Corporate income and franchise taxes
How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?
The North Carolina corporate income tax is imposed on “state net income,” which is the taxpayer’s federal taxable income determined under the Internal Revenue Code, adjusted for statutory additions and deductions and, for multistate corporations, allocated and apportioned. North Carolina does not allow consolidated returns (unless authorized by the secretary of revenue) and corporations must file on a separate entity basis.
How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?
Most corporations apportion their income by the single sales factor. Exceptions include:
- railroad companies;
- telephone companies;
- motor carriers; and
- air and water transportation corporations, which have special formulas.
A corporation may request the use of an alternative apportionment formula if it believes the statutory formula subjects a greater portion of its income to tax than is attributable to its business in the state.
North Carolina regulates transfer pricing. If the secretary of revenue finds that a corporation’s intercompany transactions lack economic substance or are not at fair market value, the secretary may redetermine the corporation’s state net income by adjusting intercompany transactions or, if those adjustments are not adequate, by requiring a combined return of all members of the affiliated group that are conducting a unitary business.
How is nexus determined for corporate income tax purposes?
North Carolina imposes a corporate income tax on all C corporations doing business in the state. The term “doing business” is defined broadly by regulation as the operation of any activity for economic gain. The regulation further provides that corporations that are partners in partnerships or joint ventures operating in North Carolina are considered to be doing business in the state.
Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?
North Carolina has no specific statutory provision regarding affiliate nexus for corporate income tax purposes. The Department of Revenue interprets doing business broadly and views an agency relationship or ownership interest in a partnership, joint venture, or limited liability company operating in North Carolina as sufficient to create nexus.
What are the applicable corporate income tax rates?
For taxable years beginning on or after January 1, 2019, the corporate income tax rate is 2.5%.
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
There are several exemptions from the corporate income tax, including organizations exempt from federal income tax under the Internal Revenue Code and insurance companies paying the gross premiums tax.
Additions and deductions to federal taxable income are required to compute state net income. Deductions include interest from obligation of the United States and dividends treated as received from sources outside the United States, net of related expenses, to the extent included in federal taxable income. Several of the deductions relate to decoupling provisions and have related additions.
Many of the tax credits available to corporations have been repealed or expired. One exception is the tax credits for historic rehabilitation, which may be claimed against the corporate income tax. A taxpayer that qualified for a tax credit which has expired or sunset may continue to take any remaining installments or carryovers, assuming the statutory requirements are met.
What filing requirements and procedures apply? Are there special filing requirements for groups of company?
Every corporation doing business in the state must file a return. Consolidated returns are not permitted except as directed or allowed by the secretary of revenue. Any corporation filing a consolidated return for federal purposes must determine its state net income as if a separate federal return had been filed.
Corporate franchise tax If your state imposes a corporate franchise tax, please stipulate:
(a) The applicable tax base.
The franchise tax is imposed on the greatest of:
- the apportioned net worth base;
- 55% of the appraised value for property tax purposes of all the corporation’s real and tangible personal property in the state; or
- the total actual investment in tangible property in the state.
Net worth is defined as the corporation’s total assets without regard to the deduction for accumulated depreciation, depletion, or amortization less total liabilities, computed in accordance with generally accepted accounting principles or the method of accounting the corporation uses for federal income tax purposes. The net worth calculation is then subject to several statutory adjustments. The net worth base is apportioned by the same apportionment formula that the corporation uses for corporate income tax purposes.
(b) Tax rates.
The tax rate is $1.50 for each $1,000 of the corporation’s tax base, subject to a minimum tax of $200.
(c) Any exemptions or deductions.
There are several exemptions from the franchise tax, including organizations exempt from federal income tax under the Internal Revenue Code and insurance companies paying the gross premiums tax.
There is a deduction from the net worth base for accumulated depreciation, depletion, and amortization as determined in accordance with the method used for federal tax purposes. In addition, a creditor corporation may deduct the amount of indebtedness owed to it by an affiliate to the extent the indebtedness was added to the net worth base by the debtor corporation.
(d) Filing formalities.
The franchise tax is reported on the same form as the corporate income tax.
Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?
Yes. It is imposed in addition to the corporate income tax.