Specific State & Local Taxes for Businesses
The corporate income tax rate is 3%. The state is in the second year of its three-year transition to single sales factor apportionment for multistate corporations. Effective January 1, 2018, the state will determine how much of a corporation’s income is subject to state tax based solely on its revenue from sales located in or sourced to North Carolina. It will no longer factor in a company’s property and payroll in the state.
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. – contributions not to exceed five percent of net income; income from tax exempt securities; 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.
Quarterly estimated income tax payments are required if a corporation expects to have an income tax liability of $500 or more.
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.
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.
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.sosnc.com
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) rehabilitating historic structures and historic mills; 4) construction of cogenerating power plants; 5) qualified film or television production expenses; 6) qualified expenses of research performed in the state; 7) construction or leasing of a railroad intermodal facility in the State, and 8) manufacturing cigarettes for exportation.
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.
Special Tax Provisions for Limited Liability Companies
A LLC is subject to income 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.
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.
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 $22,300 per employee per year in 2016. Entities commencing business in North Carolina are subject to a tax rate of 1.0% during the first year. The rate may be changed after the entity comes under experience rating. The minimum tax rate allowed in 2016 under the experience rating tables is .06% of taxable payrolls; the maximum tax rate, 5.76%. The tax is administered by the Division of Employment Security within the North Carolina Department of Commerce. Information regarding the tax is available at www.ncesc1.com.
Privilege Taxes on Certain Machinery and Equipment
A privilege tax of 1% of sales price, with a maximum of $80 per article, is imposed on purchasers (excluding motion picture or film production companies or retailers of food prepared for consumption) 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 datacenters that purchase certain capitalized equipment. The privilege tax is imposed in lieu of State use tax, and a credit is allowed when a substantially equivalent tax is due and paid to another state.