2018 Corporate Taxes Law Changes

This subdivision was amended to change the definition of a “corporation” for purposes of franchise tax. The annual franchise tax is imposed on corporations doing business in this state. Previously, the definition included limited liability companies that elect to be taxed as corporations but did not include partnerships that elect to be taxed as corporations. This change includes partnerships that elect to be taxed as corporations in the definition of “corporation” and makes consistent the treatment of all business entities that either are corporations or choose to be taxed as corporations. This also makes franchise tax treatment consistent with income tax treatment.

(Effective for taxable years beginning on or after January 1, 2019 and applies to the calculation of franchise tax reported on the 2018 and later corporate income tax returns; SB 99, s. 38.2(a), S.L. 2018-5.)

This subsection was amended to eliminate some language, add new subdivision (1b) and delete subdivision (3).

Vague language was eliminated to make clear that if a corporation does not maintain its books and records in accordance with generally accepted accounting principles (GAAP), then its net worth is computed in accordance with the method the corporation uses for federal tax purposes.

Subdivision (1b) was added so that if a corporation uses an accounting method other than GAAP for federal tax purposes, then new subdivision (1b) requires that asset valuation, depreciation, depletion, and amortization be calculated for franchise tax purposes using the same method used for federal income tax purposes.

Subdivision (3) was deleted to prevent a double deduction of treasury stock that is already captured in the current franchise tax calculation.

(Effective for taxable years beginning on or after January 1, 2019 and applies to the calculation of franchise tax reported on the 2018 and later corporate income tax returns; SB 99, s. 38.2(b), S.L. 2018-5.)

This subdivision from the reorganization of G.S. 105-122 was amended to reinstate a deduction for any indebtedness specifically incurred and existing solely for and as the result of the purchase of any real estate and any improvements made on the real estate. The deduction was previously eliminated in the 2015 General Assembly franchise tax simplification changes. With the reinstatement of the deduction, the term “specifically” was added into the phrase “indebtedness incurred” to emphasize the connection of the debt incurred specifically to the real estate purchased or improved.

(Effective for taxable years beginning on or after January 1, 2020 and applies to the calculation of franchise tax reported on the 2019 and later corporate income tax returns; SB 628, s. 1.3(b), S.L. 2017-204.)

This subsection from the reorganization of the G.S. 105-122 was further amended to provide a future reduction in the franchise tax rate for S-Corporations. It provides that the franchise tax rate for an S-Corporation as defined in G.S. 105-130.2 is $200 for the first one million dollars ($1,000,000) of the corporation’s tax base and $1.50 per $1,000 of its tax base that exceeds one million dollars ($1,000,000). This rate reduction is for taxable years beginning on or after January 1, 2019 and will apply to the franchise tax reported on the 2018 and later corporate income tax returns.

(Effective for taxable years beginning on or after January 1, 2019 and applies to the calculation of franchise tax reported on the 2018 and later corporate income tax returns; SB 257, s. 38.6(a), S.L. 2017-57 and SB 628, s. 1.3(c), S.L. 2017-204.)

This section was rewritten to add an expiration date of January 1, 2023 for property not placed in service by that date. The credit for historic rehabilitation under Article 3D expired for expenditures incurred on or after January 1, 2015. However, the taxpayer could not claim the credit until the property was placed in service, which could be a different taxable year than when the expenditures were actually incurred. Prior to this change, there was not an expiration date for claiming the credit for historic rehabilitation property expenses incurred before January 1, 2015.

(Effective June 12, 2018; SB 99, s. 38.10(j), S.L. 2018-5.)

This section was rewritten to add an expiration date of January 1, 2028 for property not placed in service by that date. The credit for historic rehabilitation under Article 3L expires for expenditures incurred on or after January 1, 2020. However, the taxpayer could not claim the credit until the property was placed in service, which could be a different taxable year than when the expenditures were actually incurred. Prior to this change, there was not an expiration date for claiming the credit for historic rehabilitation property expenses incurred before January 1, 2020.

(Effective June 12, 2018; SB 99, s. 38.10(k), S.L. 2018-5.)

Effective for tax years beginning on or after January 1, 2019, the tax rate for C corporations is decreased from 3% to 2.5%.

(Effective for taxable years beginning on or after January 1, 2019; SB 257, s. 38.5(b), S.L. 2017-57.)

The 2015 General Assembly enacted legislation to require North Carolina to phase in a single sales factor apportionment formula over a three year period, beginning in tax year 2016. Under prior law, the apportionment formula consisted of the sum of the property factor, the payroll factor, and twice the sales factor divided by four. As amended, subsection (i) of G.S. 105-130.4 is rewritten as follows:

• For taxable year 2016, the sales factor is triple weighted. As such, all apportionable income of a corporation must be apportioned to North Carolina using an apportionment formula that consists of the sum of the property factor, the payroll factor, and three times the sales factor divided by five. 
• For taxable year 2017, the sales factor will be quadruple weighted. As such, all apportionable income of a corporation must be apportioned to North Carolina using an apportionment formula that consists of the sum of the property factor, the payroll factor, and four times the sales factor divided by six. 
• For taxable year 2018 and thereafter, the sales factor will be the only apportionment factor.

In addition, effective January 1, 2018, the following statutory provisions related to the property and payroll factor, as well as special apportionment rules that currently allow single sales factor apportionment, are repealed because they will no longer be necessary:

• G.S. 105-130.4(a)(6) - Definition of Public Utility 
• G.S. 105-130.4(a)(4) – Definition of an Excluded Corporation 
• G.S. 105-130.4(j) – Property Factor 
• G.S. 105-130.4(k) – Payroll Factor 
• G.S. 105-130.4(r) – Special Apportionment Rule for Excluded Corporations and Public Utilities 
• G.S. 105-130.4(s1) – Special apportionment Rule for a Qualified Capital Intensive Corporation.

(The amendment to triple-weight the sales factor is effective for taxable years beginning on or after January 1, 2016; HB 97, s. 32.14(a), S.L. 2015-241.)

(The amendment to quadruple-weight the sales factor is effective for taxable years beginning on or after January 1, 2017; HB 97, s. 32.14(b), S.L. 2015-241.)

(The amendment to a sales factor only apportionment formula and the repeal of the various special apportionment formulas is effective for taxable years beginning on or after January 1, 2018; HB 97, s. 32.14(c) and (d), S.L. 2015-241.)

This subsection was rewritten to codify the Department’s current practice and policy for sourcing sales to this state. Subparagraph 3(a), discussing receipts from the sale of real and tangible personal property, was rewritten to clarify that receipts from incidental services sold as part of, or in connection with, a sale of tangible personal property in this state are sourced to this state, regardless of where those services are performed. Subparagraph 3(c), discussing receipts from the sale of services, was rewritten to add the definition of “income-producing activity” already in current practice and policy. Specifically, it defines “income-producing activity” as an activity directly performed by the taxpayer or its agents for the ultimate purpose of generating the sale of the service. Additional clarifying language further provides that receipts from services, where the income-producing activity is performed within and outside this state are attributed to this state in proportion to the ratio of income producing activity performed in this state to the total income-producing activity performed everywhere.

(Effective June 12, 2018; SB 99, s. 38.2(c), S.L. 2018-5.)

This subdivision which requires an addback to federal taxable income of the amount allowed as a credit against the taxpayer’s corporate income tax was amended to repeal a reference to G.S. 105-130.47. G.S. 105-130.47 was the tax credit for qualifying expenses of a production company that expired for qualifying expenses occurring on or after January 1, 2015.

(Effective June 12, 2018; SB 99, s. 38.2(d), S.L. 2018-5.)

This subdivision, which requires an addback to federal taxable income of the amount excluded from gross income under section 199 of the Internal Revenue Code, has been repealed. Section 199 of the Code is the domestic production activities deduction for federal taxable income and the addback was needed because North Carolina decoupled from this federal deduction in 2005. Section 199 of the Code was repealed as part of the federal Tax Cuts and Jobs Act, making this state adjustment no longer necessary.

(Effective for taxable years beginning on or after January 1, 2018; SB 99, s. 38.1(e), S.L. 2018-5.)

This subdivision, which requires an addback to federal taxable income of the amount of a donation made to a nonprofit organization or a unit of state or local government for which a credit is claimed under G.S. 105-129.16H, has been repealed. G.S. 105-129.16H was the tax credit for donating funds to a nonprofit organization or a unit of state or local government to enable a nonprofit or government unit to acquire renewable energy property. It expired for donations made for renewable energy property placed in service on or after January 1, 2016 except as provided for taxpayers covered by G.S. 105-129.16A(f).

(Effective June 12, 2018; SB 99, s. 38.2(d), S.L. 2018-5.)

This subdivision requires an addback to federal taxable income of the amount of gain excluded from the taxpayer’s federal taxable income under IRC Section 1400Z-2 because the gain was reinvested into a qualified Opportunity Fund as defined under the Code. The purpose of this subdivision is to decouple from the deferral of gains reinvested into an Opportunity Fund available under federal law. The adjustment in this subdivision does not result in a difference in basis of the affected assets for state and federal income tax purposes.

(Effective June 12, 2018; SB 99, s. 38.1(b), S.L. 2018-5.)

This subdivision requires an addback to federal taxable income of the amount of gain permanently excluded from the taxpayer’s federal taxable income under IRC Section 1400Z-2 because the gain was accrued from the sale or exchange of an investment in an Opportunity Fund held for at least 10 years. The purpose of this subdivision is to decouple from the exclusion of gains from the sale or exchange of an investment in an Opportunity Fund available under federal law.

(Effective June 12, 2018; SB 99, s. 38.1(b), S.L. 2018-5.)

This new subdivision requires a taxpayer to add to federal taxable income the amount deducted pursuant to IRC Section 250. As part of the Tax Cuts and Jobs Act, IRC Section 250 allows deductions of percentages of foreign derived intangible income and global intangible low-taxed income. The purpose of this subdivision is to decouple from the deductions available under federal law.

(Effective June 12, 2018; SB 99, s. 38.1(b), S.L. 2018-5.)

This new subdivision requires an addback to federal taxable income of the amount deducted pursuant to IRC Section 965(c). As part of the Tax Cuts and Jobs Act, IRC Section 965(c) allows deductions for a portion of the IRC Section 965 repatriation income that reduces the overall tax rate for federal income tax purposes. The purpose of this subdivision is to decouple from the deductions available under federal law.

(Effective June 12, 2018; SB 99, s. 38.1(b), S.L. 2018-5.)

This subdivision was amended to allow a corporation a deduction from federal taxable income for the amount included in federal taxable income under IRC Sections 951A and 965, net of related expenses. These sections were added as part of Tax Cuts and Jobs Act. IRC Section 951A requires United States shareholders of any foreign controlled corporations to include its global intangible low-taxed income in its federal taxable income for the year. IRC Section 965 requires taxpayers with untaxed foreign earnings and profits to pay a tax as if those earnings and profits had been repatriated to the United States. Previously, this subdivision only allowed deductions for amounts included in federal taxable income under IRC Sections 78 and 951, net of related expenses but these IRC Sections were added to this subdivision to be consistent with treatment of other similar income.

(Effective June 12, 2018; SB 99, s. 38.1(b), S.L. 2018-5.)

This new subdivision was added to allow a corporation a deduction from federal taxable income for the amount paid to a taxpayer during the taxable year from the State Emergency Response and Disaster Relief Reserve Fund for hurricane relief or assistance to the extent included in federal taxable income. A taxpayer may not deduct any payment made to the taxpayer for goods or services provided by the taxpayer.

(Effective for taxable years beginning on or after January 1, 2017; SB 99, s. 5.6(k), S.L. 2018-5.)

This new subdivision was added to allow a deduction from federal taxable income of the amount of gain included in the taxpayer’s federal taxable income under IRC Section 1400Z-2 to the extent the same income was included in the taxpayer’s North Carolina taxable income in a prior tax year. The purpose of this subdivision is to prevent double taxation of income the taxpayer was previously required to include in the calculation of state net income.

(This subdivision was recodified from the original Session Law.)

(Effective June 12, 2018; SB 99, s. 38.1(b), S.L. 2018-5.)

This new subdivision was added to limit the unrelated business taxable income of an organization that is exempt from federal income tax under IRC Section 501(c)(3) as it relates to qualified parking facilities. As part of the Tax Cuts and Jobs Act, IRC Section 512(a)(7) requires tax exempt organizations to increase their unrelated business taxable income by any amount paid or incurred by the organization for any qualified transportation fringe benefits, any parking facility used in connection with qualified parking, or any on-site athletic facilities. The purpose of this subdivision is to decouple from the Tax Cuts and Jobs Act increase only as it relates to parking facilities.

(Effective for taxable years beginning on or after January 1, 2018; SB 99, s. 38.2(i), S.L. 2018-5.)

This section was amended as part of a series of changes to the state’s federal corrections statutes, which address a taxpayer’s obligation when the taxpayer’s federal taxable income is changed or corrected at the federal level and the change affects the amount of state tax payable. Specifically, the changes create a distinction between situations where the changes are a result of an action initiated by the Internal Revenue Service and situations where the changes are the result of an amended return voluntarily filed by a taxpayer.

The existing language in G.S. 105-130.20 was placed in new subsection (a) and was rewritten to clarify when a taxpayer must notify the Secretary of a federal determination that affects the amount of state tax payable. Subsection (a) also incorporates a cross-reference to a new definition of “federal determination” in G.S. 105-228.90 and makes other stylistic changes.

New subsection (b) was added to provide guidance to taxpayers who voluntarily file amended returns with the Internal Revenue Service and the adjustments affect state tax payable. New subdivision (b)(1) provides that if a taxpayer voluntarily files an amended federal return and the adjustment increases state tax payable, the taxpayer must file a state amended return within six months of filing the federal amended return.

New subdivision (b)(2) provides that if a taxpayer voluntarily files an amended federal return and the adjustment decreases state tax payable, the taxpayer may file a state amended return within the general statute of limitations for obtaining a refund.

New subsection (c) was added to impose penalties against a taxpayer who fails to file a required amended state return within the timeframes set within G.S. 105-130.20.

(Effective June 12, 2018 and applies to federal amended returns filed on or after that date; SB 99, s. 38.3(a), S.L. 2018-5.)

The percentage rate to be used in calculating the insurance regulatory charge under this statute is six and one-half percent (6.5%) for the 2018 and 2019 calendar years. This charge is a percentage of gross premiums tax liability.

(Effective June 12, 2018; SB 99, s. 22.2, S.L. 2018-5.)

This section was amended to add subsection (1b) which is the definition of a “foreign captive insurance company.” A “foreign captive insurance company” is defined as a captive insurance company as defined in G.S. 58-10-340(9), except that such company is not formed or licensed under the laws of this state but is formed and licensed under the laws of any jurisdiction within the United States other than this state.

(Effective June 12, 2018; SB 99, s. 38.2(e), S.L. 2018-5.)

This section was amended to clarify that the tax on captive insurance companies does not apply to a “foreign captive insurance company.” The amendment also added language to clarify that the newly defined “foreign captive insurance company” is not subject to corporate income tax, franchise tax, gross premiums tax or the insurance regulatory charge. However, this does not apply to foreign captive insurance companies for corporate income tax that are required to be included in a combined return.

(Effective June 12, 2018; SB 99, s. 38.2(f), S.L. 2018-5.)

This subsection was rewritten to add “foreign captive insurance company” to the list of exempt entities from the gross premiums tax.

(Effective June 12, 2018; SB 99, s. 38.2(g), S.L. 2018-5.)