2023 Personal Taxes Law Changes

This subsection was added to clarify that the statutory method used by S Corporations and partnerships to divide income between North Carolina and other states also applies to sole proprietorships. Pursuant to G.S. 105-153.4(d), S Corporations and partnerships must use the allocation and apportionment provisions set forth in G.S. 105-130.4 to determine income attributable to North Carolina.

(Effective for taxable years beginning on or after January 1, 2022; SB 174, s. 1.3., S.L. 2023- 12.)

This subdivision was amended to change the date an individual who receives proceeds from the Business Recovery Grant Program is allowed to deduct the proceeds from federal adjusted gross 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 for taxable years beginning on or after January 1, 2020; and applies to amounts received by a taxpayer on or after that date; HB 103, s. 18.(a)., S.L. 2023-46.)

The 2022 General Assembly added or revised several statutes within Article 4 of Chapter 105 to allow S Corporations and certain partnerships and pass-through entities (“PTEs”) to elect to pay North Carolina income tax at the entity level (a “Taxed S Corporation,” a “Taxed Partnership,” or collectively a “Taxed PTE”). The 2022 legislation is collectively referred to throughout this document as the “North Carolina SALT Workaround.” The 2023 General Assembly revised the North Carolina SALT Workaround. The 2023 revisions are collectively referred to as the “2023 SALT Workaround Update.

The 2023 SALT Workaround Update made significant changes to G.S. 105-153.5(c3) as explained below.

The North Carolina SALT Workaround added G.S.105-153.5(c3)(1) to allow a deduction from adjusted gross income (“AGI”) to a taxpayer who is a shareholder in 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.

The 2023 SALT Workaround Update amended subdivision (1) to limit the deduction to only the amount of taxpayer’s pro rata share of income attributable to North Carolina from the Taxed S Corporation to the extent the income attributable to North Carolina (1) was included in the Taxed S Corporation’s North Carolina taxable income and (2) was included in the taxpayer’s AGI modified by North Carolina law.

The 2023 SALT Workaround Update added subdivision (1a) to allow a new deduction from AGI to a resident taxpayer who is a shareholder in an S Corporation for the amount of the taxpayer’s pro rata share of income not attributable to North Carolina from the S Corporation to the extent the income (1) was included in the S Corporation's taxable income in another state or the District of Columbia, (2) was subject to an entity- level tax levied on the aggregate pro rata share of the S Corporation's income allocable to one or more of its shareholders, and (3) was included in the taxpayer's AGI modified by North Carolina law. An S Corporation is taxable in another state or the District of Columbia if the S Corporation's business activity in that state or the District of Columbia subjects the S Corporation to a net income tax, or a tax measured by net income.

The North Carolina SALT Workaround added G.S. 105-153.5(c3)(2) to require an addition to AGI to a taxpayer who 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.

The 2023 SALT Workaround Update amended subdivision (2) to limit the addition to only the amount of taxpayer’s pro rata share of net taxable loss attributable to North Carolina from the Taxed S Corporation to the extent the net taxable loss (1) was included in the Taxed S Corporation’s North Carolina taxable income and (2) was included in the taxpayer’s AGI modified by North Carolina law.

The North Carolina SALT Workaround added G.S. 105-153.5(c3)(3) to allow a deduction from AGI to a taxpayer who is a partner in 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.

The 2023 SALT Workaround Update amended subdivision (3) to limit the deduction to only the amount of taxpayer’s share of distributive income attributable to North Carolina from the Taxed Partnership to the extent the share of distributive income attributable to North Carolina (1) was included in the Taxed Partnership’s North Carolina taxable income and (2) was included in the taxpayer’s AGI modified by North Carolina law.

The 2023 SALT Workaround Update added subdivision (3a) to allow a new deduction from AGI to a resident taxpayer who is a partner in a partnership for the amount of the taxpayer’s share of distributive income not attributable to North Carolina from the partnership to the extent the income (1) was included in the partnership’s taxable income in another state or the District of Columbia, (2) was subject to an entity-level tax levied on the aggregate distributive share of the partnership's income allocable to one or more of its partners, and (3) was included in the taxpayer's AGI modified by North Carolina law. A partnership is taxable in another state or the District of Columbia if the partnership's business activity in that state or the District of Columbia subjects the partnership to a net income tax or a tax measured by net income.

The North Carolina SALT Workaround added G.S. 105-153.5(c3)(4) to require an addition to AGI to a taxpayer who 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.

The 2023 SALT Workaround Update amended subdivision (4) to limit the addition to only the amount of taxpayer’s share of distributive taxable loss attributable to North Carolina from the Taxed Partnership to the extent the loss (1) was included in the Taxed Partnership’s North Carolina taxable income and (2) was included in the taxpayer’s AGI, subject to the adjustments modified by North Carolina law.

(Effective for taxable years beginning on or after January 1, 2023; SB 174, s. 1.6(c)., S.L. 2023- 12.)

This subsection was amended to decrease the income tax rate imposed on an individual’s North Carolina taxable income for each of the following taxable years:

(Effective October 3, 2023; HB 259, s. 42.1.(a), S.L. 2023-134.)

This subdivision was added to create a rate reduction trigger for individual income tax. If the state’s total General Fund revenue for a specified year exceeds the trigger amount indicated for that year, then the applicable individual income tax rate for the indicated and subsequent tax years will equal the greater of (i) the prior taxable year's individual income tax rate decreased by one-half percentage point (0.50%) or (ii) two and forty-nine hundredths percent (2.49%). The trigger amounts are as follows:

(Effective October 3, 2023; HB 259, s. 42.1.(a), S.L. 2023-134.)

This subdivision was repealed as a part of 2023 SALT Workaround Update. In lieu of the tax credit, a resident taxpayer who is a shareholder of an S Corporation is allowed a deduction for the amount of the taxpayer’s pro rata share of income not attributable to North Carolina from the S Corporation subject to the provisions of G.S. 105-153.5(c3)(1a).

(Effective for taxable years beginning on or after January 1, 2023; SB 174, s. 1.6.(a), S.L. 2023- 12.)

This subdivision was repealed as a part of 2023 SALT Workaround Update. In lieu of the tax credit, a resident taxpayer who is a partner of a partnership is allowed a deduction for the amount of the taxpayer’s share of distributive income not attributable to North Carolina from the partnership subject to the provisions of G.S. 105- 153.5(c3)(3a).

(Effective for taxable years beginning on or after January 1, 2023; SB 174, s. 1.6.(a), S.L. 2023- 12.)

This subsection was added as a part of the 2023 SALT Workaround Update. New G.S. 105-153.9(c) was added to clarify that the tax credit for income taxes paid to other states by individuals is not refundable.

(Effective April 3, 2023; SB 174, s. 1.4., S.L. 2023-12.)

This subsection was added as part of the 2023 SALT Workaround Update. New G.S. 105- 153.9(d) allows a resident partner in a partnership that pays entity-level income tax in another state or the District of Columbia but does not elect to be Taxed Partnership to include the partner’s distributive share of entity-level income taxes paid by the partnership to the other state or the District of Columbia when computing the tax credit for income taxes paid to other states. In addition, a cross-reference to G.S. 105- 153.9(a)(5) was removed because that statute was repealed effective January 1, 2023.

(The first amendment was effective for taxable years beginning on or after January 1, 2022; SB 174, s. 1.5.(d), S.L. 2023-12.). The second amendment is effective for taxable years beginning on or after January 1, 2023; SB 174, s. 1.6.(d), S.L. 2023-12.)

This subsection was added as part of the 2023 SALT Workaround Update. New G.S. 105- 153.9(e) allows a resident shareholder in an S Corporation that pays entity-level income tax in another state or the District of Columbia but does not elect to be Taxed S Corporation to include the shareholder’s pro rata share of entity-level income taxes paid by the S Corporation to the other state or the District of Columbia when computing the tax credit for income taxes paid to other states. In addition, a cross-reference to G.S. 105-153.9(a)(4) was removed because that statute was repealed effective January 1, 2023.

(The first amendment was effective for taxable years beginning on or after January 1, 2022; SB 174, s. 1.5.(d), S.L. 2023-12. The second amendment is effective for taxable years beginning on or after January 1, 2023; SB 174, s. 1.6.(d), S.L. 2023-12.)

This subsection was added as part of the 2023 SALT Workaround Update. New G.S. 105-153.9(f) prohibits an individual from claiming a tax credit for income taxes paid to another state or the District of Columbia on income eligible for the deduction provided in G.S. 105-153.5(c3).

(Effective for taxable years beginning on or after January 1, 2023; SB 174, s. 1.6.(d), S.L. 2023- 12.)