The budget act does not contain many substantive tax changes, and rather is limited to budget matters. The two principal tax law changes are as follows.

First, individuals will compute their North Carolina taxable incomes starting with federal adjusted gross income, rather than federal taxable income. This will substantially change the adjustments required to adjust federal income to state taxable income.

The only important change for corporations is an amendment to GS 105-122(b)(2) to conform the capital/surplus franchise tax base to the way it likely has been applied in practice. In addition to a deduction for reserves for depreciation of tangible assets, a deduction will be allowed for income tax reserves for amortization of intangible assets. This change is effective for years beginning on or after January 1, 2007.

The Franchise Tax Bulletin currently states a deduction for allowable depreciation reserves, without limitation to tangible assets.

Other bills are pending affecting substantive tax law changes for corporations, including a major proposal for corporate combined returns, previously reported on in this blog.