Specific State & Local Taxes for Businesses

Specific State & Local Taxes for Businesses

Corporate Income Tax

An income tax is levied at the rate of 6.9% on the portion of net income allocable to the State. For tax years 2009 and 2010 there is a 3% surtax on tax payable by a corporation. The surtax is in addition to the income tax levied under G.S. 105-130.3 and is computed on tax before any available credits. No addition to tax may be made pursuant to G.S. 105-163.41 to the extent the underpayment of estimated tax is due to the addition of the surtax.

Corporations with taxable nexus in North Carolina and at least one additional state calculate their North Carolina apportionable income through use of the apportionment formula as described in the franchise tax section on the next page. Non-apportionable income is directly allocated in accordance with applicable revenue statutes. Corporations without taxable nexus in at least one state other than North Carolina are not permitted to apportion income.

If a corporation believes that the statutory apportionment formula results in the allocation to this State of a greater portion of its net income than is reasonably attributable to business or earnings within the State, it may make a written request to the Secretary for permission to use an alternative method of apportionment. The corporation has the burden of establishing that the alternative method is the better method of determining the amount of the corporation’s income attributable to the corporation’s business in the State. If granted, the order can apply to no more than three years and is renewable. If denied, the Secretary’s decision is final and is not subject to administrative or judicial review.

In determining net income, North Carolina allows – in addition to operating expenses, depreciation, etc. – a deduction for all taxes paid or accrued in the year, except taxes on income; contributions not to exceed five percent of net income; income from tax exempt securities; payments to employee pension or profit-sharing trusts; current year losses; dividend received from captive real estate investment trust; and net economic losses (as defined in the law) carried forward from any or all of the 15 preceding years. Domestic production income excluded under section 199 of the Internal Revenue Code (IRC) and income from international shipping activities excluded under subchapter R of chapter 1 of the IRC must be added to income.

For tax year 2008, taxpayers were required to add to federal taxable income 85% of the 50% additional first-year depreciation deduction allowed for calendar year 2008 and fiscal year 2007 for property placed in service on or after January 1, 2008 for federal income tax purposes in section 168(k) or section 168(n) of the Internal Revenue Code under the Economic Stimulus Act of 2008. A taxpayer may deduct 20% of the total amount of bonus depreciation added to federal taxable income in tax year 2008 in each of the first five taxable years beginning on or after January 1, 2009.

North Carolina’s treatment of the taxability of subsidiary dividends received conforms to the federal determination. Taxable income is reduced by the amount of special deductions on the federal form. Because this income is nontaxable, corporations are required to attribute expenses to non-taxed dividends in arriving at State taxable income. North Carolina provides limits on the potential tax liability of certain taxpayers as a result of the attribution of expenses to dividends. For most corporations, the amount of expenses attributed to dividends is limited to 15% of the dividends. For bank holding companies or electric power holding companies, which are required by federal law to maintain a holding company structure, special limits apply and tax credits are available to recoup part of the additional tax paid due to attribution of expenses to dividends.

Quarterly estimated income tax payments are required if a corporation expects to have an income tax liability of $500 or more.

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Franchise Tax

A franchise tax is levied on business corporations (including those electing federal S Corporation status and limited liability companies that elect to be taxed as C or S corporations for federal income tax purposes) at the rate of $1.50 per $1,000 of the largest of three alternate bases. These bases are (a) the amount of the capital stock, surplus, and undivided profits apportionable to the State; or (b) 55% of appraised value of property in the State subject to local taxation; or (c) the book value of real and tangible personal property in the State less any debt outstanding which was created to acquire or improve real property in the State. Book value may be computed by use of the same depreciation methods as are permitted for federal income tax purposes.

Only corporations with taxable nexus in one or more other states are permitted to apportion “capital” as described in (a) above. The formula used by corporations to determine the amount of “capital” apportionable to North Carolina is the total of the following ratios divided by 4: the ratio of payrolls in the State to total payrolls; the ratio of the value of tangible property used in the State to the value of all tangible property used, wherever located; and two times the ratio of sales of merchandise shipped to North Carolina customers to total sales. In computing the property ratio, owned property is valued at original cost and leased property is valued at eight times the annual rental rate.

For several other types of industries (construction contractor, securities dealer, a loan company or a corporation that receives more than 50% of its ordinary gross income from intangible property), apportionment is based only on the sales factor.

Holding companies (80% of gross income is from subsidiaries) are separately taxed and the tax may not exceed $75,000 when it is computed on the capital stock, surplus, and undivided profits base.

The minimum franchise tax is $35.

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Incorporation Fees

A fee of $125 is payable to the Office of the Secretary of State upon filing articles of incorporation; this fee is $60 for non-profit corporations. There is a fee of $250 for application for certificate of authority on foreign companies only. In addition, an annual report filing fee may be paid with the corporation’s income and franchise tax return or may be filed and paid electronically with the North Carolina Secretary of State. If the fee is paid with the return, the filing fee is $25. The franchise tax and corporate income tax are reported on the same return.

For corporations set up as LLCs, a fee of $125 is due when filing articles of organization; a fee of $250 for application for certificate of authority. An annual report with a $200 filing fee is also required, but LLC’s subject to the franchise tax may receive a franchise tax credit equal to the difference between this fee and the standard $25 annual report fee.

Various fees other than those mentioned above are imposed when documents are delivered to the Office of the Secretary of State for filing. Additional information can be obtained from the Corporations Division, Office of the Secretary of State, Post Office Box 29622, Raleigh, North Carolina 27626-0622, and from the Secretary of State’s website at http://www.secstate.state.nc.us

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Tax Credits for Growing Businesses (Article 3J)

Effective for taxable years beginning on or after January 1, 2007, Article 3J provides tax credits to growing businesses. These credits replace the Article 3A credits, also known as the William Lee Act, which expired for taxable years beginning on or after January 1, 2007, with some exceptions. A taxpayer cannot take Article 3J credits and Article 3A credits with respect to the same establishment.

Credits are available for 1) creating jobs; 2) investing in business property; and 3) investing in real property (limited geographic availability). The Article 3J tax credits are based on a system that divides the State into three development tiers, with tier one being the most economically distressed and tier three being the least economically distressed. Each county is assigned an annual tier designation by the Secretary of Commerce. The Department of Commerce publishes a list of county tier designations at www.nccommerce.com. Within each tier, there may be urban progress zones or agrarian growth zones, a list of which is published by the Department of Commerce.

The amount of the creating jobs credit and the number of jobs that must be created to qualify varies by tier and whether the job is created in an urban progress or agrarian growth zone. The business property credit is calculated as a percentage of the amount of investment over a threshold. The threshold and percentage vary by the tier of the location where the property is located, with urban progress and agrarian growth zones treated as being in tier 1. The real property credit is available only for property in service in a tier 1 county.

To qualify for the Article 3J credits, job creation or investment must occur at an establishment whose primary activity is one of the following: 1) aircraft maintenance and repair; 2) an air courier services hub; 3) a company headquarters (creation of at least 75 jobs within 24 months); 4) a customer service call center; 5) an electronic shopping and mail order house; 6) information technology and services; 7) manufacturing; 8) a motorsports facility; 9) a motorsports racing team; 10) research and development; 11) warehousing; or 12) wholesale trade.

In addition, a taxpayer must satisfy general eligibility requirements by: 1) meeting wage standards published by the Department of Commerce; 2) providing health insurance for all full-time employees at the credit-qualifying establishment and paying at least 50% of health care premiums; 3) having a good environmental record; 4) having a good OSHA record; and 5) having no overdue tax debts with the State.

The creating jobs and business property credits are taken in four equal installments and the real property credit in seven installments, beginning with the taxable year following the year in which the qualifying activity took place. The credits are allowed against the franchise tax, the income tax, and the gross premiums tax. The taxpayer may divide a credit between the taxes against which it is allowed. The total of all credits may not exceed 50% of the cumulative amount of taxes against which they are allowed for the taxable year, reduced by the sum of all other credits against those taxes. Unused credits may be carried forward for the succeeding five years (15 years for the credit for investment in real property and 20 years for investments of $150,000,000 over two years).

Additional information on the Article 3J credits is available on the Department of Revenue website at www.dornc.com.

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Other Income Tax Credits

Income tax credits are also available for the following: 1) investing in renewable energy property; 2) construction of low-income housing; 3) construction of renewable fuel facilities; 4) North Carolina State Ports Authority wharfage, handling and throughput charges; 5) contributions of cash or property to improvement projects undertaken by development zone agencies; 6) rehabilitating historic structures and historic mills; 7) donations of real property used for public access, conservation, or conservation tillage equipment; 8) gleaned crops; 9) S&L supervisory fees; 10) construction of cogenerating power plants; 11) recycling of oyster shells; 12) certain telephone subscriber line charges; 13) investing in large or major recycling facilities; 14) construction of dwelling units for handicapped persons; 15) construction of poultry composting facilities; 16) certain holding company expenses related to dividends; 17) qualified film or television production expenses; 18) small business health insurance costs; 19) biodiesel producers; 20) expenses of research performed in the state or payments for research to universities in the state; and 21) construction or leasing of a railroad intermodal facility in the State.

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Income Taxes for S Corporations

S Corporations are not subject to the corporate income tax. Each shareholder’s pro rata share of S Corporation income attributable to North Carolina is taxed under the individual income tax. A shareholder who is a resident of the State also takes into account his share of S Corporation income not attributable to North Carolina when computing his individual income tax.

An S Corporation incorporated or doing business in this State is required to file an information return with the Department of Revenue. The return should show the name, address, social security or federal identification number of each shareholder, and for each shareholder, income attributable and the amount of income not attributable to the State.

An S Corporation is required to file an agreement with the Department of Revenue for each nonresident shareholder whereby each nonresident shareholder agrees to file an income tax return, pay tax imposed by the State, and be subject to personal jurisdiction in the State for purposes of collecting unpaid taxes, penalties, interest, etc. However, an S Corporation may file a composite return and make composite payment of tax on behalf of some or all of its nonresident individual shareholders.

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Special Tax Provisions for Limited Liability Companies

A LLC is subject to taxation as a partnership if it is classified as a partnership for federal income tax purposes or as a corporation if it is classified as a corporation for federal income tax purposes. A single-member LLC may also be classified as a disregarded entity, meaning its income, losses, and income tax credits are reported on the owner’s income tax return. An LLC classified as a corporation (C or S) for federal income tax purposes is subject to the franchise tax, but all other LLCs are exempt. However, it is the intent of the law that the franchise tax applies equally to assets held by corporations and assets held by corporate-affiliated LLCs. A non-corporate LLC’s assets are attributed to a controlling corporation if the corporation or affiliated group of corporations owned 50% or more of the LLC’s assets. This is to prevent corporations from reducing their franchise tax by transferring assets to their LLC.

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Withholding Income Tax

Employers are required to withhold individual income tax from wages and salaries of their employees. A pension payer that must withhold federal income tax from a pension payment to a North Carolina resident is required to withhold State income tax. A pension recipient may elect not to have taxes withheld and certain pension payments are exempt.

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Employment Security Tax

Business entities are subject to a payroll tax under the North Carolina Employment Security Law if they have one or more employees for 20 different weeks during a calendar year or pay $1,500 in wages in any calendar quarter during a calendar year in this State. The tax is payable quarterly and applies to wage payments up to $19,700 per employee per year in 2010. Entities commencing business in North Carolina are subject to a tax rate of 1.20% during the first two years. The rate may be changed after the entity comes under experience rating. The minimum tax rate allowed in 2010 under the experience rating tables is 0% of taxable payrolls; the maximum tax rate, 6.84%. The tax is administered by the Division of Employment Security.  Information regarding the tax is available at www.ncesc.com.

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Privilege Taxes on Manufacturing Fuel and Certain Machinery and Equipment

A privilege tax of 1% of sales price, with a maximum of $80 per article, is imposed on purchasers of manufacturing machinery, parts, and accessories stored, used, or consumed in the state and on purchasers of crane systems, port or dock facilities, rail equipment, and material handling equipment if they are used in connection with a major recycling facility in the state, and on research and development companies in the physical, engineering, and life sciences, specified software publishing companies, industrial machinery refurbishing companies, and eligible data centers that purchase certain capitalized equipment.

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