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North Carolina: Major Tax Reform Enacted – How Will It Impact You?


8/9/13

Synopsis:
 
Governor McCrory signed a major tax reform bill into law with sweeping implications for nearly all North Carolina taxpayers. Major changes were made to the personal and corporate income tax, sales and use tax, and estate tax, with most of the changes being effective January 1, 2014.
 
Corporate Income Tax Provisions:
 
Tax Rate
The corporate income tax rate will be reduced from 6.9 percent to 6 percent in the 2014 tax year and to 5 percent in the 2015 tax year. If net general fund tax collections for fiscal year 2014-15 exceed $20.2 billion, the corporate tax rate will be lowered further, to 4 percent, in the 2016 tax year. If collections for fiscal year 2015-16 exceed $20.975 billion, the 2017 tax year rate will be lowered yet again, to 3%.
 
Credits
A number of corporate tax credits were repealed, including tax credits relating to the construction of dwelling units for handicapped persons, real property donations, conservation tillage equipment, gleaned crops, telephone subscriber line charges, savings and loan supervisor fees, and construction of poultry composting facilities.
 
Personal Income Tax Provisions:
 
Tax Rates, Personal Exemptions, Standard Deduction, and Other Changes
Currently, North Carolina imposes its personal income tax at a graduated rate based on income, ranging from 6 percent to 7.75 percent. These graduated rates will be phased out beginning in 2014 and replaced with a flat tax of 5.8 percent for all taxpayers. Beginning in 2015, the rate will be lowered to 5.75 percent.
 
The method for calculating personal income tax will change beginning with the 2014 tax year. All personal exemptions will be repealed and the standard deduction will be increased as follows:

  • Joint filers: from $6,000 to $15,000
  • Heads of household: from $4,400 to $12,000
  • Single filers: from $3,000 to $7,500
     

The new legislation repeals nearly all adjustments to a taxpayer’s federal gross income when calculating income for North Carolina personal income tax. Many deductions have been repealed, including deductions for net business income, educator expenses, and certain contributions to state-operated college savings funds. The only permissible itemized deductions will be:

  • Charitable contributions
  • Personal residence interest and real property taxes, with a cap of $20,000 for both
     

The new legislation also repeals nearly all existing adjustments used to calculated North Carolina taxable income. The only permitted additions are:

  • Bonus depreciation and §179 asset expensing decoupling add-back
  • Exclusion from federal gross income for the §199 domestic production activity deduction
  • Interest on state and municipal obligations for states other than North Carolina
  • Reduction in an S corporation shareholder’s income from the corporation attributable to built-in gain tax imposed on the corporation
  • Excess of federal basis over state basis in property disposed of in a tax year
     

The only permissible subtractions from federal gross income will include:

  • Deductions allowed for add-backs for bonus depreciation and §179 asset expensing decoupling
  • Interest on certain federal and North Carolina obligations
  • Certain exempt gain from disposition of pre-1985 obligations
  • Social Security, qualified railroad retirement benefits, and government retirement benefits exempt under certain court settlements
  • Refunds of state, local and foreign taxes included in federal gross income
  • Certain income of enrolled members of Native American tribes
  • Excess of state basis over federal basis in property disposed of in a tax year
     

Credits
The state technology development credit, which will be renamed the “research and development credit,” will be extended through 2015. The state personal income tax childcare credit will be increased from $100 to $125 and will be made available to joint filers earning up to $40,000. However, a number of personal credits have been repealed, including:

  • Credit for certain real property donations for environmental conservation
  • Interactive digital media credit
  • Credit for taxes paid on certain federal retirement benefits
  • Childcare, education expense and employment-related expense credits
  • Disabled persons and construction of dwelling units for handicapped persons credits
  • Charitable contribution credit for non-itemizing taxpayers
  • Certain credits for low-income taxpayers
  • Credits for agricultural expenses, farm property taxes, and crops
     

Sales and Use Tax:
 
The legislation makes a number of changes to North Carolina’s state sales and use tax rules, including:

  • A number of exemptions for sales made in schools will be repealed in 2014
  • Beginning July 1, 2014, the state’s back-to-school sales tax holiday will be repealed
  • The 3 percent admission tax will be replaced by the general state sales tax rate, subject to certain exemptions
  • Sales tax will be levied on certain repair and maintenance contracts beginning in 2014
  • Sales of manufactured and modular homes will be subject to the full state sales tax rate in 2014
     

Estate Tax:
 
The tax reform legislation repeals the North Carolina estate tax. The repeal applies to the estates of decedents who die on or after January 1, 2013.


What Does CohnReznick Think?
The tax reform bill signed into law contains sweeping changes – taxpayers should review their specific situation to ensure that they understand how the new laws will impact their tax position.


Contact:
 
For more information, please contact Patrick Duffany, Partner and State and Local Tax Practice Leader, at 860-368-3607.
 
To learn more about CohnReznick’s state and local tax services, please visit our webpage.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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