2021 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).

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).

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.)

This subsection was amended 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.)

Article 3H was reenacted as it existed immediately before its repeal for new rehabilitation projects for which an application for an eligibility certification was submitted on or after January 1, 2015.

Note: The reenactment and extension of Article 3H tax credits does not require a taxpayer that obtained an eligibility certificate prior to January 1, 2015, for a rehabilitation project under this Article to reapply for an eligibility certification for the same project.

As part of this legislation, several sections within the Article were re-written as follows:

Several amendments were made to subsection (a1) of G.S. 105-129.71.

The first amendment specifies that qualifying rehabilitation expenditures must be incurred on or after January 1, 2019. The second amendment provides that if the eligible site is placed in service in two or more phases in different years, the amount of tax credit that may be claimed in a year is the amount based on the qualified rehabilitation expenditures associated with the phase placed into service during that same year. Finally, subdivisions (4) and (7) of subsection (a1) were rewritten to update the conditions by which an “eligible railroad station” must satisfy.

Subdivision (4) requires the site to be in a designated local landmark as certified by a city on or before June 30, 2027. Under prior law, the site designation was required on or before June 30, 2019.

Subdivision (7) requires the site to be issued a certificate of occupancy on or before December 31, 2029. Under prior law, the certificate of occupancy was required to be issued on or before December 31, 2019.

(Effective November 18, 2021; SB 105, s. 42.7.(a), S.L. 2021-180.)

Two amendments were made to subsections (a) and (b) of G.S. 105-129.75.

Subsection (a) was amended to effectively extend the sunset of Article 3H. Under prior law, except for the tax credits allowed under G.S. 105-129.71(a1), Article 3H expired January 1, 2015, for rehabilitation projects for which an application for an eligibility certification was submitted on or after January 1, 2015. Now, except for the tax credits allowed under G.S. 105-129.71(a), Article 3H expires and a tax credit allowed under G.S. 105-129.71(a) may not be claimed, for rehabilitation projects not completed and placed in service prior to January 1, 2030.

Subsection (b) was amended to extend the sunset provision for the tax credit allowed under G.S. 105-129.71(a1). Under prior law, the tax credit expired for rehabilitation projects not placed in service prior to January 1, 2022, for rehabilitation expenditures made after January 1, 2019, and before January 1, 2022. Now, the credit expires for rehabilitation projects not placed in service prior to January 1, 2030, for rehabilitation expenditures made after January 1, 2019, and before January 1, 2030.

(Effective November 18, 2021; SB 105, s. 42.7.(a), S.L. 2021-180.)

Two amendments were made to subsections (a) and (c) of G.S. 105-129.105.

Subsection (a) was amended to add new subdivision (4), which provides an enhanced “education bonus” to taxpayers that make qualifying rehabilitation expenditures for a certified historic structure that was originally used for an educational purpose, is used for an educational purpose following the rehabilitation, and remains used for an educational purpose for each year in which the credit, or a carryforward of the credit, is claimed.

Under the new law, an “education bonus” is an amount equal to five percent (5%) of qualified rehabilitation expenditures not to exceed twenty million dollars ($20,000,000). In addition, if the certified historic structure is used for multiple purposes, then the education bonus must be proportionate to the area of the certified historic structure used for an educational purpose.

Subsection (c) was amended to define the term “educational purpose.” Under the new law, an “educational purpose” is “a purpose that has as its objective the education or instruction of human beings; it comprehends the transmission of information and the training or development of the knowledge or skills of individual persons.”

(Effective for taxable years beginning on or after January 1, 2021; SB 105, s. 42.7A.(a), S.L. 2021-180.)

This section was amended to effectively extend the sunset of Article 3L. Under prior law, the Article was set to expire for qualified rehabilitation expenditures and rehabilitation expenses incurred on or after January 1, 2024, for projects not placed in service by January 1, 2032. Now, the Article is set to expire for qualified rehabilitation expenditures and rehabilitation expenses incurred on or after January 1, 2030, for projects not placed in service by January 1, 2032.

(Effective November 18, 2021; SB 105, s. 42.7A.(b), 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 2020 General Assembly added subdivision (31) to require an addition to federal taxable income 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 2021 General Assembly amended subdivision (31) to clarify that the addition is not required to the extent the amount is required to be added to the taxpayer’s federal taxable income under another provision of North Carolina corporate income tax law.

(Effective November 18, 2021; SB 105, s. 42.13B.(b), 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, North Carolina conforms 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.)

This subdivision was added 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.

(Effective for taxable years beginning on or after January 1, 2021, and applies to amounts received by a taxpayer on or after that date; SB 105, s. 34.3B.(a), S.L. 2021-180.)

This subdivision was added to allow a deduction for twenty percent (20%) of the amount added to the taxpayer’s federal taxable income not otherwise disallowed by G.S. 105- 130.7B and pursuant to the provisions of G.S. 105-130.5(a)(31) in each of the first five taxable years beginning with tax year 2021.

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

This subdivision was amended to add subsubdivision (e) that exempts a corporation from applying the qualified interest expense deduction limitation if the proportionate amount of interest paid or accrued to a related member has already been disallowed by the application of section 163(j) of the Code.

Sub-subdivision (e) was added to prevent a double denial of nondeductible interest expenses. Because both North Carolina and federal tax law limit the deduction amount allowed for net business interest expenses, a partial limitation may be imposed on the intercompany interest under section 163(j) of the Code and if so, that deduction will need to be recognized under G.S. 105-130.7B. If it is not recognized under G.S. 105- 130.7B, then the taxpayer may add back more interest than was actually incurred in total.

(Effective November 18, 2021 and applies retroactively for taxable years beginning on or after January 1, 2018; SB 105, s. 42.13B.(d), S.L. 2021-180.)

This subsection was amended to clarify that for net economic losses for mergers and acquisitions occurring prior to January 1, 2015, the Secretary must apply the previous standards under G.S. 105-130.8 for taxable years beginning before January 1, 2015, and must apply the standards under Code sections 381 and 382 for net operating losses for taxable years beginning in 2015 and after.

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

This subsection was amended to add new subdivision (11) to define the term “taxed S Corporation.” As amended, a taxed S Corporation is an S Corporation for which a valid election under G.S. 105-131.1A(a) is in effect.

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

This section was amended twice. First, subsection (a) was amended to provide that a taxed S Corporation is subject to tax under G.S. 105-131.1A, and second, subsection (b) was amended to clarify that the provisions of subsection (b) do not apply to taxed S Corporations.

(Effective for taxable years beginning on or after January 1, 2022; SB 105, s. 42.5.(b), 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. 105-131.1A(a) allows an S Corporation to elect to have the income tax under Article 4 of Chapter 105 imposed on the S Corporation. The S Corporation 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).

New G.S. 105-131.1A(b) imposes an income tax on the taxable income of a taxed S Corporation. The tax is levied, collected, and paid annually. The tax is imposed on the North Carolina taxable income of the taxed S Corporation at the rate levied in G.S. 105- 153.7. The North Carolina taxable income of a taxed S Corporation is determined as follows:

(1) North Carolina taxable income of a taxed S Corporation is equal to the sum of the following:

a. Each shareholder’s pro rata share of the taxed S Corporation’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 shareholder’s pro rata share of the taxed S Corporation’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 shareholder’s pro rata share of the taxed S Corporation’s taxable income. Note: Separately stated items are those items described in section 1366 of the Internal Revenue Code (“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 S Corporation's taxable income.

New G.S. 105-131.1A(c) allows a taxed S Corporation that qualifies for a tax credit to apply each shareholder's pro rata share of the taxed S Corporation's credits against the shareholder's pro rata share of the taxed S Corporation's income tax. An S Corporation must pass through to its shareholders 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.

An S Corporation cannot pass through to its shareholders any of the following:

(1) Any credit allowed under Chapter 105 for any taxable period the S Corporation makes the taxed S Corporation 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 S Corporation makes the taxed S Corporation election and the carryforward of any unused portion of such installment.

With respect to resident shareholders, new G.S. 105-131.1A(d) provides that a taxed S Corporation is allowed a credit against the taxes imposed by this section for income taxes imposed by and paid to another state or country on income taxed under this section. The credit allowed by this subsection is administered in accordance with the provisions of G.S. 105-153.9.

New G.S. 105-131.1A(e) allows a deduction for shareholders of a taxed S Corporation as specified in G.S. 105-153.5(c3)(1). This deduction is only allowed if the taxed S Corporation complies with the provisions of G.S. 105-131.1A(g).

New G.S. 105-131.1A(f) requires shareholders of a taxed S Corporation to make an addition as provided in G.S. 105-153.5(c3)(2).

New G.S. 105-131.1A(g) requires the full amount of the tax payable as shown on the taxed S Corporation return to be paid to the Department within the time allowed for filing the return. In the case of any overpayment by a taxed S Corporation of the tax imposed under this section, only the taxed S Corporation may request a refund of the overpayment.

If the taxed S Corporation 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 S Corporation 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 S Corporation. 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 S Corporation, the shareholders of the S Corporation are not allowed the deduction provided in G.S. 105-153.5(c3)(1).

New G.S. 105-131.1A(h) provides the basis of both resident and nonresident shareholders of a taxed S Corporation shall be determined as if the taxed S Corporation election has not been made and each of the shareholders of the taxed S Corporation had properly taken into account each shareholder's pro rata share of the taxed S Corporation's items of income, loss, and deduction in the manner required with respect to an S Corporation for which no such election is in effect.

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

This section was amended as part of the legislation that created North Carolina’s SALT Workaround for PTEs. Specifically, new language was added to clarify that the provisions of subsections (b) through (f) do not apply to a taxed S Corporation.

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

This section was amended as part of the legislation that created North Carolina’s SALT Workaround for PTEs. The amendment limits the application of this subsection with respect to a taxed S Corporation.

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

This section was amended 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 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.

Note: G.S. 105-163.41(d)(5), the large corporation exception, does not apply with respect to a taxable year of 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.)

This subsection was amended 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.)