July 2013 (Updated November 8, 2013)
For months now NC lawmakers have been working to reach an agreement on tax reform provisions. Eight different pieces of legislation were introduced between March and June, with some having multiple versions. On Monday, July 15, Governor McCrory announced that an agreement had been reached. On July 17, the Tax Simplification and Reduction Act (Proposed Conference Committee Substitute of House Bill 998) passed the Legislature and is on its way to the Governor for signature.
Following are some of the key provisions of the Act. Unless indicated otherwise, all provisions are effective January 1, 2014.
- A new flat rate of 5.8% replaces a graduated scale ranging from 6.0% to 7.75%. This flat rate drops to 5.75% beginning in 2015.
- Personal exemptions are eliminated.
- Standard deductions are increased for all filers.
- A cap of $20,000 is placed on itemized deductions for interest on qualifying residence(s) and real estate property tax. It appears the intent is for the cap to apply to the total of these two categories, not individually to each residence.
- The child tax credit is increased for taxpayers with income below certain levels.
- The net business income deduction ($50,000 maximum per taxpayer) that was first introduced for the 2011 tax year is repealed.
- The exemption for social security income taxed on the Federal return remains intact.
- The deduction for private retirement income is eliminated.
- No limitation was placed on the deduction for charitable contributions.
- The estate tax is repealed effective January 1, 2013
- The corporate income tax rate is reduced from 6.9% to 6.0% for 2014. Effective January 1, 2015, the rate drops to 5.0%.
- If state revenue exceed certain thresholds, the rate is set to drop to 4.0% on January 1, 2016 and again to 3.0% on January 1, 2017.
- The state research and development credit set to expire January 1, 2014 was extended for two years and is repealed for taxable years beginning on or after January 1, 2016.
- Several tax credits were not extended and will expire as scheduled on January 1, 2014. These include the Article 3J credits for creating jobs, investing in business property and investment in real estate. Carry-forward installments of these credits claimed prior to this date will presumably continue.
- There is no change to the franchise tax regime. Proposals had been made to modify how the tax is calculated and to expand the reach of this tax to non-corporate entities such as LLCs.
- While there was considerable discussion about the expansion of sales tax to services, the expansion called for in the Act is limited. Specifically, service contracts become subject to sales tax at the general tax rate. A service contract is defined as “a warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract by which the seller agrees to maintain or repair tangible personal property.” Additional clarification of this definition will likely be needed.
- Currently, farmers can purchase tangible person property, digital property, and services without sales tax, however, now only “qualifying farmers” receive this benefit. A “qualifying farmer” is one with annual gross income of $10,000 or more from dairy, poultry, egg, livestock, aquatic, or field crop farming.
- The preferential rates, along with the associated cap, afforded manufactured and modular homes are repealed, subjecting future sales to the general tax rate.
- There is no increase to the sales tax applicable to food.
- There is no change to the ability for non-profits to receive sales tax refunds, although annual claims for the largest non-profits are capped at $45 million.
In addition to the above, the Act tasks the Revenue Laws Study Committee with examining certain key tax provisions in time for the 2014 legislative session. These include:
- The 1% privilege tax ($80 cap) on certain machinery and related production assets.
- The impact of repealing sales tax refunds to non-profits.
- Simplification and possibly elimination of the franchise tax.
- The feasibility of expanding the sales tax base to include additional services.
- The application of the formula by which corporate income tax rates may be reduced in the future.
- The authority of local governments to impose privilege taxes on businesses and the various State privilege license taxes.
As noted above, most of these changes take effect in a few months, so now is the time to begin planning. While most of these provisions will result in lower taxes, some items such as the expiration of certain credits and expansion of sales tax will result in net tax increases. JPS can help you understand the implication of these changes and to plan accordingly.