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Net Worth Base (G.S. § 105-122(b)) – (Applicable for Tax Years Beginning On or After January 1, 2017)

Based on Year End Balance Sheet

Net worth is measured as of the end of the taxable year using generally accepted accounting principles (“GAAP”). If the corporation does not use GAAP in maintaining its books and records, then net worth may be computed using the same accounting method used for federal income tax purposes, so long as this method fairly represents the corporation’s net worth for franchise tax purposes.

Net Worth Defined

A corporation’s net worth is defined as the total assets of the corporation without regard to deductions for accumulated depreciation, depletion, or amortization minus total liabilities.

Adjustments to Net Worth

In determining net worth, the following adjustments are required:

(a) A deduction for accumulated depreciation, depletion, or amortization allowed for federal income tax purposes.

(b) A deduction for the cost of treasury stock.

(c) An addition for the amount of affiliated indebtedness owed to a parent, subsidiary, affiliate, or noncorporate entity if the corporation or affiliated group directly or indirectly owns 50% or more of the noncorporate entity, other than debt that is merely endorsed, guaranteed or otherwise supported by the corporation or affiliated group of corporations.

The addition for affiliated indebtedness may be reduced based on the ratio of the borrowed capital over the total assets of the creditor corporation. Borrowed capital does not include indebtedness incurred by a bank from a deposit evidenced by a certificate of deposit, passbook, cashier’s check, certified check, or similar document or record.

(d) A creditor corporation that is subject to franchise tax may deduct the amount of indebtedness owed to it by a parent, subsidiary, or affiliated corporation to the extent such indebtedness has been added by the debtor corporation in computing its franchise tax liability.

Multistate Corporations (G.S. § 105-122(c))

Every corporation permitted to apportion its net income for income tax purposes under the provisions of G.S. § 105-130.4 must apportion its net worth through use of the same fraction computed for apportionment of its apportionable income under G.S. § 105-130.4. A corporation that is subject to the general business franchise tax, but exempt from income tax, must apportion its net worth by using the apportionment factor it would have used had it been subject to the income tax. Adjustments in the method of apportionment authorized by the Secretary of Revenue for apportionment of net income do not apply automatically to apportionment of net worth. Unless the Secretary specifically authorizes a modified method of allocation for franchise tax purposes, the statutory formula must be used.

Alternate Apportionment Formula

If any corporation believes that the statutory apportionment formula allocates more of its net worth to North Carolina than is reasonably attributable to its business in this State, it may make a written request to the Secretary of Revenue for permission to use an alternative formula which it believes is a better method to allocate its net worth to North Carolina.

The written request must be made with the Secretary not later than ninety (90) days after the regular or extended due date of the tax return. Taxpayers should address all correspondence in connection with such petitions to the Secretary of the Revenue.

The Secretary must issue a written decision on a corporation’s request for an alternative apportionment method. The decision can apply to no more than three years. If the request is denied, the Secretary’s decision is final and is not subject to administrative or judicial review. A corporation authorized to use an alternative formula may apportion its net worth base using the alternative method or the statutory method.