to require an individual to add to AGI the amount of any expenses that would normally be deductible under the Code that are excluded from AGI to the extent that payment of the expense resulted in forgiveness of a PPP loan.

As enacted, subdivision (20) of subsection (c2) requires an individual to add the amount of any expense deducted under the Code to the extent that payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act, and the income associated with the forgiveness is excluded from gross income pursuant to section 1106(i) of the CARES Act. Importantly, the term “covered loan” has the same meaning as defined in section 1106 of the CARES Act, (i.e., a PPP loan).

(Effective June 30, 2020; H1080, s. 1(f), S.L. 2020-58.)

This subsection was amended to codify an existing Department practice. G.S. 105-154(d) allows a nonresident partner that is not an individual to execute a nonresident partner affirmation, Form D-403 NC-NPA, to affirm that the nonresident partner will timely file a North Carolina income tax return and report the partner’s share of the partnership income to North Carolina. Form NC-NPA affirms that the nonresident partner will pay any income tax due with its applicable North Carolina tax return.

Under prior law, the statute did not give a due date for Form D-403 NPA to be filed. As amended, Form D-403 NPA must be annually filed by the nonresident partner and attached to the partnership return, Form D-403, when the partnership return is due to be filed. If the affirmation is not timely filed with Form D-403, the manager of the business is required to pay the tax on the nonresident partner's share of partnership income.

(Effective June 30, 2020; H1080, s. 4.3, S.L. 2020-58.)

If an individual’s North Carolina income tax liability after allowable tax credits and North Carolina tax withheld is $1,000 or more, the individual is required to pay estimated income tax as outlined in G.S. 105-163.15. If an individual underpays the amount of estimated tax due for the tax year, the Secretary is required to assess interest on the amount of the underpayment.

In response to the COVID-19 outbreak, the 2020 General Assembly enacted Session Law 2020-3 to provide state tax relief to North Carolinians. As part of this legislation, the Secretary is required to waive the accrual of interest from April 15, 2020, through July 15, 2020, (collectively the “COVID Period”) on an underpayment of tax imposed on estimated tax payments due during the COVID Period.

(Effective May 4, 2020; SB 704, s. 1.1.(a), S.L. 2020-3.)

This subsection was amended to correct a statutory reference that erroneously referred to G.S. 105-151. The 2013 General Assembly recodified G.S. 105-151 as G.S. 105-153.9, effective for taxable years beginning on or after January 1, 2014.

(Effective June 30, 2020; H1080, s. 4.1, S.L. 2020-58.)

The 2019 General Assembly amended this section by defining new terms and by simplifying existing terms that apply to Article 4A, effective January 1, 2020. The 2020 General Assembly made an additional change to this section by adding subsection (12a) to define an additional term that applies to Article 4. The changes are as follows:

Subsection (1) was amended to define “compensation” as “consideration a payer pays a payee.”

Subsection (6a) was added to define an “Individual Taxpayer Identification Number (ITIN)” as “a taxpayer identification number issued by the Internal Revenue Service to an individual who is required to have a U.S. taxpayer identification number but who does not have, or is not eligible to obtain, a Social Security number (SSN) from the Social Security Administration.”

Previous subsection (6a) was renumbered to subsection (6b) and was amended to define an “ITIN contractor” as “an ITIN holder who performs services [in North Carolina] for compensation other than wages.”

Previous subsection (6b) was renumbered to subsection (6c) and was amended to define an “ITIN holder” as “a person whose taxpayer identification number is an Individual Taxpayer Identification Number (ITIN), including applied for and expired numbers."

Subsection (9a) was added to define “payee” as any of the following:

a. A nonresident contractor 
b. An ITIN contractor 
c. A person who performs services in [North Carolina] for compensation that fails to provide the payer a taxpayer identification number. 
d. A person who performs services in [North Carolina] for compensation that fails to provide the payer a valid taxpayer identification number. The Secretary must notify a payer that a taxpayer identification number is not valid.

Subsection (10) was amended to define a “payer” as “a person who, in the course of a trade or business, pays compensation.”

Subsection (12a) was added to define a “Taxpayer Identification Number (TIN)” by cross-reference to G.S. 105-228.90(b)(9).

(Changes made by the 2019 General Assembly effective January 1, 2020; SB 523, s. 6.4.(a), S.L. 2019-169. Changes made by the 2020 General Assembly effective June 30, 2020; H1080, s. 4.4.(c), S.L. 2020-58.)

This subsection was amended by the 2019 General Assembly to require every payer who pays more than $1,500 in compensation to a payee to withhold state income tax from the compensation paid to the payee at a rate of 4%. For purposes of this subsection, the definitions of payer, compensation, and payee are defined in G.S. 105-163.1, as amended by section 6.4.(a) of Session Law 2019-169.

(Effective January 1, 2020; SB 523, s. 6.4.(b), S.L. 2019-169.)

The 2019 General Assembly amended this subsection to incorporate the term “payee” as defined in G.S. 105-163.1, effective January 1, 2020.

As amended and specifically stated in G.S. 105-163.3(d), a payer required to deduct and withhold from a payee's compensation under [G.S. 105-163.3] must file a return, pay the withheld taxes, and report the amount withheld in the time and manner required under G.S. 105-163.6 and G.S. 105-163.7 as if the compensation were wages.

(Effective January 1, 2020; SB 523, s. 6.4.(b), S.L. 2019-169.)

The 2019 General Assembly amended this subsection to incorporate the term “payee” as the term is defined in G.S. 105-163.1, effective January 1, 2020.

As amended and specifically stated in G.S. 105-163.3(f), a payer may refund to any person any amount the payer withheld improperly from the person under G.S. 105-163.3, if the refund is made before the end of the calendar year and before the payer furnishes the person the annual statement required by G.S. 105-163(d). An amount is withheld improperly if it is withheld from a payment to a person who is not a payee, if it is withheld from a payment that is not compensation, or if it is in excess of the amount required to be withheld under G.S. 105-163.3.

(Effective January 1, 2020; SB 523, s. 6.4.(b), S.L. 2019-169.)