2023 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 2023 General Assembly further amended this subsection by setting a cap on the franchise tax for a holding company at five hundred dollars ($500) for the first one million dollars ($1,000,000) of its franchise tax base. As amended, the franchise tax rate is now five hundred dollars ($500) for the first one million dollars ($1,000,000) of the corporation’s tax base as determined under G.S. 105-120.2(a) and one dollar and fifty cents ($1.50) per one thousand dollars ($1,000) of its tax base that exceeds one million dollars ($1,000,000).

(Effective for taxable years beginning on or after January 1, 2025, and is applicable to the calculation of franchise tax reported on the 2024 and later corporate income tax returns; HB 259, s. 42.6A.(b), S.L. 2023-134.)

Subdivision (2) was amended by the 2023 General Assembly to correct a statutory cross-reference defining qualified interest expense. As amended, the statute now specifically references the sub-subdivisions contained in G.S. 105-130.7B(b)(4)(a) through G.S. 105-130.7B(b)(4)(d). Previously, the statutory reference was G.S. 105-130.7B(b)(4).

(Effective April 3, 2023; SB 174, s. 1.2., S.L. 2023-12.)

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.)

The 2023 General Assembly amended this subsection by setting a cap on the franchise tax for a C Corporation at five hundred dollars ($500) for the first one million dollars ($1,000,000) of its franchise tax base. As amended, the franchise tax rate is now five hundred dollars ($500) for the first one million dollars ($1,000,000) of the corporation’s tax base as determined under G.S. 105-120.2(a) and one dollar and fifty cents ($1.50) per one thousand dollars ($1,000) of its tax base that exceeds one million dollars ($1,000,000).

(Effective for taxable years beginning on or after January 1, 2025, and is applicable to the calculation of franchise tax reported on the 2024 and later corporate income tax return; HB 259, s. 42.6A.(a), S.L. 2023-134.)

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.)

This subdivision was amended to change the date a corporation that receives proceeds from the Business Recovery Grant Program is allowed to deduct the proceeds from federal taxable income. Under prior law, the deduction was effective January 1, 2021, and applied to proceeds received on or after that date. As amended, the deduction is effective January 1, 2020, and applies to proceeds received on or after that date.

(Effective June 16, 2023; HB 103, s. 18.(a), S.L. 2023-46.)

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: Neither an S Corporation nor a Taxed S Corporation are 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 percentage rate to be used in calculating the insurance regulatory charge under this statute is two percent (2%) for the 2024 calendar year and the 2025 calendar year. This charge is a percentage of premiums tax liability.

(Effective October 3, 2023; HB 259, s. 30.1.(a), S.L. 2023-134.)