On June 30, 2020, North Carolina Gov. Roy Cooper signed House Bill 1080, advancing the state’s IRC conformity to May 1, 2020, but decoupling from several tax relief provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The new law makes numerous other changes to the North Carolina tax system.
Interest expense
House Bill 1080 decouples North Carolina tax laws from the CARES Act relief under section 163(j) for the 2019 and 2020 tax years. The federal law provides a temporary increase in the limit on deductions for business interest payments from 30% to 50% of adjusted taxable income. House Bill 1080 requires taxpayers to add back the extra interest deduction claimed under section 163(j).
Qualified improvement property
With the May 1, 2020 conformity date, North Carolina will conform to the qualified improvement property (QIP) fix enacted by CARES Act. North Carolina taxpayers computing bonus depreciation should consider that the state uses a specific method to decouple from federal bonus depreciation that varies from many other states. For more information on the state impact of the amended federal QIP provisions, please read RSM’s article, State tax review: Qualified improvement property and the CARES Act.
Net operating losses
House Bill 1080 decouples North Carolina from the CARES Act changes in relating to treatment of net operating losses (NOLs). The CARES Act allows NOLs incurred in 2018, 2019 or 2020 to be carried back for five years and allows losses to be carried forward to tax years after Dec. 31, 2020, without being subject to the 80% income limitation. House Bill 1080 decouples from these changes by requiring individual taxpayers to add back the amount of any 2018, 2019 or 2020 NOL (other than farming losses) carried back to a prior year. The amount added back would be deducted in five equal installments beginning in 2021. Individual taxpayers would also be required to add back the amount of any carryforward deductions for NOLs (other than farming losses) arising in 2018, 2019 or 2020 in excess of the pre-CARES Act imitation. The amount added back would be deducted in five equal installments beginning in 2021.
Affiliated indebtedness
The legislation also aligns the franchise tax net worth affiliated indebtedness additions with the income tax add-back. Currently, an addition is required for indebtedness a corporation owes to a parent, a subsidiary, an affiliate or a noncorporate entity in which the corporation or an affiliated group of corporations owns directly or indirectly more than 50% of the capital interests of the noncorporate entity. House Bill 1080 rewrites the provision to require an addition for the amount of indebtedness the corporation owes that creates net interest expense, but does not create qualified interest expense. Net interest expense and qualified interest expense are as defined in the corporate tax provisions.
The amended affiliated indebtedness provisions are effective for taxable years beginning on or after Jan. 1, 2021, and applicable to the calculation of franchise tax reported on the 2020 and later corporate income tax returns.
