North Carolina ~ Multiple Taxes: Interest Expense Deduction Amended, Financial Swaps Added to Definition of Apportionable “Sales” , and Other Changes Enacted

Legislation has been enacted that:

— amends the corporate income tax interest expense deduction;

— broadens the definition of “sales” for purposes of the sales factor of the corporate income tax apportionment formula to include dividends and receipts from certain financial swaps and similar financial derivatives;

— adds a definition of “air transportation corporation” to the special apportionment formula for transportation corporations;

— repeals the franchise tax on mutual burial associations, effective for taxes due on or after April 1, 2017;

— expends personal income tax deductions; and

— requires a personal income tax addition adjustment for any unqualified withdrawal from a Parental Savings Trust Fund account.

The legislation also made numerous technical and clarifying changes to sales and use, motor fuels, tobacco, and administrative tax provisions.

Corporate Income Tax Interest Expense Deduction

The corporate income tax deduction for qualified interest expense paid to a related member is limited to the greater of:

— 15% of the taxpayer’s North Carolina adjusted taxable income; or

— the taxpayer’s proportionate share of interest paid to a person who is not a related member during the same taxable year.

The deductible interest expense was previously limited to 30% of the taxpayer’s North Carolina adjusted taxable income. A taxpayer’s proportionate share of interest is the amount of net interest expense paid directly to or through a related member to a related member that is the ultimate payer of the interest, divided by the total net interest expense of all related members that is paid directly to or through a related member to the same ultimate payer, multiplied by the interest paid by the ultimate payer to a person who is not a related member. In determining whether the interest expense limitation does not apply because another state imposes an income or gross receipts tax on the interest income, interest amounts eliminated by combined or consolidated return requirements do not qualify as interest.

Personal Income Tax Adjustments

Taxpayers computing personal income tax liability must add to federal adjusted gross income any amount withdrawn from a Parental Savings Trust Fund account that is not used for qualified higher education expenses, unless the withdrawal was due to the death or permanent disability of the designated beneficiary. Taxpayers may deduct from adjusted gross income:

— the amount of income from the cancellation of indebtedness under IRC §108(i) that is recognized for federal income tax purposes; and

— the amount by which a federal ordinary and necessary business expense deduction was reduced or not allowed because the taxpayer claimed a federal credit against its federal income tax liability instead of the deduction;

An itemized deduction may be claimed for amounts repaid in the current taxable year for an item included in adjusted gross income in an earlier taxable year because the taxpayer had an unrestricted right to the item. If the repayment is $3,000 or less, the deduction is the amount of the repayment modified by the federal 2%-of-adjusted-gross-income limit on certain miscellaneous deductions under IRC §67(a) and excluding the miscellaneous deductions provided under IRC §67(b). If the repayment is more than $3,000, the deduction is the amount of repayment. The deduction is not allowed if the taxpayer calculates the federal income tax for the year of repayment under IRC §1345(a)(5). The itemized deduction and the deduction for IRC §108(i) income is effective for taxable years beginning on or after January 1, 2014. A taxpayer that was required to make a North Carolina addition adjustment for the amount of IRC §108(i) income that was deferred for federal income tax purposes and that may be subtracted for taxable years beginning on or after January 1, 2014, may apply to the North Carolina Department of Revenue for a refund of income tax paid on the deferred income. A request for a refund must be made by July 1, 2016. A request for a refund received after that date is barred.

S.B. 729 , Laws 2016, effective for taxable years beginning on or after January 1, 2016 and as noted


Wolters Kluwer Tax and Accounting

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