2019 Personal Taxes Law Changes

This section was rewritten as part of the disaster relief provisions contained in Article 1A of Chapter 166A of the North Carolina General Statutes to help facilitate and expedite the state’s recovery after a natural disaster.

Prior to the enactment of S.L. 2019-187, every nonresident individual who derived income from a business, trade, profession, or occupation carried on in North Carolina was subject to North Carolina individual income tax.

After the enactment of S.L. 2019-187, the provisions of G.S. 105-153.2 do not apply to a nonresident business or to a nonresident employee if the nonresident business or nonresident employee derives income in North Carolina solely from performing disaster-related work during a disaster response period at the request of a critical infrastructure company. For the purposes of this section, the definitions of nonresident business, nonresident employee, disaster-related work, disaster response period, and critical infrastructure company are contained in G.S. 166A-19.70A.

For more information on North Carolina disaster relief, including definitions and related legislation, see Appendix A of this publication.

(Effective August 1, 2019, and applies to disaster declarations on or after that date; SB 498, s. 1.(j), S.L. 2019-187.)

Section 38.1.(j) of Session Law 2018-5 was amended to clarify that the change to G.S. 105-153.5(a) in section 38.1.(c) of Session Law 2018-5 was effective for taxable years beginning on or after January 1, 2018.

(Effective March 20, 2019; SB 56, s. 3.1, S.L. 2019-6.)

This subdivision was amended twice, once by the 2017 General Assembly and again by the 2019 General Assembly. The first amendment increased the amount of the North Carolina standard deduction for each filing status for taxable years beginning on or after January 1, 2019 to the following:

The second amendment further increased 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:

(The 2017 General Assembly amendment effective for taxable years beginning on or after January 1, 2019; SB 257, s. 38.2.(a), S.L. 2017-57. The 2019 General Assembly amendment 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 as part of a pair of conforming changes made to conform North Carolina law to federal income tax provisions that exclude from federal gross income a qualified charitable distribution (“QCD”) from an individual retirement plan by a person who has attained the age 70 ½ or older.

For tax years 2014 through 2018, North Carolina did not adopt the federal income exclusion for QCDs. Instead, G.S. 105-153.5(c2)(3) required a taxpayer to add to federal adjusted gross income the amount of QCD excluded from the taxpayer’s federal gross income. Similarly, for tax years 2014 through 2018, G.S. 105- 153.5(a)(2)a allowed a taxpayer to include the amount of QCD added to a taxpayer’s federal adjusted gross income as a North Carolina itemized deduction.

For taxable years beginning on or after January 1, 2019, the General Assembly adopted the federal income exclusion for QCDs. Consequently, G.S. 105-153.5(a)(2)a, which allowed a taxpayer to claim the QCD added to federal adjusted gross income as a North Carolina itemized deduction, was amended to limit its application to tax years 2014 through 2018.

(Effective November 1, 2019; HB 399, s. 1.(a), S.L. 2019-237.)

This subsection was amended to replace the term “dependent child” with the term “qualifying child.” This amendment was made to conform North Carolina law to section 24 of the Internal Revenue Code (“IRC”).

(Effective March 20, 2019; SB 56, s. 3.2, S.L. 2019-6.)

G.S. 105-153.5(b) was amended to add new subdivision (14) to make the necessary adjustments to decouple North Carolina from the federal provisions included in IRC section 118 that make certain grant proceeds from governmental entities taxable upon receipt as gross income.

Prior to the enactment of the federal Tax Cuts and Jobs Act (“Act”) in 2017, IRC section 118 excluded from gross income "any contribution to the capital of the taxpayer." Under the Act, IRC section 118 was amended to expressly provide that the term "contribution to the capital of the taxpayer" does not include "any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such)."

Prior to the enactment of the federal Tax Cuts and Jobs Act (“Act”) in 2017, IRC section 118 excluded from gross income "any contribution to the capital of the taxpayer." Under the Act, IRC section 118 was amended to expressly provide that the term "contribution to the capital of the taxpayer" does not include "any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such)."

(Effective for taxable years beginning on or after January 1, 2019, and applies to amounts received on or after that date; HB 399, s. 2.(b), S.L. 2019-237.)

This subdivision was amended as part of a pair of conforming changes made to conform North Carolina law to federal income tax provisions that exclude from federal gross income a qualified charitable distribution (“QCD”) from an individual retirement plan by a person who has attained the age 70 ½ or older.

For tax years 2014 through 2018, North Carolina did not adopt the federal income exclusion for QCDs. Instead, G.S. 105-153.5(c2)(3) required a taxpayer to add to federal adjusted gross income the amount of QCD excluded from the taxpayer’s federal gross income. Similarly, for tax years 2014 through 2018, G.S. 105-153.5(a)(2)a allowed a taxpayer to include the amount of QCD added to taxpayer’s federal adjusted gross income as a North Carolina itemized deduction.

For taxable years beginning on or after January 1, 2019, the General Assembly adopted the federal income exclusion for QCDs. Consequently, G.S. 105-153.5(c2)(3), which required an addition to federal adjusted gross income for the amount of the QCD, was amended to limit its application to tax years 2014 through 2018.

(Effective November 1, 2019; HB 399, s. 1.(b), S.L. 2019-237.)

This subdivision was amended to change a statutory reference from IRC section 1400Z-2(b) to IRC section 1400Z-2(a).

(Effective March 20, 2019; SB 56, s. 3.3, S.L. 2019-6.)

This subdivision was amended to replace the term “adjusted gross income” with the term “North Carolina taxable income.”

In 2018, the North Carolina General Assembly decoupled from federal law which allows a taxpayer to defer gains from investments in Opportunity Zones. Under G.S. 105-153.5(c2)(5), a taxpayer is required to add to federal adjusted gross income any gain deferred or excluded from the taxpayer’s adjusted gross income pursuant to the provisions of IRC section 1400Z-2. To prevent double taxation, G.S. 105-153.5(c2)(6) allows the taxpayer to deduct from federal adjusted gross income the amount of gain previously required to be included in the calculation of North Carolina taxable income.

Prior to the enactment of this legislation, the statute referred to gain that was included in the taxpayer's federal adjusted gross income. G.S. 105-153.5(c2)(6) was rewritten to correct the terms to conform with the intent of the 2018 legislation.

(Effective March 20, 2019; SB 56, s. 3.3, S.L. 2019-6.)

This subsection was amended by the 2017 General Assembly to decrease the income tax rate imposed on an individual’s North Carolina taxable income for taxable years beginning on or after January 1, 2019 from 5.499% to 5.25%.

(Effective for taxable years beginning on or after January 1, 2019; SB 257, s. 38.1.(a), S.L. 2017-57.)

This sub-subdivision was rewritten as part of the disaster relief provisions contained in Article 1A of Chapter 166A of the North Carolina General Statutes to help facilitate and expedite the state’s recovery after a natural disaster.

Prior to the enactment of S.L. 2019-187, every nonresident individual who derived income from a business, trade, profession, or occupation carried on in North Carolina, and had total gross income from all sources both inside and outside of North Carolina that exceeded the amount of the individual’s North Carolina standard deduction as provided in G.S. 105-153.5(a)(1) was required to file a North Carolina individual income tax return with the Department.

After the enactment of S.L. 2019-187, the provisions of G.S. 105-153.8(a)(2)a do not apply to a nonresident business or to a nonresident employee if the nonresident business or nonresident employee derives income in North Carolina solely from performing disaster-related work during a disaster response period at the request of a critical infrastructure company. For the purposes of this sub-subdivision, the definitions of nonresident business, nonresident employee, disaster-related work, disaster response period, and critical infrastructure company are contained in G.S. 166A-19.70A.

For more information on North Carolina disaster relief, including definitions and related legislation, see Appendix A of this publication.

(Effective August 1, 2019, and applies to disaster declarations on or after that date; SB 498, s. 1.(k), S.L. 2019-187.)

This subsection was amended to expand the innocent spouse relief provisions provided under North Carolina law to mirror the federal innocent spouse relief provisions under IRC section 6015. As amended, a taxpayer may qualify for state tax relief with respect to both an underpayment of tax and an understatement of tax. Under prior law, the Department did not extend state tax relief to underpayments of tax.

(Effective for taxable years beginning on or after January 1, 2018; SB 523, s. 2.1.(a), S.L. 2019-169.)

This subsection was rewritten as part of the disaster relief provisions contained in Article 1A of Chapter 166A of the North Carolina General Statutes to help facilitate and expedite the state’s recovery after a natural disaster.

Subsection (c) of G.S. 105-154 requires every partnership doing business in North Carolina that is required to file a federal partnership return to file an informational return with the Secretary. This subsection was amended to provide that a partnership that is not doing business in North Carolina because it is a nonresident business performing disaster-related work during a disaster response period at the request of a critical infrastructure company is not required to file an information return with the Secretary. Importantly, the partnership must still provide to its partners any information necessary for the partners to properly file a state income tax return. For the purposes of this subsection, the definitions of nonresident business, disaster-related work, disaster response period, and critical infrastructure company are contained in G.S. 166A-19.70A.

For more information on North Carolina disaster relief, including definitions and related legislation, see Appendix A of this publication.

(Effective August 1, 2019, and applies to disaster declarations on or after that date; SB 498, s. 1.(i), S.L. 2019-187.)

This subsection provides that when a business conducted in North Carolina is owned by a nonresident individual or by a partnership having one or more nonresident members, the manager of the business is responsible for reporting the share of the income of each nonresident owner or partner and is required to compute and pay the tax due on behalf of those partners on a tax return.

Under prior law, if the manager of the business determined that the business made an error or omitted something from the tax return that resulted in an overpayment, both the manager of the business and the nonresident owner or partner could request a refund of the overpayment made on behalf of the nonresident owner or partner within the provisions of G.S. 105-241.7(b).

As amended, regardless of the provisions in G.S. 105-241.7(b), the manager of the business may not request a refund of an overpayment made on behalf of the nonresident owner or partner if the manager of the business has previously filed a tax return and paid the tax due. Importantly, the nonresident owner or partner may, on its own income tax return, request a refund of an overpayment made on its behalf by the manager of the business within the provisions of G.S. 105-241.6.

(Effective for taxable years beginning on or after January 1, 2019, and applies to a request for refund filed on or after that date; SB 523, s. 1.1.(a), S.L. 2019-169.)

This subsection was amended to replace the phrase “or other officer of the United States,” with a specific reference to “an agreement of the U.S. competent authority.” As amended and specifically stated, if a taxpayer’s adjusted gross income, filing status, personal exemptions, standard deduction, itemized deductions, or federal tax credit are changed or corrected by the Commissioner of Internal Revenue or an agreement of the U.S. competent authority, and the change or correction affects the amount of state tax payable, the taxpayer must file an income tax return reflecting each change or correction from a federal determination (as the term is defined in G.S. 105-228.90) within six months after being notified of the change or correction.

(Effective July 26, 2019, and applies to a federal determination on or after that date; SB 523, s. 6.3.(c), S.L. 2019-169.)

This section was rewritten as part of the disaster relief provisions contained in Article 1A of Chapter 166A of the North Carolina General Statutes to help facilitate and expedite the State’s recovery after a natural disaster.

Subsection (a) of G.S. 105-131.7 requires every S Corporation incorporated or doing business in North Carolina to file a return with the Secretary. New subsection (f) was added to G.S. 105-131.7 to provide that an S Corporation that is not doing business in this State because it is a nonresident business performing disaster-related work during a disaster response period at the request of a critical infrastructure company is not required to file an information return with the Secretary. Importantly, an S Corporation must still provide to its shareholders any information necessary for the shareholders to properly file a State income tax return. For the purposes of this subsection, the definitions of nonresident business, disaster-related work, disaster response period, and critical infrastructure company are contained in G.S. 166A-19.70A.

For more information on North Carolina disaster relief, including definitions and related legislation, see Appendix A of this publication.

(Effective August 1, 2019, and applies to disaster declarations on or after that date; SB 498, s. 1.(h), S.L. 2019-187.)

There were two laws enacted by the 2019 General Assembly that impact this section. First, this section was amended to clarify several of the definitions that apply to Article 4A by defining new terms and by simplifying existing terms. Second, this section was rewritten as part of the disaster relief provisions contained in Article 1A of Chapter 166A of the North Carolina General Statutes to help facilitate and expedite the State’s recovery after a natural disaster.

Amendment One:

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

New subsection (6a) was added to define “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 defines “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 “ITIN holder” as “a person whose taxpayer identification number is an Individual Taxpayer Identification Number (ITIN), including applied for and expired numbers.”

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

1. A nonresident contractor. 
    
2. An ITIN contractor.
    
3. A person who performs services in [North Carolina] for compensation that fails to provide the payer a taxpayer identification number. 
    
4. 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 “payer” as “a person who, in the course of a trade or business, pays compensation.”

New subsection (12a) was added to define “Taxpayer Identification Number (TIN)” as “an identification number issued by the Social Security Administration or the Internal Revenue Service excluding Taxpayer Identification Number for Pending U.S. Adoptions (ATIN) and Preparer Taxpayer Identification Number (PTIN).”

Amendment Two:

Subsection (13) was amended to define “wages” as having “the same meaning as in section 3401 of the [Internal Revenue] Code, except the term does not include amounts paid to a ‘nonresident employee’ for a business, trade, profession, or occupation carried on in [North Carolina] to perform ‘disaster-related work’ during a ‘disaster response period’ at the request of a ‘critical infrastructure company’.” For the purposes of this subsection, the definitions of nonresident employee, disaster-related work, disaster response period, and critical infrastructure company are contained in G.S. 166A-19.70A.

(Amendment one to this section effective January 1, 2020; SB 523, s. 6.4.(a), S.L. 2019-169. Amendment two to this section effective August 1, 2019 and applies to disaster declarations on or after that date; SB 498, s. 1.(l), S.L. 2019-187.)

This subsection was amended 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.)

This subdivision was rewritten as part of the disaster relief provisions contained in Article 1A of Chapter 166A of the North Carolina General Statutes to help facilitate and expedite the State’s recovery after a natural disaster.

Subsection (b) of G.S. 105-163.3 provides a specific list of exemptions whereby a payer is exempt from the requirement to withhold state income tax from compensation paid to a payee. New subdivision (5) was added to provide an exemption for certain ITIN contractors who are nonresident individuals that receive compensation from a nonresident business or a critical infrastructure company.

As amended and specifically stated in G.S. 105-163.3(b)(5), the withholding requirement [found under G.S. 105-163.3] does not apply to compensation paid by a nonresident business or a critical infrastructure company to an ITIN contractor who is a nonresident individual for a business, trade, profession, or occupation carried on in [North Carolina] to perform disaster-related work during a disaster response period at the request of a critical infrastructure company. For the purposes of this subdivision, the definitions of nonresident business, nonresident individual, disaster-related work, disaster response period, and critical infrastructure company are contained in G.S. 166A-19.70A.

(Effective August 1, 2019, and applies to disaster declarations on or after that date; SB 498, s. 1.(m), S.L. 2019-187.)

This subsection was amended to incorporate the term “payee” as defined in G.S. 105-163.1, as amended by Section 6.4.(a) of Session Law 2019-169.

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.)

This subsection was amended to incorporate the term “payee” as the term is defined in G.S. 105-163.1, as amended by Section 6.4.(a) of Session Law 2019-169.

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.)

This subsection was rewritten as part of the disaster relief provisions contained in Article 1A of Chapter 166A of the North Carolina General Statutes to help facilitate and expedite the State’s recovery after a natural disaster.

Subsection (b) of G.S. 105-163.7 requires every employer and payer that is either required to withhold or voluntarily withholds North Carolina income taxes to electronically file an annual withholding reconciliation return with the Secretary (Form NC-3). New language was added to exempt certain employers from filing Form NC-3 if the employer meets the criteria established in Session Law 2019-187.

As amended and specifically stated in G.S. 105-163.7(b), an employer that is not doing business in this State because it is a nonresident business performing disaster-related work during a disaster response period at the request of a critical infrastructure company is not required to file an information return with the Secretary. Importantly, the employer must still provide to an employee, upon request, any information necessary for the employee to properly file a State income tax return. For the purposes of this subsection, the definitions of nonresident business, disaster-related work, disaster response period, and critical infrastructure company are contained in G.S. 166A-19.70A.

For more information on this amendment, including definitions and related legislation, see Appendix A of this publication.

(Effective August 1, 2019, and applies to disaster declarations on or after that date; SB 498, s. 1.(n), S.L. 2019-187.)