Below is a brief overview of 2015 North Carolina tax law changes.
In 2015, the North Carolina General Assembly made some modest changes in a continuation of its 2013 efforts in overhauling the State's tax system to transition North Carolina from an income-based tax system toward a consumption-based tax system. Some of the most significant 2015 changes include reducing the personal income tax rate, raising the standard deduction, restoring medical deductions, expanding the sales tax base to include certain services, phasing in single-sales factor apportionment for multistate corporations, and changes to the franchise tax.
Personal Income Tax Changes
The General Assembly enacted three personal income tax relief provisions: restoration of the medical and dental expense deduction for itemizers in 2015, an increase in the standard deduction in 2016 and a rate reduction in 2017.
Prior to the 2013 tax reform, the N.C. itemized deduction was based on the federal itemized deduction amount. In 2013, N.C. itemized deductions were limited to charitable deductions, mortgage interest, and real property taxes paid with respect to a qualified residence (with the deduction for mortgage interest and real property taxes limited to $20,000 in the aggregate). Beginning with the 2015 tax year, N.C. itemizers may once again include the amount allowed under IRC Sec. 213 for medical and dental expenses in their N.C. itemized deduction.
Beginning in 2016, the N.C. standard deduction will increase from $15,000 to $15,500 for married taxpayers filing jointly, from $12,000 to $12,400 for heads of households, and from $7,500 to $7,750 for single taxpayers and married taxpayers filing separately.
Beginning in 2017, the personal income tax rate will drop from 5.75% to 5.499%.
Expansion of the Sales Tax Base
Beginning March 1, 2016, the sales tax base is expanded to include repair, installation and maintenance services (“RMI services”). RMI services are services performed to determine what needs to be done to keep tangible personal property in working order, to keep such property in working order and to restore such property to working order. Tangible personal property for this purpose specifically includes motor vehicles. RMI services also include services to install or apply tangible personal property.
The definition of a “retailer” liable for sales tax is amended to exclude a person whose only business activity is performing such services and who otherwise derives less than half of its revenue from retail sales. The rationale for narrowing the definition of retailer is to limit the base expansion to services from existing retailers who are already subject to the sales tax system, but not necessarily contractors who only perform services or for whom only a portion of their services qualify as RMI services. The definition of a “retailer” has also been amended to exclude a person that solely operates as a real property contractor. Thus, a person who operates as a real property contractor by installing tangible personal property onto real property and who does not also sell tangible personal property at retail will not become a retailer and so will not be swept into the sales tax system.
Single Sales Factor Phase-in for Multi-State Corporations
In North Carolina, a multistate corporate taxpayer apportions its business income to North Carolina by multiplying income by the average of three factors representing the proportion of its total property, payroll and sales that are located in or sourced to N.C. Beginning in 2016, N.C. will phase in single sales factor apportionment over a three-year period. Under the single sales factor phase-in, the sales factor will be given triple weight in 2016 and quadruple weight in 2017. In 2018, the property and payroll factors will be repealed altogether, and business income will be apportioned solely by reference to the sales factor. The rationale for the change is that basing the corporate tax, in part, on property and payroll implicitly penalizes corporations with substantial investment and employees in the State.
Franchise Tax Changes
In addition to income tax, North Carolina imposes a franchise tax on corporations for the privilege of doing business in this State. Historically, the franchise tax is levied on the greatest of three measures: (i) the taxpayer's apportioned issued and outstanding capital stock, surplus and undivided profits; (ii) 55 percent of the appraised value as determined for ad valorem taxation of real and tangible personal property in North Carolina; or (iii) the taxpayer's total actual investment in tangible personal property in North Carolina. Effective for 2017, the capital stock base has been replaced by a net worth base. Net worth is defined as total assets less total liabilities computed in accordance with GAAP or, for non-GAAP filers, in accordance with the taxpayer’s federal tax accounting methods. In calculating its net worth, the taxpayer may deduct depreciation and amortization as computed for federal tax purposes and the cost of treasury stock and must add back debt owed to affiliates. All other adjustments required under current law in computing the capital stock base will no longer apply in computing net worth.