NC’s Budget Bill Includes Several Tax Provisions
September 23, 2015
NC Governor Pat McCrory signed the new state budget into law on Friday, September 18. The law includes a projected $400 million in income tax cuts, to be offset in part by the expansion of sales tax to repair, installation and maintenance services.
Following is a brief recap of the key tax provisions include in this legislation.
Effective in 2016, the historic preservation credit is extended and modified.
Corporate income tax changes will go into effect in 2016:
- Income tax rates will drop to 4%, with an additional reduction to 3% when certain revenue targets are met.
- Interest expense paid or accrued to related parties will be subject to additional limitation.
- Single sales factor apportionment for multi-state operations will be phased in, with full implementation in 2018.
- The Revenue Laws Study Committee is tasked to study the impact of having the state shift to market-based sourcing to determine the origin and thus taxation of income for multi-state operations. The study will include securing data from larger entities, which will be obligated to cooperate or face a significant penalty.
Corporate franchise tax changes will go into effect in 2017:
- The minimum franchise tax will increase from $35 to $200.
- The capital base will transition to a net worth base with new definitions and calculations, including consideration of non-corporate related party debt. Also, net worth should be calculated using generally accepted accounting principles (GAAP). Those businesses not currently using GAAP for their books and records will be able to use their existing method of accounting, but will need to consider any significant difference in the resulting franchise tax.
Individual income tax:
- Beginning in 2015, charitable and medical deductions allowed on the Federal tax return will be allowed on the NC return without further limitation.
- The state’s standard deduction will be increased slightly starting in 2016.
- The tax rate will drop slightly from 5.75% to 5.499% starting in 2017.
Effective March 1, 2016, sales tax is expanded to repair, maintenance and installation services involving tangible personal property that itself is subject to sales tax. In 2015 warranty and service contracts on tangible personal property became taxable, while this most recent expansion covers services that are not performed under the terms of a written warranty or contract. It is expected that the Department of Revenue will clarify the scope and application of this new provision before its effective date.
Additional tax-related legislation is still being discussed in the NC Legislature, including House Bill 117 and a separate bill to include various technical corrections to existing laws.
Have questions about changes in North Carolina’s tax legislation and its impact on your business?
Contact JPS – we can help you navigate changing tax laws and stay abreast of important implications to your business.
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