North Carolina Governor Signs Budget Legislation Enacting Various Tax Provision.
On September 18, the NC Governor signed the State’s fiscal 2016-2017 budget legislation which, among other things, decreases the corporate tax rate from 5% to 4%, and includes additional rate reduction triggers. The legislation also gradually adopts a single sales factor apportionment formula which becomes fully effective for tax years beginning on or after January 1, 2018. As part of the phase-in of a single sales factor, the legislation authorizes a study to examine the effects of market based sourcing on the computation of the sales factor. To support this study the new law requires, as part of the income tax filing for 2015, corporate taxpayers, with apportioned income greater than $10M and an apportionment percentage less than 100%, to file an information return sourcing receipts in accordance with market-based sourcing rules.
The legislation also enacted a limitation on the deductibility of interest expense for interest paid to a related party, effective January 1, 2016. Essentially, a company’s net interest expense (i.e., the difference between interest paid to a related member less interest received from a related member) is deductible only up to 30% of adjusted taxable income (defined as state net income computed without regard to the interest deduction limitation and certain other adjustments). There are a few exceptions to the limitation; namely, the related member paid an income or gross receipts tax on such income, the related member is a bank, the related member is a foreign entity operating in a jurisdiction with an income tax treaty and the jurisdiction taxes the interest expense at a rate equal to or greater than the NC rate, or the related member is taxable in NC. The legislation also changes the computation of the franchise tax, and also requires an addition to the franchise tax base for indebtedness owed to an affiliate, subject to certain exceptions.
Other significant changes include the expansion of the sales tax base to include repair, maintenance and installation services sold in conjunction with the sale of tangible personal property, a reduction of the personal income tax rate from 5.75% to 5.499%, and an increase to the personal income tax standard deduction.
As a disclaimer, the corporate tax changes enacted by NC H.B. 97 are subject to a contingency provision found in Section 32.21A of the bill. Under that section, both H.B. 117 and H.B. 943 must also be ratified and signed prior to January 1, 2016. Both bills have been ratified but neither has been signed into law as of the distribution date of this blog.
For questions or assistance regarding North Carolina's Budget Legislation , please contact Lori Ross.
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