2022 Corporate Taxes Law Changes

The 2021 General Assembly amended G.S. 105-122(d) to simplify how franchise tax is calculated by eliminating the fifty-five percent (55%) of appraised value of North Carolina property tax base and the investment in North Carolina property tax base. As part of this change, this subsection was amended to make conforming changes that a corporation or an affiliated group of corporations that owns more than fifty percent (50%) of the capital interests in a noncorporate limited liability company must include, pursuant to G.S. 105- 122, the same percentage of only the net worth base, instead of three tax bases. This change was needed to update the statute to the new language found in G.S. 105- 122(d).

(Effective for taxable years beginning on or after January 1, 2023, and is applicable to the calculation of franchise tax reported on the 2022 and later corporate income tax returns; SB 105, s. 42.3(b), S.L. 2021-180.)

The 2021 General Assembly amended G.S. 105-122(d) to simplify how franchise tax is calculated by eliminating the fifty-five percent (55%) of appraised value of North Carolina property tax base and the investment in North Carolina property tax base. As part of this change, this subsection was amended to eliminate the fifty-five percent (55%) of appraised value of North Carolina property tax base and the investment in North Carolina property tax base for each corporation identified as a holding company. This change was needed to update the statute to the new language found in G.S. 105- 122(d).

(Effective for taxable years beginning on or after January 1, 2023, and is applicable to the calculation of franchise tax reported on the 2022 and later corporate income tax returns; SB 105, s. 42.3(c), S.L. 2021-180.)

The 2022 General Assembly made two changes to this subsection.

Subdivision (2) was amended to clarify that a corporation may not artificially reduce its franchise tax base by making a non-interest bearing loan to an affiliate. As amended, it states that an addition for indebtedness is required in determining a corporation’s net worth for the amount it owes to a parent, a subsidiary, an affiliate, or a noncorporate entity in which the corporation or group of corporations owns directly or indirectly more than fifty percent (50%) of the capital interest of the noncorporate entity, unless the indebtedness creates qualified interest expense, as defined in G.S. 105-130.7B(b)(4).

(Effective June 29, 2022; HB 83, s.1.2., S.L. 2022-13.)

New subdivision (2b) was added by the 2022 General Assembly to clarify that the net worth of a foreign entity that is filing a federal income tax return is based on the value of the assets in the United States.

The federal Tax Cut and Jobs Act enacted in 2017 changed the way foreign income is sourced for federal purposes which led to a potential inconsistency in the way foreign income was taxed for state franchise tax purposes. Prior to adding this clarification, the taxpayer’s net worth base for franchise tax potentially included foreign attributes while the statutory apportionment requirement only permits the inclusion of domestic attributes. The statute now specifically states that only United States assets are included in the net worth base of a foreign entity.

(Effective for taxable years beginning on or after January 1, 2023, and is applicable to the calculation of franchise tax reported on the 2022 and later corporate income tax returns; HB 83, s.1.1.(a), S.L. 2022-13.)

The 2021 General Assembly amended this subsection to simplify how franchise tax is calculated by eliminating the fifty-five percent (55%) of appraised value of North Carolina property tax base and the investment in North Carolina property tax base. The elimination of the two tax bases using property values may reduce the franchise tax liability of corporations that have significant real and personal property investments in North Carolina by making a corporation’s tax base only its net worth base as set out in G.S. 105-122.

(Effective for taxable years beginning on or after January 1, 2023, and is applicable to the calculation of franchise tax reported on the 2022 and later corporate income tax returns; SB 105, s. 42.3(a), S.L. 2021-180.)

This section was amended by the 2021 General Assembly to phase out the corporate income tax imposed on C Corporations doing business in North Carolina beginning with the 2025 tax year. As amended, the tax is a percentage of the taxpayer’s state net income computed as follows:

Note: An S Corporation is not subject to the tax levied in this section.

(Effective for taxable years beginning on or after January 1, 2025; SB 105, s. 42.2.(a), S.L. 2021-180.)

The 2021 General Assembly retroactively amended this subdivision to provide that, for taxable years beginning on or after January 1, 2023, a taxpayer must add back 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.

This subdivision was re-written to require an addition to federal taxable income 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, this subdivision 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 federal taxable income 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, the 2021 General Assembly passed an amendment to conform North Carolina to the federal treatment of expenses paid by PPP loans for tax years 2020 through 2022.

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

Congress enacted the Employee Retention Tax Credit (ERC) in 2020 to offset federal payroll tax as part of pandemic relief efforts. This relief was allowed to be claimed as a credit against payroll tax to enable employers to more quickly receive the benefit of the credit.

Because the ERC is not technically an income tax credit but rather is a payroll tax credit, the 2021 General Assembly retroactively added subdivision (11a) to allow for a deduction from federal taxable income for the amount by which an ordinary and necessary business expense was required to be reduced or was not allowed under the Code because the taxpayer claimed a federal ERC against employment taxes in lieu of a deduction. As added, this new deduction is available retroactively but only to the extent that a similar credit is not allowed by this Chapter for the same amount.

(Effective retroactively for taxable years beginning on or after January 1, 2020; HB 243, s. 20.15.(b), S.L. 2022-6.)

The 2021 General Assembly added this subdivision to provide for a deduction from federal taxable income for the amount received by a taxpayer under the Business Recovery Grant Program to the extent it is included in federal taxable income.

The 2022 General Assembly amended this subdivision to add the ReTOOLNC grant program for recovery from the economic impacts of the COVID-19 pandemic as well as rent and utility assistance received pursuant to Section 3.3 of Session Law 2020-4 (as amended by Section 1.2 of Session Law 2020-97) to the list of allowable amounts to be deducted from federal taxable income, to the extent that it is included. It was also amended to change the effective date from taxable years beginning on or after January 1, 2021, and applying to amounts received on or after that date, to January 1, 2020, and applying to amounts received on or after that date.

(Effective for taxable years beginning on or after January 1, 2020, and applies to amounts received by a taxpayer on or after that date; HB 243, s. 20.7.(a), S.L. 2022-6.)

The 2022 General Assembly made two clarifying changes to this subsection.

Subdivision (4) was amended to provide that the qualified interest expense limitation does not apply to when the ultimate payee of the interest income from a related member does not meet one of the limitation’s exceptions set forth in the statute. This clarifies that a corporation cannot claim a qualified interest expense by creating multiple intercompany debt transactions to initially meet one of the exceptions from the limitation, but when interest is subsequently paid to a related member that would not have met the exception.

New subdivision (6) was added to define the term “ultimate payee” as a related member that receives or accrues interest directly from a related member or indirectly through related members.

(Effective June 29, 2022; HB 83, s.1.3., S.L. 2022-13.)

This subsection was amended to clarify that the provisions of North Carolina’s net loss calculations that are based on federal consolidated income tax filings must be computed on a separate entity basis. As amended, the statute now explicitly states that the Secretary must apply the standards contained in regulations adopted under sections 381 and 382 of the Code on a separate entity basis in determining the extent to which a loss survives a merger or acquisition.

(Effective June 29, 2022; HB 83, s.1.4., S.L. 2022-13.)

This subsection was amended to add reference to G.S. 105-130.8A(c) which clarifies what standards apply to carryforward in the case of mergers and acquisitions. As amended, the statute now states that except as provided in G.S. 105-130.8A(c), any unused portion of a net economic loss carried forward to taxable years beginning on or after January 1, 2015, is administered in accordance with G.S. 105-130.8A.

(Effective June 29, 2022; HB 83, s.1.4., S.L. 2022-13.)

This subdivision was amended to make a conforming change so that it reads the same as the corresponding language in the franchise tax statute. As amended, this subdivision now states that insurance companies subject to the tax on gross premiums as specified under G.S. 105-228.5 are exempt from corporate income tax; whereas, prior to the change, it stated that insurance companies paying the tax on gross premiums as specified under G.S. 105-228.5 are exempt from corporate income tax.

(Effective June 29, 2022; HB 83, s.1.5., S.L. 2022-13.)

This section was amended by the 2021 General Assembly as part of the legislation that created North Carolina’s SALT Workaround for PTEs. Subdivision (6) was added to define a taxed pass-through entity by cross-reference to G.S. 105-153.3.(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.5.(l), S.L. 2021- 180.)

This section was amended by the 2021 North Carolina General Assembly as part of the legislation that created North Carolina’s SALT Workaround for PTEs.

Subsection (d) was added to require taxed pass-through entities to make estimated tax payments in the same manner as a corporation subject to North Carolina income tax.

The 2022 General Assembly amended the subsection (d) to clarify that Article 4C does not apply to a taxed pass-through entity if the entity was not a taxed pass-through entity during the preceding tax year.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.5.(m), S.L. 2021-180. Amended effective June 29, 2022; H83, s. 2.4, S.L. 2022-13.)

This section was amended to provide that a captive insurance company is not entitled to claim a gross premium tax exemption as an inactive captive insurance company unless the company has been declared inactive by the Commissioner of Insurance of North Carolina. This declaration can be made if the captive insurance company has ceased transacting the business of insurance and has no remaining liabilities associated with policies written or assumed by the company. As amended, this declaration provides certainty for the Department of Revenue in identifying inactive captive insurance companies that are exempt from liability for gross premium tax. In addition, this section was amended to limit the tax exemption to any full year that the captive insurance company is inactive.

This section was also amended to prohibit waiver or modification of the conditions for declaring a company inactive unless the captive insurance company has been placed into supervision, receivership, or liquidation, pursuant to Article 30 of Chapter 58 of the General Statutes, and the Commissioner of Insurance has determined that payment of the minimum amount of tax required under G.S. 105-228.4A(f) will result in the company’s inability to meet its insurance obligations.

(Effective for premium taxes imposed for taxable years beginning on or after January 1, 2022; SB 347, s.9., S.L. 2022-7.)

The 2022 General Assembly has directed that this subsection be amended to eliminate the phrase “NC Health Choice” from the statute. As a result of the repeal of Article 2, Part 8 of Chapter 108A of the General Statutes, the Revisor of Statutes is directed to eliminate this phrase from wherever it appears in the General Statutes not already amended.

(Effective on the date that the NC Health Choice program is eliminated, as approved by the Centers for Medicare and Medicaid Services (CMS) in accordance with subsection (a) of this section. The Secretary of the Department of Health and Human Services shall report to the Revisor of Statutes and the Fiscal Research Division when the elimination of the NC Health Choice program has been approved by CMS and the specific date approved for that elimination to take place; HB 103, s.9D.15.(z), S.L. 2022-74.)

This subsection was amended to provide that two or more captive insurance companies under common ownership and control will be taxed as separate companies, if they are either a protected cell captive insurance company or a special purpose captive insurance company with a cell or series structure. As amended, this subsection now states that two or more captive insurance companies under common ownership and control, other than a protected cell captive insurance company or a special purpose captive insurance company with a cell or series structure, are taxed as a single captive insurance company.

(Effective for premium taxes imposed for taxable years beginning on or after January 1, 2022; SB 347, s.5.(a), S.L. 2022-7.)

This subsection was amended to specify the aggregate amount of tax payable by a special purpose captive insurance company with a cell or series structure having more than 10 cells or series.

As amended, this subsection now states that the aggregate amount of tax payable by a protected cell captive insurance company with more than 10 cells or a special purpose captive insurance company with a cell or series structure with more than 10 cells or series may not be less than ten thousand dollars ($10,000) and may not exceed the ($5,000) multiplied by the number of cells or series over 10, or two hundred thousand dollars ($200,000).

(Effective for premium taxes imposed for taxable years beginning on or after January 1, 2022; SB 347, s.5.(a), S.L. 2022-7.)

This new subsection (g) was added to provide that if a captive insurance company formed and licensed under the laws of another jurisdiction redomesticates to North Carolina prior to December 31, 2022 and obtains approval from the North Carolina Commissioner of Insurance pursuant to G.S. 58-10-380(g) to operate as a North Carolina-domiciled captive insurance company, it is exempt from premium taxes imposed by G.S. 105- 228.4A for the remainder of the year in which redomestication occurs and for the calendar year following its redomestication. As amended, this subsection expires for taxable years beginning on or after January 1, 2024.

(Effective for premium taxes imposed for taxable years beginning on or after January 1, 2021; SB 347, s.5.(b), S.L. 2022-7.)

The 2022 General Assembly has directed that this section be amended to eliminate the phrase “NC Health Choice” from the statute. As a result of the repeal of Article 2, Part 8 of Chapter 108A of the General Statutes, the Revisor of Statutes is directed to eliminate this phrase from wherever it appears in the General Statutes not already amended.

(Effective on the date that the NC Health Choice program is eliminated, as approved by the Centers for Medicare and Medicaid Services (CMS) in accordance with subsection (a) of this section. The Secretary of the Department of Health and Human Services shall report to the Revisor of Statutes and the Fiscal Research Division when the elimination of the NC Health Choice program has been approved by CMS and the specific date approved for that elimination to take place; HB 103, s.9D.15.(z), S.L. 2022-74.)

This subsection was amended by the 2021 General Assembly to make a substantive change limiting the gross premiums tax base for insurers of bail bonds to the amount paid by the surety bondsman to the insurer of the bail bonds. As amended, subdivision (b1) states that an insurer of bail bonds gross premiums tax is measured by amounts received by an insurer from a surety bondsman during the calendar year for bail bonds written on behalf of the insurer.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.8.(a), S.L. 2021-180.)

This subdivision was amended to correct a statutory reference. As amended, it now states that up to twenty percent (20%), as determined in accordance with G.S. 58-87-10(g), of the net proceeds of the additional tax on property coverage contracts must be credited to the Workers’ Compensation Fund. Previously, it stated that the amount was to be determined in accordance with G.S. 58-87-10(f), which was incorrect.

(Effective June 29, 2022; HB 83, s.1.6., S.L. 2022-13.)