North Carolina Budget Legislation Creates Tax Refund Opportunity

South Carolina Enacts “SALT Workaround” Election for Pass Through Entities
June 7, 2021
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December 22, 2021

North Carolina Budget Legislation Creates Tax Refund Opportunity

North Carolina Enacts 2021 Budget Bill, Including PPP Expense Conformity

On November 18th the North Carolina General Assembly passed the long-awaited state budget bill (SB 105).  Governor Roy Cooper signed the bill into law, as the 2021 Appropriations Act (“The Act”), later that same day. One aspect of this legislation creates a refund opportunity for taxpayers who have expenses related to forgiven Paycheck Protection Program (“PPP”) loans.

Prior to passage of this legislation, North Carolina was one of the few states that disallowed deduction of expenses associated with forgiven PPP loans, requiring an addback on the North Carolina return of any such expenses that were deducted for federal tax purposes. This resulted in significantly higher North Carolina tax liabilities for many taxpayers. Now, North Carolina allows deduction of these expenses for all tax years prior to 1/1/2023. Taxpayers will need to amend their 2020 return in order to take advantage of this change for any PPP-related expenses incurred in 2020.

The Act contains numerous other tax law changes, including the following:

  • Business Recovery Grant Program created to provide relief to North Carolina businesses that suffered substantial economic damage from the COVID-19 pandemic.
    • Hospitality Grants for businesses classified in NAICS Code 71 or 72 that demonstrate that they have suffered an economic loss of at least 20%. The grant amount is equal to the lesser of five hundred thousand dollars ($500,000), 20% of the economic loss for applicants who have not previously received an award amount under other programs, or 10% for applicants who have previously received an award amount under other programs.
    • Reimbursement Grants for a business not classified in NAICS Code 71 or 72 which demonstrates that it suffered an economic loss of at least 20% and has not previously received an award under the COVID-19 Job Retention Program, the Economic Injury Disaster Loan program, the Paycheck Protection Program, the Restaurant Realization Fund or the Shuttered Venue Operations Grant Program.  The grant amount is equal to the lesser of five hundred thousand dollars ($500,000) or  20% of the economic loss.
    • The grant amount (for each of the above grants) is equal to the lesser of five hundred thousand dollars ($500,000), 20% of the economic loss for applicants who have not previously received an award amount under other programs, or 10% for applicants who have previously received an award amount under other programs
  • Update Internal Revenue Code Conformity to April 1, 2021.
    • This includes the aforementioned PPP expense conformity as well as forgiven Economic Injury Disaster Loans, Shuttered Venue and Restaurant Revitalization grants.
    • It also includes making permanent the 7.5% (rather than 10%) medical expense deduction floor.
    • However, the Act still decouples from the federal $10,200 unemployment benefits exclusion as well as the federal provisions regarding discharge of student loans, increased food and beverage deductions, mortgage interest, principal residence indebtedness, and qualified education loans.
  • Individual Income Tax
    • Rate reduction phased in over the next 5 years, from the current 5.25% to 3.99% after 2026;
    • Standard deduction increase, beginning in 2022;
    • Exemption for certain military pension income, beginning in 2021;
    • Child deduction increase, from $2,500 to $3,000 beginning in 2022;
    • Separate North Carolina NOL calculation beginning in 2022;
    • Extra Credit Grant Program deduction extended into 2021;
  • Corporation Income Tax
    • Phase-out of the corporation income tax by 2030;
    • Net Operating Loss (“NOL”) technical corrections related to mergers and acquisitions;
  • Franchise Tax
    • Elimination of the tangible property bases, leaving only the Net Worth base;
  • Pass-Through Entities
    • New SALT cap workaround election for taxable years beginning on or after January 1, 2022. Under this provision, an S corporation or partnership with individual owners can make an annual election to taxed at the entity level on its North Carolina taxable income. The electing pass through entity would be taxed at the individual income tax rate, and its individual owners would deduct their pro rata shares of the entity’s income from their AGI when calculating their North Carolina taxable income.
  • Credits
    • Mill Rehabilitation Credit reenacted, sunset date extended to 2030, and credit provisions expanded for rehabilitated railroad station projects;
    • Historic Rehabilitation Credit sunset date extended to 2030;
  • Property Tax exemption for vaccines extended to vaccines not held as inventory;
  • Administrative changes
    • Late Payment Penalty changed from flat 10% to graduated rate (ranging from 2% to 10%) based on the length time the payment is delinquent. This change takes effect July 1, 2022.
    • Increased Department of Revenue powers regarding information requests and tax adjustments related to Intercompany Transactions.
    • Extend deadline for filing final employer returns, for businesses ceasing operations, from 30 days following the last payment of wages to one month after the end of the calendar quarter when the employer terminates its business (but no later than January 31 of the succeeding year).
    • Allow the Department of Revenue to assess Employer Withholding based on an estimate of the tax due when an employer fails to file a return.
    • Nonaccrual of Interest on individual income tax returns due on or before April 15, 2021 (for the period 4/15/21 5/17/2021) also applies to partnership and estate and trust tax returns.
    • Department of Revenue required to submit written reports on the status of the Power of Attorney Registration Project, beginning 1/1/2022 and monthly thereafter.

 

We’re here to help!

WebsterRogers’ State and Local Tax (SALT) Team has significant experience with these issues.  We can help you evaluate the impact of these legislative changes as well as amend your returns to take advantage of the PPP-expense refund opportunity. Reach out to WebsterRogers SALT today to discuss your situation and how we can help.