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Article | State and Local Tax

North Carolina Passes Sweeping Tax Law Changes

New North Carolina legislation, S.B. 174, which was signed into law by Governor Roy Cooper on April 3, includes extensive changes for pass-through entities (PTEs) as well as for corporate and personal income taxpayers.

IRC Conformity Update:

S.B. 174 updates North Carolina’s corporate and individual income tax conformity date from April 1, 2021, to January 1, 2023.

PTEs

The changes for PTEs are both forward-looking and retroactive for tax years beginning on or after January 1, 2022.

Retroactive changes:

S corporation and Partnership Owners:

The updated provision now allows partnerships and S corporations to become permissible owners of a PTE electing partnership. Previously, only partnerships that were fully owned by individuals, estates, trusts, and certain tax-exempt organizations were eligible to make the North Carolina PTE tax election.

Tiered partnerships are now eligible to make the election. However, for the purposes of PTE tax, the partnership's calculation of North Carolina taxable income cannot include the distributive share of the pass-through partner. Rather, according to N.C. Gen. Stat. § 105-154(d), the partnership must transfer the distributive share to the pass-through partner. This modification takes effect for taxable years starting on or after January 1, 2022.

Credit for Taxes Paid to Another State:

The Act amends N.C. Gen. Stat. § 105-153.9 to allow North Carolina resident partners and S corporation shareholders that don’t pay the entity-level PTE tax in North Carolina a credit for PTE tax payments made in other states. This change is effective for taxable years beginning on or after January 1, 2022.

Updates for Tax Year 2023 and Beyond:

  • Resident Partners and Shareholders: Starting from January 1, 2023, the Act will exclude the resident partner or shareholder's portion of the PTE's income or loss that is not related to North Carolina from the calculation of North Carolina taxable income for the PTE. The resident partners and shareholders can deduct their portion of the PTE's income, which is subject to PTE tax in another state and included in their adjusted gross income. However, they won't receive a tax credit for taxes paid to other states, and the credit that was previously available to resident shareholders of taxed S corporations for taxes paid to other states is now abolished.
  • Multistate Sole Proprietorships: The North Carolina Department of Revenue's current treatment of multistate sole proprietorship is confirmed by the Act, which requires these businesses to allocate and apportion in the same way as partnerships and S corporations
  • Binding Election: Beginning on or after January 1, 2023, the PTE tax election is an annual election for the tax year covered by the return and may not be revoked after the return is filed.

    • Administrative and Miscellaneous Provisions

    Under S.B. 174, a presidentially declared disaster can result in the waiver of penalties for failure to timely file an informational return.

    Bad Check/EFT Penalty: The new law clarifies that bad check or electronic funds transfer penalties apply to garnishees who issue such payments and allows taxpayers to request review of proposed assessments or denials of refunds using forms other than Form NC-242, provided they include a written statement clearly indicating their request for review.

    Statute of Limitation on Collections: North Carolina now has a 10-year limitations period for collecting delinquent taxes, starting from the date the respective taxes become collectible by the DOR."

    If you have questions on State and Local Tax matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

    About the Author(s)
    Bryan M. Holm, CPA, MST, Manager, State and Local Tax Bryan Holm is a Manager in the Cherry Hill, NJ office of HBK CPA's and Consultants. He joined the firm in 2021 as a member of the HBK State and Local Tax (SALT) team. His background includes work with top 10 accounting firms. Prior to specializing in state and local taxation, Bryan worked in tax resolution for the Internal Revenue Service. He has served clients in a variety of industries including private equity firms, manufacturing, the restaurant industry, retail, construction, and the banking industry. Bryan has provided a variety of state and local tax services to clients, including; Audit Defense, Refund Reviews, Nexus Reviews, Voluntary Disclosure Agreements, Income/Franchise Tax Compliance, M&A Due Diligence, and SALT Consulting and Advisory Services. Bryan has also been a speaker and writer on state and local tax matters.
    Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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