North Carolina enacts Omnibus Tax Bill
Makes sweeping changes to NEL deduction
TAX ALERT |
On May 29, 2014, North Carolina Governor Pat McCrory signed into law HB 1050, or the Omnibus Tax Bill (the Bill). Most significantly, the Bill replaced the corporate net economic loss (NEL) deduction with a state net loss (SNL) deduction for tax years beginning on or after Jan. 1, 2015. Other changes to the corporate income tax, as well as changes to the city and county privilege license taxes and the sales and use tax, are also likely to have substantial impact.
Corporate income tax
The clear high point of the Bill is the repeal of the NEL deduction provided under N.C. Gen. Stat. section 105-130.8, and its replacement through the creation of the SNL deduction provided under N.C. Gen. Stat. section 105-130.8A. The new SNL deduction is intended to bring North Carolina closer into line with the federal net operating loss (NOL) deduction provided under Internal Revenue Code (IRC) section 172, which arguably should benefit taxpayers both in terms of certainty and compliance costs.
Items to consider in relation to the SNL deduction include:
- The SNL is calculated based on the amount by which a taxpayer's North Carolina allowable deductions for the year, other than prior-year losses, exceed federal gross income as modified by North Carolina additions and subtractions. The NEL is based on the amount by which allowable deductions exceed income from all sources, including income not subject to tax.
- The SNL follows IRC sections 381 and 382 in determining the extent to which a loss would survive a merger or acquisition, except that federal loss limitations may be impacted by apportionment as the SNL is calculated on a post-apportionment basis in the year of loss and applied to offset future post-apportionment income. Under the NEL, pre-merger losses can be used to offset post-merger profits only to the extent that (1) the group of assets previously operated at a loss is operated at a profit after the merger, (2) but for the merger, the corporation suffering the loss would have been able to utilize the deduction, and (3) the business of the acquired corporation that sustained the loss has not been materially altered or enlarged by the merger.
- The SNL, like the NEL before it, provides for a 15-year carryforward period, with no carryback allowed.
Taxpayers should be aware that the NEL is still in effect through the end of calendar year 2014. Taxpayers that incur losses in the current tax year will need to calculate NEL for 2014 subject to a 15-year carryforward period. N.C. Gen. Stat. section 105-130.8 will continue to govern the computation and utilization of NEL incurred or carried forward for tax years beginning before Jan. 1, 2015. Accordingly, all unused NEL as of the end of calendar year 2014 will expire for tax years beginning on or after Jan. 1, 2030.
The North Carolina Department of Revenue is working on drafting guidance to provide details regarding the NEL repeal and SNL implementation. Presumably, this guidance will address transition items not addressed in the Bill, such as the utilization order of NEL and SNL carryforwards. As of the date of this article, the Department has not officially commented regarding the scope of the guidance or when it will be released.
The Bill also provides clarification of the state's treatment of IRC section 179 expenses, codifying the $200,000 investment limitation, which had been incorrectly listed as $125,000 under prior law. The Bill also provides an explanation of tax basis adjustments required as a result of the state's decoupling from federal accelerated depreciation and expensing and allows a taxpayer to take any remaining bonus depreciation in the current tax year in relation to an asset that has been sold or no longer has any remaining useful life.
Local privilege license taxes
The Bill mandates the repeal of city and county privilege license taxes. For the 2014-2015 fiscal year, localities may continue to apply the privilege license tax ordinance that was in effect for the 2013-2014 fiscal year. However, beginning on July 1, 2014, a locality has the power to levy privilege taxes only on businesses physically located within the limits of the locality, as opposed to entities physically located elsewhere but doing business within the limits of the locality. After July 1, 2015, the city and county privilege tax statute is repealed, and localities are no longer authorized to impose privilege license taxes.
Sales and use tax
The Bill made the following changes to the state's sales and use tax:
- Prepaid meal plans: Effective for prepaid meal plans purchased or billed on or after July 1, 2014, the Bill provides for the imposition of a 4.75 percent privilege tax on gross receipts derived from the sale of a prepaid meal plan. The Bill defines the term "prepaid meal plan" as a prepaid arrangement offered by an institution of higher learning that entitles a person to food or prepared food on a predetermined unit or unlimited basis. The sale of the plan is sourced to the location where the food or prepared food is available to be consumed, and if the plan is bundled with other items (e.g., tuition), the tax base is determined using a reasonable allocation of value. Where an institution of higher learning enters into an arrangement with a food service provider, both entities are considered to be the retailer of any prepaid meal plans sold. However, absent an election to the contrary in the agreement between the institution of higher learning and the food service provider, the institution of higher learning is required to collect and remit the tax. Note: For the purposes of determining the applicability of this tax, a plan that provides a purchaser with a fixed dollar amount that declines with use is not a prepaid meal plan.
- Rentals of private residences, cottages or similar accommodations: The Bill provides that gross receipts derived from the rental of private residences, cottages or similar accommodations listed with a real estate broker or agent where there is a right to occupy beginning on or after June 1, 2014, is subject to the 4.75 percent general rate of sales and use tax and any local occupancy tax imposed by a municipality.
- Service contracts: Effective Oct. 1, 2014, the Bill changes the definition of the term "service contract" to include any contract under which an obligor agrees to maintain or repair tangible personal property (including motor vehicles) other than a manufacturer's warranty or dealer's warranty provided at no charge. The sale price of, or gross receipts derived from the sale of, a service contract is subject to the 4.75 percent sales and use tax. The Bill provides a detailed explanation of when an obligor or facilitator will be deemed to be a service contract retailer required to collect and remit the tax and provides a number of exemptions, including an exemption for service contracts for tangible personal property that will become part of real property. Retailers will be required to report sales of service contracts on the accrual basis of accounting, regardless of whether they generally report sales on a cash basis.
- Real property contractors: Effective Jan. 1, 2015, the Bill provides new rules applicable to real property contractors and contractor-retailers. A real property contractor is considered the end user of tangible personal property purchased for use in fulfilling a construction contract and must pay sales or use tax on the cost price of the property purchased unless a statutory exemption under G.S. 105-164.13 or G.S. 105-164.13E applies. A contractor-retailer may purchase tangible personal property that it both uses and resells as exempt inventory under a sale for resale exemption, but it must pay use tax on any property taken out of inventory and used to fulfill a construction contract.
- Vapor products: Effective Feb. 1, 2015, the Bill changes the definition of the term "tobacco product" to include vapor products. The term "vapor product" is defined as "[a]ny nonlighted, noncombustible product that employs a mechanical heating element, battery, or electronic circuit regardless of shape or size and that can be used to produce vapor from nicotine in a solution." Accordingly, effective July 1, 2014, vapor products will be subject to the state's 12.8 percent tobacco excise tax.
Taxpayers must be very careful in determining the impact of the Bill on their business liabilities as the changes involved affect a wide variety of taxes and there is substantial variation in effective dates.
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