United States

North Carolina decouples from CARES Act provisions

TAX ALERT  | 

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.

Paycheck Protection Program

House Bill 1080 expressly conforms to the federal exclusion from gross income of any amount of indebtedness forgiven on a loan covered under the CARES Act's Paycheck Protection Program. A number of states have conformed to this provision of the CARES Act. 

Sales and use taxes

The new legislation also makes several changes to the sales and use tax highlighted below:

  • Clarifies that marketplace facilitators must collect the sales and use tax if they are engaged in business in North Carolina, including remote facilitators that make $100,000 of sales or 200 transactions, or facilitators with physical presence in the state
  • Provides that retailers must collect local meals tax on prepared food and beverages if they are required to remit the state and local sales and use tax, i.e., food delivery platforms will be responsible for collecting any local meals tax in addition to the sales and use tax, effective July 1, 2020

Takeaways

North Carolina enacted COVID-19 tax relief in early May, but nationwide budget shortfalls have states decoupling from portions of the CARES Act. Businesses in North Carolina should be aware of the new law’s effect on interest expense deductions and net operating losses. Those changes could significantly increase tax burdens for some companies filing in the state. Taxpayers with questions on state conformity should consult with their state and local tax adviser for more information.

Businesses in every industry should consider State tax planning in response to economic distress. For more information on the coronavirus, please see RSM’s Coronavirus Resource Center which includes related and frequently updated developments.

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