Corporate Tax Changes in North Carolina Budget Bill
- September 16, 2015
The North Carolina General Assembly unveiled the state budget late Monday night – 76 days after it was due. Contained in the 429 pages are a number of proposed changes to the corporate income and franchise tax.
Rate Reduction Trigger
Under House Bill 97, if the amount of General Fund tax collections in any fiscal year exceeds $20,975,000,000 the corporate income tax rate must be reduced to 3% effective for the tax year that begins on the following January 1.
Single Sales Factor Apportionment
House Bill 97 would phase in the single sales factor over the next three years. Under the bill, all corporations would apportion their income using the single sales factor beginning with tax year 2018.
Market-Based Sourcing and Informational Reports
House Bill 97 requires the Revenue Laws Study Committee to study the calculation of the sales factor using market-based sourcing. General Assembly staff have previously stated they are unable to prepare a fiscal estimate of the cost of such a change due to the lack of available data. As a result, under the bill, all corporations with apportionable income over $10 million and an apportionment formula of less than 100% are required to file an informational report with the North Carolina Department of Revenue. The report must calculate the corporation’s sales factor for tax year 2014 using market-based sourcing under the model regulations drafted by the Multistate Tax Commission. The informational report is due at the time the corporation’s tax return for 2015 is due. A taxpayer may not request an extension of time to file the informational report. The bill requires the Secretary to assess a penalty in the amount of $5,000 for any corporation that fails to timely file the report.
Limitation on Intercompany Interest Expense
House Bill 97 enacts a new statute limiting the amount of intercompany interest a corporation can deduct. The provision requires a corporation to add to its federal taxable income the amount of net interest expense paid to a related member. A corporation would be entitled to deduct from federal taxable income the amount of qualified interest expense paid to a related member. “Net interest expense” is defined as the excess of interest paid by the corporation to a related member over the amount of interest received from a related member. “Qualified interest expense” is defined as the amount of net interest expense paid to a related member not to exceed 30% of the taxpayer’s adjusted gross income. There are certain exceptions to the new limitation. It does not apply, for example, if the related member is a bank or if the related member pays an income or gross receipts tax to North Carolina or another state with respect to the interest. As part of the proposed legislation, the existing privilege tax on banks in N.C. Gen. Stat. § 105-102.3 would be repealed.
Franchise Tax Base
House Bill 97 modifies the franchise tax by converting the capital stock, surplus and undivided profits base to a net worth base. Under the bill, “net worth” is a corporation’s total assets (without regard to the deduction for accumulated depreciation, depletion or amortization) less its total liabilities as determined in accordance with generally accepted accounting principles (GAAP). If the corporation does not maintain its books and records using GAAP, then its net worth would be determined in accordance with the method of accounting it uses for federal income tax purposes, as long as that method fairly reflects its net worth.
House Bill 97 is scheduled to be voted on this week. If it passes, it will then be sent to the governor.