Important Notice: Impact of the FCAA of 2020 on North Carolina's Individual Income Tax Return

North Carolina General Statute (“N.C. Gen. Stat.”) § 105-153.7(a) provides that “a tax is imposed for each taxable year on the North Carolina taxable income of every individual.”

N.C. Gen. Stat. § 153.4 provides that for individuals who are residents of this state, nonresidents of this state, or part-year residents of this state, the term “North Carolina taxable income” refers to “the taxpayer’s adjusted gross income” as modified in N.C. Gen. Stat. §§ 105-153.5 and 105.153.6. 

N.C. Gen. Stat. § 153.3 provides that “adjusted gross income” is the taxpayer’s federal adjusted gross income (“AGI”) as “defined in the section 62 of the Code.”

N.C. Gen. Stat. § 228.90(b)(1b) defines the term “Code” as “the Internal Revenue Code as enacted as of January 1, 2019, including any provisions enacted as of that date that become effective either before or after that date.”

For individual income tax purposes, the starting point for determining North Carolina taxable income is AGI as defined in the Internal Revenue Code (“Code”) as of a certain date. North Carolina currently references the Code as of January 1, 2019.

Because North Carolina’s individual income tax law incorporates by reference many of the provisions of the Code, the General Assembly must determine whether to update the state’s reference to the Code. Importantly for purposes of this notice, unless and until the General Assembly updates North Carolina law to reference the Code as it was enacted as of December 20, 2019, or later, the tax provisions in the FCAA do not apply to an individual when calculating North Carolina taxable income.

The General Assembly is scheduled to convene on April 28, 2020. Even if the General Assembly enacts legislation to update the state’s reference to the Code to December 20, 2019, or later, it may elect to continue to decouple from some of the federal provisions included in the FCAA. In that case, taxpayers may be required to make decoupling adjustments to AGI on Form D-400 Schedule S when calculating North Carolina taxable income. Therefore, any person required to file a North Carolina income tax return and whose tax liability is impacted by the provisions included in the FCAA should check the Department’s website for updates. Updates will be posted to the website as soon as they become available. 

Individuals may choose to wait to file their 2019 North Carolina Individual Income Tax Return (Form D-400) until after the General Assembly makes a determination on whether to update the state’s reference to the Code. A calendar year taxpayer who files the 2019 D-400 after April 15, 2020, will need to either file Form D-410 by the original due date of the return or be granted an automatic extension to file the corresponding federal return in order to receive an automatic six-month extension of time to file the state income tax return. 

Individuals who file their 2019 Form D-400 prior to any action of the General Assembly and whose North Carolina taxable income is impacted by changes in the FCAA later adopted by the General Assembly may be required to file an amended North Carolina tax return. If the amended return reflects additional tax due, a taxpayer will avoid a late payment penalty if the additional tax reflected on the amended return is paid when the amended return is filed. However, interest will be due on the additional tax from the original due date of the return until the additional tax is paid.