On September 18, 2015, North Carolina Governor Pat McCrory signed the 2015 Appropriations Act, which will reduce corporate and personal income tax rates, phase in single sales factor apportionment and extend the Historic Preservation Tax Credit.
The corporate income tax rate will decrease from 5% to 4%, effective January 1, 2016. The corporate rate reduction can occur anytime during any year that the general tax fund collections are greater than $20.975 billion.
The single sales factor apportionment will be phased in over a three year period. The numerator of the apportionment factor has changed. Effective for tax years beginning on or after January 1, 2016, the numerator of the apportionment factor will change. It will be the property factor plus the payroll factor plus three times the sales factor. It previously was only two times the sales factor. The denominator will be five instead of four as it previously was. The apportionment factor will change again for tax years beginning on or after January 1, 2017. The numerator of the apportionment factor will be the property plus the payroll factor plus four times the sales factor and the denominator will be six instead of five. Finally, the apportionable income will be based on a single sales factor beginning on or after January 1, 2018.
Corporations with an apportionment percentage less than 100% and an apportionable income of more than $10 million must file an informational report with the Department of Revenue. The report must use the market-based sourcing showing the calculation of its tax year 2014 sales factor. A taxpayer may not request an extension to file the informational report.
Market based-sourcing is replacing cost of performance in many states. The current method in North Carolina is the cost of performance method. The cost of performance method states that service revenue is apportioned to the state where the income-producing activity is performed. If the income-producing activity is performed across multiple states then the revenue is apportioned entirely to the state with the greatest proportion of revenue earned. The cost of performance method is seen as an all or nothing type of sourcing. The new method of market based-sourcing will allow service income to be sourced to North Carolina if the services were delivered in North Carolina and income from intangibles would be sourced to another state if the intangibles were used in the other state. It allows states to tax out-of-state service providers with customers within the respective states. Services performed in Ohio for North Carolina customers would be included in the North Carolina sales factor numerator.
The personal income tax rate will be reduced from 5.75% to 5.499% for taxable years beginning on or after January 1, 2017.
The standard deduction amounts based on filing status will increase for taxable years beginning on or after January 1, 2016. Married filing jointly taxpayers will have an increase from $15,000 to $15,500, Head of household taxpayers will have an increase from$12,000 t0 $12,400 and single or married taxpayers filing separately will have an increase from $7,500 to $7,750.
An itemized deduction for medical and dental expenses will be allowed to the extent the expenses are deductible at the federal level for taxable years beginning on or after January 1, 2015.
Have a Barnes Dennig tax representative reach out to you today to discuss the changes in this law and how you and your business might be affected.