2021 Personal Taxes Law Changes

Several statutes within Article 4 of Chapter 105 were added or revised to reduce the impact of the federal limitation on the individual state and local tax (“SALT”) deduction by allowing pass-through entities (“PTE”) to elect to pay North Carolina tax at the entity level. The PTE is allowed to deduct the full amount of its SALT payments as a business expense on its federal income tax return. This legislation will be referred to collectively as “North Carolina’s SALT Workaround for PTEs.” As part of this legislation, G.S. 105-153.3 was amended to add the following definitions:

• (18a) Taxed partnership. – A partnership for which a valid election under G.S. 105-154.1 is in effect. 
• (18b) Taxed pass-through entity. – A taxed S Corporation or a taxed partnership. 
• (18c) Taxed S Corporation. – Defined in G.S. 105-131(b).

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.5.(f), S.L. 2021- 180.)

This subdivision was amended by the General Assembly to increase the North Carolina standard deduction amount for each filing status for taxable years beginning on or after January 1, 2022. The new deduction amount for each filing status is as follows:

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.1.(b), S.L. 2021-180.)

This subsection was amended by the General Assembly to decrease the rate imposed on an individual’s North Carolina taxable income. The new rate for each tax year is as follows:

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.1.(a), S.L. 2021-180.)

This subsection was amended to increase the deduction amount for each dependent child for whom the taxpayer is allowed a federal child tax credit under section 24 of the Internal Revenue Code (“Code”). The increased deduction is equal to the amount listed in the table below based on the taxpayer’s federal adjusted gross income (“AGI”), as calculated under the Code:

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.1.(c), S.L. 2021-180.)

The Consolidated Appropriations Act, 2021, enacted by Congress in December 2020, extended through tax year 2021 the federal provision that temporarily increased the charitable contribution deduction limit for qualified charitable contributions from 60% of an individual’s federal adjusted gross income (“AGI”) to 100% of an individual’s AGI. The 2020 General Assembly amended G.S. 105-153.5(a)(2a) to refer to the Internal Revenue Code (“Code”) as of January 1, 2020, which excludes the temporary increase to the charitable deduction limitation. As such, an individual who claimed North Carolina itemized deductions for tax year 2020 could only deduct qualified charitable contributions up to 60% of the individual’s AGI.

The General Assembly amended this sub-subdivision for two purposes: first, to clarify the State’s decoupling provisions as they relate to the deduction of charitable contributions for State income tax purposes, and second, to extend the State’s reference to the Code as of January 1, 2020, through tax year 2021. As such, an individual who claims North Carolina itemized deductions for tax year 2021 may only deduct qualified charitable contributions up to 60% of the individual’s AGI.

(Effective November 18, 2021; SB 105, s. 42.4.(b), S.L. 2021-180.)

The Consolidated Appropriations Act, 2021, enacted by Congress in December 2020, extended through tax year 2021 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 decoupled from this federal provision since 2014. The General Assembly amended this sub-subdivision to extend the State’s decoupling provision through tax year 2021.

(Effective November 18, 2021; SB 105, s. 42.4.(b), S.L. 2021-180.)

This subsection was amended to add new subdivision (5a) to allow a taxpayer a deduction for specific payments received from the United States government. As amended, subdivision (5a) provides a deduction for the following:

a. Retirement pay for service in the Armed Forces of the United States to a retired member that meets either of the following: 
1. Served at least 20 years. 
2. Medically retired under 10 U.S.C. Chapter 61. Importantly, this deduction does not apply to severance pay received by a retired member due to separation from the member's armed forces.

b. Payments of a Plan defined in 10 U.S.C. § 1447 to a beneficiary of a retired member eligible to deduct retirement pay under sub-subdivision a.

(Effective for taxable years beginning on or after January 1, 2021; SB 105, s. 42.1A.(a), S.L. 2021-180.)

In 2020, the General Assembly created the Extra Credit Grant program (“Program”), which provided a one-time grant payment of $335 to eligible individuals. Under the provisions of the Program, for tax year 2020, an individual could deduct the grant payment when computing State taxable income to the extent it was included in the individual’s federal adjusted gross income.

In 2021, the General Assembly amended this subsection twice: first, to extend the deduction through tax year 2021 and second, to correct a statutory reference. The correct reference for the deduction is (b)(15).

(Effective November 18, 2021; SB 105, s. 42.13A.(a), S.L. 2021-180.)

This subsection was amended as part of the legislation that created a separate State net operating loss for individual income tax purposes. New subdivision (16) was added to allow a taxpayer to deduct the amount of State net operating loss allowed under the provisions of G.S. 105-153.5A.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.6.(a), S.L. 2021-180.)

This subsection was amended as part of the legislation that created a separate State net operating loss for individual income tax purposes. Subdivision (6) was amended to require an addition to an individual’s federal adjusted gross income (“AGI”) for the amount of federal net operating loss allowed as a deduction under the Internal Revenue Code.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.6.(a), S.L. 2021-180.)

This subsection was amended multiple times to decouple North Carolina from certain provisions included in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021 (“ARPA”). These amendments are as follows:

Cancellation of Qualified Principal Residence Indebtedness

Subdivision (1) was amended to extend through 2025 the requirement to add to a taxpayer’s federal adjusted gross income (“AGI”) the amount of qualified principal residence debt discharged during the tax year excluded from federal gross income under section 108 of the Internal Revenue Code (“Code”).

Employer Payments of Student Loans

Subdivision (18) was amended to extend through 2025 the requirement to add to a taxpayer’s AGI the amount of payment 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.

Paycheck Protection Program Loan Forgiveness and Expenses

Subdivision (20) was re-written to require an addition to AGI for the amount of any expense deducted under the Code to the extent the expense is allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes imposed by this Part.

Note: The addition is only required for expenses deducted in taxable years beginning on or after January 1, 2023.

Under prior law, subdivision (20) required an addition for the amount of any expense deducted under the Code to the extent the payment of the expense resulted in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act (a “PPP Loan”), and the income associated with the PPP Loan was not included in gross income. The addition to AGI for forgiven PPP Loan expenses was effective for taxable years beginning on or after January 1, 2020. Because the General Assembly chose to suspend the State’s PPP addback until tax year 2023, North Carolina conforms to the federal treatment of expenses paid by PPP loans for tax years 2020 through 2022.

Business-Related Expenses for Food and Beverages

Subdivision (21) was added to require an addition to AGI for the amount by which the taxpayer's deduction under section 274(n) of the Code for business-related expenses of food and beverages provided by a restaurant exceeds the deduction that would have been allowed under the Code as enacted as of May 1, 2020. As such, for tax years 2021 and 2022, an individual who fully deducts business-related expenses of food or beverages provided by a restaurant for federal tax purposes must add 50% of that deduction to AGI when calculating State taxable income.

Discharge of Student Loans

Subdivision (22) was added to require an addition to AGI for the amount excluded from the taxpayer’s gross income for the discharge of a student loan under section 108(f)(5) of the Code. As such, for tax years 2021 through 2025, an individual who does not include in gross income any amount of discharged student loan debt that would have been included in gross income but for the special provision included in ARPA must add the amount excluded when calculating State taxable income.

Unemployment Compensation

Subdivision (23) was added to require an addition to AGI for the amount excluded from the taxpayer’s gross income for unemployment compensation received by the taxpayer under section 85(c) of the Code. As such, for tax year 2020, an individual who did not include in gross income the first $10,200 in unemployment compensation because of a special provision included in ARPA must add the amount excluded in calculating State taxable income.

(Effective November 18, 2021; SB 105, s. 42.4.(c), S.L. 2021-180.)

The 2020 General Assembly added subdivision (17) to require an addition to federal adjusted gross income (“AGI”) for an amount equal to the amount by which the taxpayer's interest expense deduction under section 163(j) of the Internal Revenue Code (“Code”) exceeded the interest expense deduction that would have been allowed under the Code as enacted as of January 1, 2020, for tax years 2019 and 2020.

The General Assembly amended subdivision (17) to clarify that the addition is not required to the extent the amount is required to be added to the taxpayer’s AGI under another provision of North Carolina individual income tax law.

(Effective November 18, 2021; SB 105, s. 42.13A.(b), S.L. 2021-180.)

This subsection was amended to add subdivision (17a) to allow a deduction for twenty percent (20%) of the amount added to the taxpayer’s federal adjusted gross income pursuant to the provisions of G.S. 105- 153.5(c2)(17) in each of the first five taxable years beginning with tax year 2021.

(Effective November 18, 2021; SB 105, s. 42.13A.(b), S.L. 2021-180.)

This section was amended as part of the legislation that created North Carolina’s SALT Workaround for PTEs.

As part of these revisions, G.S. 105-153.5 was amended to add subsection (c3), which provides the following adjustments to a taxpayer's federal adjusted gross income (“AGI”):

Subdivision (1) was added to allow a deduction from AGI to a taxpayer that is a shareholder of a taxed S Corporation for the amount of the taxpayer's pro rata share of income from the taxed S Corporation to the extent the income was included in the taxed S Corporation's North Carolina taxable income and the taxpayer's AGI.

Subdivision (2) was added to require an addition to AGI to a taxpayer that is a shareholder of a taxed S Corporation for the amount of the taxpayer's pro rata share of loss from the taxed S Corporation to the extent the loss was included in the taxed S Corporation's North Carolina taxable income and the taxpayer's AGI.

Subdivision (3) was added to allow a deduction from AGI to a taxpayer that is a partner of a taxed partnership for the amount of the taxpayer's distributive share of income from the taxed partnership to the extent the income was included in the taxed partnership's North Carolina taxable income and the taxpayer's AGI.

Subdivision (4) was added to require an addition to AGI to a taxpayer that is a partner of a taxed partnership for the amount of the taxpayer's distributive share of loss from the taxed partnership to the extent the loss was included in the taxed partnership's North Carolina taxable income and the taxpayer's AGI.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.5.(i), S.L. 2021- 180.)

This section was added as part of the legislation that created a separate State net operating loss for individual income tax purposes.

New subsection (a) defines a “State Net Operating Loss” as the amount by which business deductions for the year exceed gross income for the year as determined under the Internal Revenue Code (“Code”), adjusted as provided in G.S. 105-153.5 and G.S. 105-153.6. The amount of a taxpayer's State net operating loss must also be determined in accordance with the following modifications:

(1) No State net operating loss deduction is allowed. 
(2) The amount deductible because of losses from sales or exchanges of capital assets cannot exceed the amount includable on account of gains from sales or exchanges of capital assets. 
(3) The exclusion provided by Code section 1202 is not allowed. 
(4) The North Carolina child deduction provided by G.S. 105-153.5(a1) is not allowed. 
(5) Deductions, which are not attributable to a taxpayer’s trade or business, are allowed only to the extent of the amount of the gross income not derived from such trade or business. 
(6) Any deduction under Code section 199A is not allowed.

New subsection (b) allows a deduction for the State net operating loss a taxpayer incurred in a prior taxable year and carried forward to the current taxable year, subject to the following limitations:

(1) The loss was incurred in one of the preceding 15 taxable years. 
(2) Any loss carried forward is applied to the next succeeding taxable year before any portion of it is carried forward and applied to a subsequent taxable year. 
(3) The taxpayer's State net operating loss deduction may not exceed the amount of the taxpayer's North Carolina taxable income determined without deducting the taxpayer's State net operating loss. 
(4) The portion of the State net operating loss attributable to the carryforward allowed under subsection (f) of G.S. 105-153.5A is only allowed to the extent described in subsection (f).

New subsection (c) provides that in the case of a taxpayer that is a nonresident in the year of the loss, the State net operating loss only includes income and deductions derived from a business carried on in this State in the year of the loss. In the case of a taxpayer that is a nonresident in the year of the deduction, the State net operating loss must be included in the numerator of the fraction used to calculate taxable income as defined in G.S. 105-153.4(b).

New subsection (d) provides that in the case of a taxpayer that is a part-year resident in the year of the loss, the State net operating loss includes income and deductions derived from a business carried on in this State while the taxpayer was a nonresident and includes business income and deductions derived from all sources during the period the taxpayer was a resident. In the case of a taxpayer that is a part-year resident in the year of the deduction, the State net operating loss must be included in the numerator of the fraction used to calculate taxable income as defined in G.S. 105- 153.4(c).

New subsection (e) provides that a taxpayer claiming a State net operating loss must maintain and make available for inspection by the Secretary all records necessary to determine and verify the amount of the deduction. The Secretary or the taxpayer may redetermine a State net operating loss originating in a taxable year that is closed under the statute of limitations for the purpose of determining the amount of loss that can be carried forward to a taxable year that remains open under the statute of limitations.

New subsection (f) provides that the portion of a taxpayer's federal net operating loss carryforward that was not absorbed in tax years beginning prior to January 1, 2022, may be included in the amount of a taxpayer's State net operating loss in taxable years beginning on or after January 1, 2022. The federal net operating loss carryforward is only allowed as a State net operating loss in tax years beginning after January 1, 2022, to the extent that it meets all of the following conditions:

(1) The loss would have been allowed in that taxable year under section 172 of the Code as enacted on April 1, 2021.
(2) The provisions of G.S. 105-153.5(c2)(8), (9), (10), (13), and (14) do not apply to the federal net operating loss carryforward. 
(3) The loss was incurred in one of the preceding 15 taxable years.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.6.(b), S.L. 2021- 180.)

This subdivision was amended to remove an obsolete reference to G.S. 105-134.6A. G.S. 105-134.6A was repealed effective for taxable years beginning on or after January 1, 2014.

(Effective November 18, 2021; SB 105, s. 42.13A.(c), S.L. 2021-180.)

This subsection was amended as part of the legislation that created North Carolina’s SALT Workaround for PTEs.

Subdivision (4) was added to address tax credits for taxes paid to another state or country in the context of North Carolina’s SALT Workaround for S Corporations. For taxed S Corporations paying taxes at the entity level in another state or country, G.S. 105-153.9(a)(4) prohibits the shareholders from claiming a North Carolina tax credit for taxes paid by the taxed S Corporation to another state or country. G.S. 105-131.1A(d) allows the taxed S Corporation to claim a credit against its North Carolina tax for such taxes paid to another state or country.

If a taxed S Corporation is not taxed at the entity level in another state or country and the tax due on the income is paid to the other state or country by its shareholders, the North Carolina resident shareholders may qualify to claim a tax credit under the provisions of G.S. 105-153.9(a)(4). In general, a taxpayer must have income taxed under Part 2 of Article 4 and tax imposed by Part 2 of Article 4 to calculate the amount of a tax credit under G.S. 105-153.9(a). Because both the State income and resulting State tax due are calculated and paid at the entity level, shareholders of taxed S Corporations do not meet this requirement.

Subdivision (4) provides clarification for calculating a shareholder’s credit in these circumstances. Specifically, a shareholder's pro rata share of the income of the taxed S Corporation is treated as income taxed to the shareholder under Part 2 of Article 4, and a shareholder's pro rata share of the tax imposed on the taxed S Corporation under G.S. 105-131.1A is treated as tax imposed on the shareholder under Part 2 of Article 4. Subdivision (5) was added to address tax credits for taxes paid to another state or country in the context of North Carolina’s SALT Workaround for partnerships. For partnerships paying taxes at the entity level in another state or country, G.S. 105- 153.9(a)(5) prohibits the partners from claiming a North Carolina tax credit for taxes paid by the taxed partnership to another state or country. The taxed partnership is entitled to a credit under G.S. 105-153.9(a) for all such taxes paid.

If a taxed partnership is not taxed at the entity level in another state or country and the tax due on the income is paid to the other state or country by its partners, the North Carolina resident partners may qualify to claim a tax credit under the provisions of G.S. 105-153.9(a)(5). In general, a taxpayer must have income taxed under Part 2 of Article 4 and tax imposed by Part 2 of Article 4 to calculate the amount of a tax credit under G.S. 105-153.9(a). Because both the State income and resulting State tax due are calculated and paid at the entity level, partners of taxed partnerships do not meet this requirement. Subdivision (5) provides clarification for calculating a partner’s credit in these circumstances. Specifically, a partner's distributive share of the income of the taxed partnership is treated as income taxed to the partner under Part 2 of Article 4 and a partner's distributive share of the tax imposed on the taxed partnership under G.S. 105-154.1 is treated as tax imposed on the partner under Part 2 of Article 4.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.5.(j), S.L. 2021- 180.)

This subsection was amended as part of the legislation that created North Carolina’s SALT Workaround for PTEs. New language was added to clarify that the provisions of subsection (d) do not apply to a taxed partnership.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.5.(g), S.L. 2021-180.)

This section was added as part of the legislation that created North Carolina’s SALT Workaround for PTEs.

New G.S. 105-154.1(a) allows a partnership to elect to have the income tax under Article 4 of Chapter 105 imposed on the partnership. The partnership must make the election on its timely filed annual return and may not revoke the election after the due date of the return (including extensions). The election cannot be made by a publicly traded partnership or by a partnership that has, at any time during the taxable year, a partner who is not one of the following:

(1) An individual; 
(2) An estate; 
(3) A trust described in section 1361(c)(2) of the Internal Revenue Code (“Code”); or 
(4) An organization described in section 1361(c)(6) of the Code.

New G.S. 105-154.1(b) imposes an income tax on the taxable income of a taxed partnership. The tax is levied, collected, and paid annually. The tax is imposed on the North Carolina taxable income of the taxed partnership at the rate levied in G.S. 105- 153.7. The North Carolina taxable income of a taxed partnership is determined as follows:

(1) North Carolina taxable income of a taxed partnership is equal to the sum of the following:
a. Each partner’s distributive share of the taxed partnership’s income or loss, subject to the adjustments provided in G.S. 105-153.5 and G.S. 105-153.6, attributable to North Carolina, and 
b. Each resident partner’s distributive share of the taxed partnership’s income or loss, subject to the adjustments provided in G.S. 105-153.5 and G.S. 105-153.6, not attributable to North Carolina.

(2) Separately stated items of deduction are not included when calculating each partner’s distributive share of the taxed partnership’s taxable income. Note: Separately stated items are those items described in section 702 of the Code and the regulations adopted under it.

(3) The adjustments required by G.S. 105-153.5(c3) are not included in the calculation of the taxed partnership's taxable income.

New G.S. 105-154.1(c) allows a taxed partnership that qualifies for a tax credit to apply each partner's distributive share of the taxed partnership's credits against the partner's distributive share of the taxed partnership's income tax. A partnership must pass through to its partners any credit required to be taken in installments pursuant to the provisions of Chapter 105 if the first installment was taken in a taxable period that the election was not in effect.

A partnership cannot pass through to its partners any of the following:

(1) Any credit allowed under Chapter 105 for any taxable period the partnership makes the taxed partnership election and the carryforward of the unused portion of such credit; 
(2) Any subsequent installment of such credit required to be taken in installments by this Chapter after the partnership makes the taxed partnership election and the carryforward of any unused portion of such installment.

New G.S. 105-154.1(d) allows a deduction for partners of a taxed partnership as specified in G.S. 105-153.5(c3)(3). This deduction is only allowed if the taxed partnership complies with the provisions of G.S. 105-154.1(f).

New G.S. 105-154.1(e) requires partners of a taxed partnership to make an addition as provided in G.S. 105-153.5(c3)(4).

New G.S. 105-154.1(f) requires the full amount of the tax payable as shown on the taxed partnership return to be paid to the Department within the time allowed for filing the return. In the case of any overpayment by a taxed partnership of the tax imposed under this section, only the taxed partnership may request a refund of the overpayment.

If the taxed partnership files a return showing an amount due with the return and does not pay the amount shown due, the Department may collect the tax from the taxed partnership pursuant to G.S. 105-241.22(1). The Department must issue a notice of collection for the amount of tax debt to the taxed partnership. If the tax debt is not paid to the Department within 60 days of the date the notice of collection is mailed to the taxed partnership, the partners of the partnership are not allowed the deduction provided in G.S. 105-153.5(c3)(3).

New G.S. 105-154.1(g) provides the basis of both resident and nonresident partners of a taxed partnership shall be determined as if the taxed partnership election has not been made and each of the partners of the taxed partnership had properly taken into account each partner's distributive share of the taxed partnership's items of income, loss, and deduction in the manner required with respect to a partnership for which no such election is in effect.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.5.(h), S.L. 2021- 180.)

This section was amended as part of the legislation that created North Carolina’s SALT Workaround for PTEs.

Subsection (f) was added to prohibit fiduciaries and beneficiaries of estates and trusts who are shareholders of a taxed S Corporation from claiming a tax credit for income tax paid to other states and countries paid by the estates and trusts or by the taxed S Corporation to another state or country on income that is taxed to the taxed S Corporation. The taxed S Corporation may, however, claim a tax credit under G.S. 105- 153.9(a)(4) for all such taxes paid.

Subsection (g) was added to prohibit fiduciaries and beneficiaries of estates and trusts who are partners of a taxed partnership from claiming a tax credit for income tax paid to other states and countries paid by the estates and trusts or by the by the estates and trusts or by the taxed partnership to another state or country on income that is taxed to the taxed partnership. The taxed partnership may, however, claim a tax credit under G.S. 105-153.9(a)(5) for all such taxes paid.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.5.(k), S.L. 2021-180.)

This subsection was amended to change the informational return filing requirements for an employer that terminates its business before the close of the calendar year. As amended, if an employer terminates its business, the informational return must be filed on or before the last day of the month following the end of the calendar quarter in which the employer terminates its business, but no later than January 31 of the succeeding year.

Note: The requirement to file an informational return with the Secretary within 30 days of the last payment of remuneration is no longer applicable.

(Effective November 18, 2021; SB 105, s. 42.13A.(d), S.L. 2021-180.)

This section was amended to add subsection (c), which provides that if a withholding agent fails to file a return and pay the tax due under Article 4A or files a grossly incorrect or false or fraudulent return, the Secretary has the authority to estimate the tax due and assess the withholding agent based on the estimate.

(Effective November 18, 2021; SB 105, s. 42.13A.(e), S.L. 2021-180.)