March 10, 2022
On March 10, 2022, the North Carolina House of Representatives passed House Bill 243, Budget Technical Corrections. The N.C. Senate passed the bill on March 9 and Governor Cooper is now expected to sign it into law. The bill is a collection of provisions designed to clarify and modify prior laws addressing oversights or changes deemed necessary. Very few tax provisions are included in this bill, but a notable one relates to the federal employee retention credit (ERC) that many business taxpayers claimed. You can read more about the ERC here.
When the ERC is claimed, wages deducted on the federal tax return must be reduced by the amount of the credit. For example, if a company had 2021 wages of $700,000 and claimed an ERC of $200,000, deductible wages on the federal return would be $500,000. Because federal income is used as the starting point for determining NC’s taxable income, this rule also reduces NC’s deduction for wages. Until now, North Carolina did not have a statutory provision allowing for the ERC’s effect on wage deductions when determining state taxable income. Many felt that this was an unfair result for NC taxpayers.
Now, due to the passage of HB 243, North Carolina allows a special deduction of the amount by which the federal wages deduction was reduced due to the ERC. Using the example above, while the federal wages deduction would be $500,000, an additional $200,000 deduction would be allowed against NC income, effectively resulting in the full $700,000 of wages being deducted. This provision is effective retroactively starting with the 2020 tax year.
Businesses that claimed the ERC in 2020 and/or 2021 and filed NC tax returns should consider the benefit of amending those returns to increase their wages deduction. For pass-through entities such as S corporations and partnerships, the owners’ tax returns would also need to be amended. Using the example above, a corporate taxpayer could recover $5,000 in NC taxes by amending its return, while individual business owners could recover a total of $10,500.
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