North Carolina Governor Roy Cooper recently signed into law H.B. 1080 (Session Law 2020-58), a measure widely-supported in the Legislature and designed to stabilize the State’s coffers due to COVID-19’s revenue impact. H.B.1080 addresses North Carolina’s decoupling (opting out) of several federal tax provisions mostly found in the CARES Act signed into law by President Trump on March 27, 2020.
On Monday, July 20, 2020, the North Carolina Department of Revenue (NCDOR) released a notice identifying and explaining North Carolina’s decoupling from these specified federal tax provisions for use in calculating State individual or corporate income tax liability.
For tax year 2020, North Carolina hitched its wagon to the Internal Revenue Code (IRC) effective May 1, 2020, with certain exceptions to provisions of the CARES Act.
Below are several significant areas in which North Carolina has decoupled from the CARES Act through H.B. 1080:
Net operating loss (NOL) carrybacks for 2018-2020
- If a Federal carryback is made, the NC return for an affected carryback year must contain an add-back of the Federal carryback deduction, which could result in NC tax. This means an amended NC return would be required. Even if the loss is not absorbed in that year, an addition is required on the NC return due to the NOL being carried back to it.
- Starting with the 2021 tax year, 20% of the NOL added back in a previous year can be deducted.
- As with the bonus and Section 179 add-backs and deductions, there could be situations in which the taxpayer does not get the full benefit of the deduction due to having low taxable income or losses; there is no provision to ensure the full benefit of the subsequent deductions is realized.
PPP loan forgiveness income
- The PPP forgiven loan amount is not considered NC taxable income.
- Aligning with the IRS, expenses paid with forgiven PPP funds are not deductible. While this non-deductibility provision is the current conclusion of the IRS, Congress has expressed their disagreement with that conclusion, which could lead to an override of the IRS’s decision. Should Congress override the IRS, NC’s decision to deny this deduction will stand, resulting in additional NC taxable income.
2019 and 2020 Expanded interest expense deduction under 163(j)
- NC’s interest deduction threshold remains at 30% of adjusted taxable income (ATI) despite the CARES Act that increased it to 50% for tax years 2019 and 2020.
- Also, while the CARES Act allows 2019 ATI to be used in computing the 2020 interest deduction limitation, NC will not allow this.
2020 Income exemption for employer payments of student loan principal and interest
- Employer payments of an employee’s student loan obligation will be computed as taxable income for NC tax purposes despite a federal tax provision in the CARES Act allowing employer payments up to $5,250 to be tax-free.
2020 Above-the-line qualified charitable contribution deduction
- Despite the CARES Act’s temporary removal of certain charitable contribution limitations, North Carolina continues to limit charitable contributions for individuals to 60% of Adjusted Gross Income (AGI).
- Additionally, there will be no state above-the-line deduction of $300 as allowed in the CARES Act.
2018 – 2020 Suspension of excess business losses (i.e. reverting to the January 1, 2019 Code limiting the amount of losses that can be utilized in a given year)
- North Carolina remains under the auspices of The Tax Cut and Jobs Act (TCJA) regarding an individual taxpayer’s excess business losses.
- This means that if a taxpayer deducted greater than these limits for federal tax purposes during 2018 – 2020 due to the CARES Act’s provision allowing this, the taxpayer must add-back the excess to their taxable North Carolina income. If a return has already been filed for 2018 or 2019, an amended NC tax return would be required. Add-backs to taxable income may be deducted in equal installments between 2021 and 2025.
H.B. 1080 includes several other tax updates not related to North Carolina’s decoupling from the IRS. One of these provided clarity that only remote “marketplace facilitators” trigger economic nexus (200 transactions or $100,000+ in gross sales). A second update mandates that food delivery marketplace facilitators, such as UberEats, DoorDash, and GrubHub, must collect and remit local meal and sales taxes.
To learn more about CARES Act: Business Tax Highlights, click here.
To learn more about CARES Act: Individual Tax Highlights, click here.