2022 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 may 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).

(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).

This subdivision was amended by the 2021 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 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 2021 General Assembly to decrease the rate imposed on an individual’s North Carolina taxable income. The rate for taxable years beginning in 2022 is 4.99%.

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

This subdivision was amended by the 2021 General Assembly 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.)

This subdivision was added by the 2021 General Assembly to allow a deduction to eligible members of the Armed Forces of the United States for specific military retirement payments received from the United States government effective for taxable years beginning on or after January 1, 2021.

The 2022 General Assembly amended subdivision (5a) to extend the deduction to eligible retirees of the uniformed services of the United States. As amended, an eligible member of the commissioned corps of the National Oceanic and Atmospheric Administration or the U.S. Public Health Service can deduct from AGI specific military retirement payments received from the United States government effective for taxable years beginning on or after January 1, 2022.

(Effective for taxable years beginning on or after January 1, 2022; HB 103, s. 42.1.(a), S.L. 2022-74.)

This subdivision was added to allow a deduction to employers for the amount of qualified wages disallowed for federal income tax purposes because the employer claimed the federal Employee Retention Credit against federal payroll tax.

(Effective for taxable years beginning on or after January 1, 2020; HB 243, s. 20.15.(a), S.L. 2022-06.)

This subdivision was added by the 2021 General Assembly to decouple North Carolina from the federal provision that makes grant monies received from North Carolina’s Business Recovery Grant Program taxable upon receipt as gross income.

The 2022 General Assembly amended this subdivision to expand the deduction to grant monies received from additional North Carolina COVID-19 relief programs. As amended, a taxpayer may deduct from adjusted gross income (“AGI”) the following payments received from North Carolina to the extent the income was included in the taxpayer’s AGI:

1. The Business Recovery Grant Program. 
2. The ReTOOLNC grant program for recovery from the economic impacts of the COVID-19 pandemic. 
3. Rent and utility assistance pursuant to Section 3.3 of S.L. 2020-4, as amended by Section 1.2 of S.L. 2020-97.

(Effective for taxable years beginning on or after January 1, 2020; HB 243, s. 20.7.(b), S.L. 2022-06.)

This subdivision was added by the 2021 General Assembly as part of the legislation that created a separate state net operating loss for individual income tax purposes. This subdivision allows a taxpayer to deduct from adjusted gross income 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 subdivision was amended by the 2021 General Assembly as part of the legislation that created a separate state net operating loss for individual income tax purposes. As rewritten, this subdivision requires a taxpayer to add to adjusted gross income (“AGI”) the amount of federal net operating loss deducted from AGI in calculating North Carolina taxable income.

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

This subdivision was added by the 2021 General Assembly to require a taxpayer to make an addition to adjusted gross income (“AGI”) for the amount of student loan forgiveness excluded from gross income pursuant to Code section 108(f)(5). The purpose of this subdivision is to decouple from the exclusion from income for the discharge of a student loan under section 9675 of the American Rescue Plan Act of 2021 (“ARPA”).

The 2022 General Assembly rewrote the subdivision to correct a drafting error to ensure taxpayers are only required to add back student loan forgiveness to the extent the amount excluded exceeds the amount that would have been allowed under the Code as enacted as of May 1, 2020. As amended, for tax years 2021 through 2025, a taxpayer 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.

In addition, the 2022 General Assembly amended the subdivision to provide language that limits the addition for taxpayers who are insolvent (as defined in section 108(d)(3) of the Code) (“Insolvent Taxpayer”). As amended, for tax years 2021 through 2025, the addition for Insolvent Taxpayers is limited to the amount of discharge of student loan indebtedness excluded from AGI under section 108(f)(5) of the Code that exceeds the amount of discharge of indebtedness that would have been excluded under section 108(a)(1)(B) of the Code.

(Effective for taxable years beginning on or after January 1, 2021; HB 83, s. 2.1.(a), S.L. 2022- 13.)

This subsection was amended by the 2021 General Assembly 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 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 by the 2021 General Assembly as part of the legislation that created a separate state net operating loss for individual income tax purposes.

Subsection (a) defines a “State Net Operating Loss” as the amount by which business deductions for the year exceed 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.

Subsection (b) allows a deduction in the current taxable year for the state net operating loss a taxpayer incurred in a prior 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).

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).

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).

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.

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. Amended by H83, s. 2.2.(a), S.L. 2022-13.)

This subsection was amended by the 2021 General Assembly 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 for taxable years beginning on or after January 1, 2022; SB 105, s. 42.13A.(c), S.L. 2021-180.)

This subsection was amended by the 2021 General Assembly 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 by the 2021 General Assembly as part of the legislation that created North Carolina’s SALT Workaround for PTEs. 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 amended several times by the General Assembly. First, a reference to the “manager of the business” was changed to the “business.” Next, the section was amended to clarify that the Department may enforce the business's liability for the tax on each nonresident owner or partner's share of the income by sending the business a notice of proposed assessment in accordance with G.S. 105-241.9. Finally, the section was amended to provide that if a nonresident partner is not an individual and the partner has executed an affirmation that the partner is not subject to NC income tax, the partnership is not required to pay the tax on behalf of the nonresident partner.

(Effective June 29, 2022; H83, s. 2.3, 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.

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.)