NORTH CAROLINA
DEPARTMENT OF REVENUE
TAX ADMINISTRATION
2006 Tax Law Changes
NC Department of Revenue 2006 Tax Law Changes
Tax Administration
Page 1
PREFACE
This document is designed for use by personnel in the North Carolina Department of
Revenue. It is available to those outside the Department as a resource document. It
gives a brief summary of the tax law:
• changes made by prior General Assemblies that take effect for tax year 2006, as
well as,
• changes made by the 2006 General Assembly, regardless of when they take
effect.
The local sales and use tax changes follow the State sales and use tax changes. The
document does not include law changes that affect the Department of Revenue but do
not affect the tax laws.
For further information on a tax law change, refer to the legislation that made the
change. Administrative rules, bulletins, directives, and other instructions issued by the
Department, as well as opinions issued by the Attorney General’s Office, may provide
further information on the application of a tax law change.
NC Department of Revenue 2006 Tax Law Changes
Tax Administration
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TABLE OF CONTENTS
Page
Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Personal Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Estate Tax, § § 105- 32.2( b), 105- 32.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Individual Income Tax, § § 105- 134.2( a), 105- 134.6( a),
105- 134.6( c)( 3a), 105- 134.6( c)( 5a), 105- 134.6( c)( 9),
105- 134.6( d)( 4) and ( 5), 105- 151.11( b), 105- 151.12( f),
105- 151.21( b), 105- 151.26, 105- 151.29, 105- 151.29( i),
105- 151.30, 105- 152( e), 105- 155( a), 105- 159, 105- 159.1( a),
105- 159.2, 105- 160.3( b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Withholding Tax, § § 105- 163.2B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
S Corporation Income Tax, § § 105- 131.2 . . . . . . . . . . . . . . . . . . . . . . . 12
Gift Tax, § § 105- 197.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Job Development Investment Grant Program, § § 143B, Article 10,
Part 2G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Corporate, Excise and Insurance Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Gross Receipts Amusement, § § 105- 40. . . . . . . . . . . . . . . . . . . . . . . . . 13
Alcoholic Beverage License and Excise Taxes, § § 105- 113.81A,
105- 113.82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Franchise Tax, § § 105- 114, 105- 114.1, 105- 116( b), 105- 120.2( c),
105- 122( b), 105- 122( d), 105- 122.1 . . . . . . . . . . . . . . . . . . . . . . . 14
Corporation Income Tax, § § 105- 130.2, 105- 130.5( a)( 18),
105- 130.7A, 105- 130.9( 4), 105- 130.17( g), 105- 130.20,
105- 130.46, 105- 130.47( a), 105- 130.47( i), 105- 130.48 . . . . . . . . 17
Piped Natural Gas Tax, § § 105- 187.43 . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Insurance Gross Premiums Tax, § § 58- 6- 25, 105- 228.5 . . . . . . . . . . . . 23
Tax Credits ( Applies to Multiple Schedules) . . . . . . . . . . . . . . . . . . . . . . . . . 24
Tax Incentives for New and Expanding Businesses, § § 105- 129.2,
105- 129.2A( a), 105- 129.2A( a2), 105- 129.2A( a4),
105- 129.3A( a), 105- 129.3B, 105- 129.4( b), 105- 129.6( a1),
105- 129.7( b)( 1), 105- 129.8, 105- 129.9, 105- 129.10 . . . . . . . . . . 24
Business and Energy Tax Credits, § § 105- 129.15, 105- 129.16A,
105- 129.16D, 105- 129.16E, 105- 129.16F . . . . . . . . . . . . . . . . . . 27
Historic Rehabilitation Tax Credits, § § 105- 129.35( a), 105- 129.36( a),
105- 129.36( b)( 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Research and Development Tax Credits, § § 105- 129.51( a),
105- 129.55( a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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Tax Administration
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TABLE OF CONTENTS
( Continued)
Page
Mill Rehabilitation Tax Credits, New Article 3H, § § 105- 129.70,
105- 129.71, 105- 129.72, 105- 129.73, 105- 129.74,
105- 129.75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Tax Credits for Growing Businesses, New Article 3I,
§ § 105- 129.80, 105- 129.81, 105- 129.82, 105- 129.83,
105- 129.84, 105- 129.85, 105- 129.86, 105- 129.87,
105- 129.88, 105- 129.89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
General Administration, § § 105- 228.90( b)( 1b), 105- 233, 105- 234,
105- 236, 105- 249.2, 105- 259( b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Sales and Use Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Sales and Use Tax, § § 105- 164.3, 105- 164.4( a), 105- 164.4( a)( 1b),
105- 164.4( a)( 1c), 105- 164.4( a)( 1d), 105- 164.4( a)( 1e),
105- 164.4( a)( 1f) b., 105- 164.4( a)( 1i), 105- 164.4( a)( 4c),
105- 164.4( a)( 4d), 105- 164.4( a)( 6), 105- 164.4( a)( 6),
105- 164.4( a)( 6a), 105- 164.4( a)( 8), 105- 164.4A,
105- 164.4B( a)( 3), 105- 164.4B( b), 105- 164.4C, 105- 164.4C( d),
105- 164.4D, 105- 164.6( c), 105- 164.7, 105- 164.12B, 105- 164.13,
105- 164.14( a1), 105- 164.14( a2), 105- 164.14( a), 105- 164.14( b)
and ( c), 105- 164.14( c), 105- 164.14( d1), 105- 164.14( h),
105- 164.14( j)( 2), 105- 164.14( j)( 2), 105- 164.14( j)( 3),
105- 164.14( j)( 5), 105- 164.14( k), 105- 164.14( k), 105- 164.14( l),
105- 164.14( m), 105- 164.15A( 1), 105- 164.16, 105- 164.16( a),
105- 164.21B, 105- 164.21B, 105- 164.27A( b), 105- 164.42H( a)( 3),
105- 164.44F( a), 105- 164.44F( a), 105- 164.44H, 105- 164.44I,
Chapter 66 of the 2006 Session Laws – State General Rate,
Chapter 66 of the 2006 Session Laws – Extend Sunsets on
Refunds, Chapter 151 of the 2006 Session Laws – PEG
Channel Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Local Sales and Use Tax, § § 105- 467( a), 105- 467( b), 105- 467( b),
105- 501. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Manufacturing Fuel and Certain Machinery and Equipment –
Article 5F, Article 5F, § § 105- 187.51, 105- 187.51A,
105- 187.51B, 105- 187.51B, 105- 187.52, 105- 187.53,
Chapter 66 of the 2006 Session Laws – Effective Date of
Privilege Tax for Research and Development Companies . . . . . . . . 68
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TABLE OF CONTENTS
( Continued)
Page
Property Taxes, § § 39- 60, 105- 273( 8a), 105- 273( 17), 105- 277.4( a1),
105- 277.4( a1), 105- 304( a1) and 105- 307, 105- 321( d), 105- 330.10,
105- 330.10, 105- 369, 105- 374( c), 105- 375, 105- 378( d) and
105- 373( a), 105- 380, 161- 31, Section 13 of S. L. 2005- 294 ( HB 1779),
S. L. 2006- 106, Section 9 — Revenue Laws Study Committee to Study
Present- Use Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Motor Fuels, 105- 449.48, 105- 449.49, 105- 449.60, 105- 449.65( b),
105- 449.80( a), 105- 449.88A, 105- 449.90( c), 105- 449.93,
105- 449.94, 105- 449.97( d), 105- 449.100, 105- 449.101( a) & ( b),
105- 449.102( a), 105- 449.105A( a), 105- 449.106( c), 105- 449.107( c),
105- 449.120( a)( 3a), 105- 449.127, 105- 449.137( b), 119- 18( a) . . . . . . . . . 73
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HIGHLIGHTS
During the 2006 session, numerous changes were made to the State’s revenue laws.
While all tax changes made are included in this document, as well as previous changes
that take effect in 2006, some of the most significant changes are outlined below. This
section is intended to provide a brief overview. For a more extensive summary and a
list of all modifications, please check the appropriate section of this document.
Personal Taxes ( page 7)
• The 8.25% rate levied on individual income was reduced to 8.0%, effective for
taxable years beginning on or after January 1, 2007, and reduced to 7.75%
effective for taxable years beginning on or after January 1, 2008.
• A new deduction was created for investment in the State’s 529 college savings
plan, effective beginning with the tax year 2006.
• A new joint filing option was enacted to assist nonresident taxpayers.
• The expense thresholds on the state child care tax credit were increased to
$ 3,000 and $ 6,000, to conform to the federal limitations.
• Income earned through an S corporation is now subject only to individual income
tax adjustments.
Corporate, Franchise, and Insurance Tax Changes ( page 13)
• The royalty reporting option for payment of trademark royalties to related
corporations was extended to patent and copyright royalties.
• LLCs that elect to be taxed as corporations for federal income tax purposes are
now subject to the general business franchise tax. This applies to taxable years
beginning or after January 1, 2007.
• The Department’s current tax treatment of deferred tax assets, as defined in
CTAM 97- 4, was codified.
Other Tax Credits ( Applies to Multiple Schedules) ( page 24)
• A new small business health insurance credit was created, effective January 1,
2007.
• The sunset of the William S. Lee Act was moved up to January 1, 2007 from
January 1, 2008. The Act was also modified through the creation of agrarian
growth zone provisions and an expanded definition of a development zone.
• Modifications were made to the existing renewable fuel credits to make
production of renewable fuel more attractive.
• A credit to encourage revitalization of historic mill facilities was enacted.
• The film incentive was modified to eliminate expense- based add- backs.
• A new credit was created for the donation of oyster shells to the Department of
Environment and Natural Resources.
NC Department of Revenue 2006 Tax Law Changes
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Sales Tax ( page 48)
• The State sales tax rate was reduced from 4.5% to 4.25%, effective December 1,
2006. The sunset of the remaining 0.25%, lowering the State rate from 4.25% to
4.0%, continues to be July 1, 2007.
• The taxes on video services were substantially rewritten, providing a uniform
State rate for video programming services provided by cable, telecommunication,
or any other type provider. The legislation also eliminates local franchise taxes
on these services, in certain circumstances, with a payment from the State to
local units as a replacement for this taxing authority.
• The sales tax rate for electricity sold to manufacturers was reduced from 2.83%
to 2.6%, effective July 1, 2007.
• A new 50% sales tax refund for motorsports racing teams was enacted, while the
refund they enjoy on aviation fuel was extended.
• Local school administrative units are now eligible for a refund of local sales taxes
paid.
• New exemptions were created for electricity and eligible business property sold
to Internet data centers and logging machinery.
• Certain types of R& D equipment purchases will be exempt from sales tax and
subject to the 1% privilege tax effective July 1, 2007.
• Several changes were made to conform to the streamlined sales tax agreement
including new definitions of telecommunications services, ancillary services, and
prepaid wireless calling. A new sales tax payment schedule for semi- monthly
payers was also established.
Property Tax ( page 70)
• New provisions allow electronic listing of individual personal property.
• County boards of equalization and review were given the authority to approve
late applications for present use value.
• Property sellers are now relieved of personal liability for property taxes when the
property transfers before taxes become delinquent.
• The effective date of the combined vehicle registration and property tax payment
system was extended to 2010.
Motor Fuels ( page 73)
• The variable portion of the gas tax was capped at current rate of 12.4 cents per
gallon, effective July 1, 2006 through June 30, 2007.
NC Department of Revenue 2006 Tax Law Changes
Tax Administration
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PERSONAL TAXES
ESTATE TAX
G. S. 105- 32.2( b) – North Carolina Estate Tax Liability Clarified: This subsection
was amended to clarify that the amount of North Carolina estate tax cannot exceed the
amount of federal estate tax determined without regard to the deduction for state death
taxes allowed under section 2058 of the Internal Revenue Code and the tax credits
allowed under sections 2011 through 2015 of the Code.
( Applies to estates of decedents dying on or after January 1, 2005; HB 1963, s. 26, S. L.
2006- 162.)
G. S. 105- 32.8 – Time for Reporting Federal Corrections Amended: Under prior law,
if the federal government corrected or otherwise determined gross estate tax, the
personal representative had two years to report the changes to the Department of
Revenue. As amended, the period for reporting federal corrections or determinations
for estate tax purposes has been reduced to six months.
( Effective July 1, 2006 and applies to federal determinations made on or after that date;
HB 1892, s. 3, S. L. 2006- 18.)
INDIVIDUAL INCOME TAX
G. S. 105- 134.2( a) – Repeal of the 8.25% Tax Rate to be Accelerated: This
subsection was amended to repeal the 8.25% income tax rate that applied to higher
income taxpayers in two phases. The rate will be reduced to 8% for tax years beginning
on or after January 1, 2007 and to 7.75% for tax years beginning on or after January 1,
2008. The 8.25% rate was scheduled to expire, for taxable years beginning on or after
January 1, 2008.
( The 8% rate is effective for taxable years beginning on or after January 1, 2007 and the
7.75% rate is effective for taxable years beginning on or after January 1, 2008; SB
1741, ss. 24.2 ( a), ( b), and ( c), S. L. 2006- 66.)
G. S. 105- 134.6( a) – Conforming Change: This subsection was amended to conform
to the changes to G. S. 105- 131.2 regarding adjustments required by shareholders of S
corporations. Consequently, an individual’s pro rata share of income from an S
corporation is subject only to the individual income tax adjustments in G. S. 105- 134.6
rather than being subject to both individual and corporate income tax adjustments.
( Effective for taxable years beginning on or after January 1, 2006; HB 1898, s. 2, S. L.
2006- 17.)
NC Department of Revenue 2006 Tax Law Changes
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G. S. 105- 134.6( c)( 3a) – Addition for a shareholder’s share of an S corporation’s
built- in gains tax deducted by the shareholder in determining federal taxable
income: New subdivision ( 3a) was enacted to require a shareholder of an S
corporation to make an addition to federal taxable income for the shareholder’s share of
built- in gains tax that the S corporation paid for federal income tax purposes. Because
the income subject to the built- in gains tax is taxed at both the S corporation and
shareholder level for federal income tax purposes, federal law allows the shareholder to
deduct his pro rata share of the built- in gains tax to provide relief from double taxation.
North Carolina does not impose a built- in gains tax; therefore, there is no double
taxation for State income tax purposes and no reason to allow the deduction for the
shareholder’s share of the built- in gains tax.
( Effective for taxable years beginning on or after January 1, 2006; HB 1898, s. 3, S. L.
2006- 17.)
G. S. 134.6( c)( 5a) – Conforming Change: This subdivision was added to require an
addition to federal taxable income for the market price of oyster shells for which a
taxpayer claims a tax credit for recycling oyster shells under G. S. 105- 151.30.
( Effective for taxable years beginning on or after January 1, 2006 and expires for
taxable years beginning on or after January 1, 2011; SB 1741, s. 24.18( e), S. L. 2006-
66.)
G. S. 105- 134.6( c)( 9) – Addition for Expenses Used to Calculate Credit for a Film or
Television Production Repealed: This subdivision, which required an addition to
federal taxable income for qualifying expenses for which a taxpayer claimed a credit
under G. S. 105- 151.29, was repealed.
( Effective for taxable years beginning on or after January 1, 2007; HB1522, s. 3, S. L.
2006- 220.)
G. S. 134.6( d) ( 4) and ( 5) – Parental Savings Trust Fund Deduction: Subdivisions ( 4)
and ( 5) were added as new adjustments required in calculating North Carolina taxable
income. Subdivision ( 4) provides a maximum deduction of up to $ 750 ($ 1,500 for
married individuals filing a joint return) for contributions to an account in the Parental
Savings Trust Fund of the State Education Assistance Authority established pursuant to
G. S. 116- 209.25. The deduction is allowed only if federal adjusted gross income is less
than the following amounts ( Married filing jointly/ Qualifying widow( er) - $ 100,000; Head
of household - $ 80,000; Single - $ 60,000; and Married filing separately - $ 50,000).
Subdivision ( 5) requires an addition to taxable income for any amounts that were
contributed to the Parental Savings Trust Fund and deducted in a prior year that were
withdrawn and used for purposes other than the qualified higher education expenses of
NC Department of Revenue 2006 Tax Law Changes
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the designated beneficiary unless the withdrawal was due to the death or permanent
disability of the designated beneficiary.
( Effective for taxable years beginning on or after January l, 2006; SB 1741, s. 24.12( a),
S. L. 2006- 66.)
The provisions in subdivision ( 4) were subsequently amended by Senate Bill 198 to
increase the maximum deduction for contributions to the Fund to $ 2,000 ($ 4,000 on a
joint return). The amendment is effective for tax years beginning on or after January 1,
2007 and applies to contributions to the Fund made on or after that date.
( As amended, the provision is effective for taxable years beginning on or after January
1, 2007; SB 198, ss. 27 ( a) and ( b), S. L. 2006- 221.)
G. S. 105- 151.11( b) – Employment Related Expenses for Determining State Child
Care Credit Increased to Federal Amounts: Under prior law, the State child care tax
credit was based on maximum employment- related expenses of $ 2,400 for one
qualifying dependent and $ 4,800 for two or more qualifying dependents. Subsection ( b)
was amended to conform the expense amounts to the federal amounts of $ 3,000 for
one qualifying dependent and $ 6,000 for two or more qualifying dependents. This
subsection was also amended to clarify that the amount of employment- related
expenses for which a credit may be claimed must be reduced by the amount of
employer- provided dependent care assistance excluded from gross income.
( Effective for taxable years beginning on or after January 1, 2006; HB 1892, s. 9, S. L.
2006- 18.)
G. S. 105- 151.12( f)– Credit for Certain Real Property Donations: Under G. S. 105-
269.15( a), the maximum dollar limit on a tax credit applies to the partnership as a whole
rather than to each of the individual partners. The 2001 General Assembly made an
exception to this provision for partnerships claiming the tax credit for real property
donations so that the dollar limit on the amount of a tax credit will apply to the individual
partners rather than the partnership. This exception was set to expire for taxable years
beginning on or after January 1, 2006. However, the law was amended to extend the
exception until tax years beginning on or after January 1, 2007.
( Effective July 10, 2006; SB 1741, s 24.15( a), S. L. 2006- 66.)
G. S. 105- 151.21( b) – Credit for Property Taxes Paid on Farm Machinery: This
statute was amended to change the definition of farm machinery from machinery
subject to State sales tax at the rate of 1% to machinery that is exempt from State sales
tax.
( Effective for tax years beginning on or after January 1, 2006; SB 622, s. 33.25, S. L.
2005- 276.)
NC Department of Revenue 2006 Tax Law Changes
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G. S. 105- 151.26 – Credit for Charitable Contributions by Nonitemizers: Under prior
law, the charitable contribution credit may not be claimed for contributions for which the
credits for certain real property donations and gleaned crops are claimed. This section
was amended to include contributions for which the credit for recycling oyster shells was
claimed. Therefore, the credit for charitable contributions and the credit for donating
real property, gleaned corps, or oyster shells may not be claimed for the same donation.
( Effective for taxable years beginning on or after January 1, 2006 and expires for
taxable years beginning on or after January 1, 2011; SB 1741, s 24.18( d), S. L. 2006-
66.)
G. S. 105- 151.29 – Film Incentives Tax Credit Definitions Amended: Subdivisions
( 1), ( 2), and ( 4) of subsection ( a) were amended to revise the definitions of “ highly
compensated individual,” “ live sporting event,” and “ qualifying expenses.” The definition
of “ highly compensated individual” in subdivision ( a)( 1) was rewritten to apply to an
individual who receives compensation in excess of $ 1,000,000 for personal services
with respect to a single production, regardless of whether the individual receives
compensation directly from the production company or indirectly from a personal
services company or an employee leasing company and regardless of whether the
compensation is considered wages or nonemployee compensation. The definition of
“ live sporting event” in subdivision ( a)( 2) was amended to make stylistic changes. The
definition of “ qualifying expenses” in subdivision ( a)( 4) was rewritten to move the
reference to “ highly compensated individual” in subsection ( a)( 1) regarding
compensation being either wages or nonemployee compensation. Subparagraph b of
subdivision ( a)( 4) was also rewritten to clarify that the withholding of income tax from
wages does not have to be done by the production company to conform with the
change to the definition of “ highly compensated individual” regarding the receipt of
compensation directly from the production company or indirectly from a personal service
company or an employee leasing company.
( Effective for taxable years beginning on or after January 1, 2006; HB 1963,
s. 4( b), S. L. 2006- 162.)
G. S. 105- 151.29( i) – Addition for Expenses Used to Calculate Credit for a Film or
Television Production Repealed: This subsection, which provided that a taxpayer
cannot claim both a tax credit under G. S. 105- 151.29 and a deduction for the same
expenses and required a taxpayer claiming a credit under this section to make an
addition to federal taxable income for the expenses used to calculate the credit as
provided in G. S. 105- 134.6( c)( 9), was repealed.
( Effective for taxable years beginning on or after January 1, 2007; HB1522, s. 4, S. L.
2006- 220.)
G. S. 105- 151.30 – Tax Credit for Recycling Oyster Shells: This section was added
to provide a tax credit to a taxpayer who donates oyster shells to the Division of Marine
Fisheries of the Department of Environment and Natural Resources. The credit is $ 1.00
NC Department of Revenue 2006 Tax Law Changes
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per bushel of oyster shells donated. The credit may not exceed the amount of tax for
the taxable year reduced by the sum of all credits allowable, except payment of tax
made by or on behalf of the taxpayer. Any unused portion of the credit can be carried
forward for the succeeding five years.
To support the credit, a taxpayer must obtain a certification by the Department of
Environment and Natural Resources stating the number of bushels of oyster shells that
were donated.
A taxpayer who claims the credit must add back to taxable income any amount
deducted under the Code for the donation of the oyster shells.
( Effective for taxable years beginning on or after January 1, 2006 and expires for
taxable years beginning on or after January 1, 2011; SB 1741, s. 24.18( c), S. L. 2006-
66.)
G. S. 105- 152( e) – Joint Return Option: Under prior law, a husband and wife who file a
joint federal return must also file a joint State return if both are residents of North
Carolina or both have North Carolina taxable income. However, if one spouse is not a
resident of North Carolina and has no North Carolina income, the other spouse must file
a separate State return. This subsection was amended to give a husband and wife who
file a joint federal return the option of filing a joint State return if both spouses are
nonresidents and only one spouse has North Carolina income or if only one spouse is a
resident of North Carolina and the other spouse had no North Carolina income. The
option to file a separate return is still available for such taxpayers since the State has no
jurisdiction to require a person who is not a resident and does not have income from
North Carolina sources to file a North Carolina return.
( Effective for taxable years beginning on or after January 1, 2006; SB 1741, s. 24.11( a),
S. L. 2006- 66.)
G. S. 105- 155( a) – Time for Filing Returns by Nonresident Aliens Amended: This
subsection was amended to conform the filing date for certain nonresident aliens to the
date those individuals are required to file their federal income tax returns.
Consequently, a return of a nonresident alien who has wages not subject to withholding
is due on the 15th day of the 6th month after the close of the tax year ( June 15 in the
case of a calendar year taxpayer). A nonresident alien who has wages subject to
withholding must file a return by the 15th day of the 4th month following the close of the
tax year.
( Effective for taxable years beginning on or after January 1, 2006; HB 1892, s. 8, S. L.
2006- 18.)
G. S. 105- 159 – Time for Reporting Federal Corrections Amended: Under prior law,
an individual whose federal taxable income was corrected or otherwise determined by
the federal government had two years after being notified by the federal government to
NC Department of Revenue 2006 Tax Law Changes
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report the changes to the Department of Revenue. As amended, the period for
reporting federal corrections or determinations has been reduced to six months.
( Effective July 1, 2006 and applies to federal determinations made on or after that date;
HB 1892, s. 5, S. L. 2006- 18.)
G. S. 105- 159.1( a) – North Carolina Political Parties Financing Fund Designation
Increased: This subsection was amended to increase the amount that a taxpayer can
designate to this fund from $ 1.00 to $ 3.00 if the income tax liability is $ 3.00 or more. In
the case of a married couple filing a joint return whose income tax liability is $ 6.00 or
more, each spouse may designate $ 3.00 to the fund.
( Effective for taxable years beginning on or after January 1, 2006; HB 320, s. 46, S. L.
2005- 345.)
G. S. 105- 159.2 – North Carolina Public Campaign Fund: Subsection ( b) was
amended to require the Department of Revenue to include specific language on the
face of the income tax return with respect to taxpayer fund designations.
( Effective for taxable years beginning on or after January 1, 2006; HB 1024,
s. 18, S. L. 2006- 192.)
G. S. 105- 160.3( b) – Conforming Change: This subsection was amended to include
the credit for recycling oyster shells provided in G. S. 105- 151.30 as a credit that is not
allowable to an estate or trust.
( Effective for taxable years beginning on or after January 1, 2006 and expires for
taxable years beginning on or after January 1, 2011; SB 1741, s. 24.18( f), S. L. 2006-
66.)
WITHHOLDING TAX
G. S. 105- 163.2B – Clarifying Change: This statute was amended to clarify that the
North Carolina State Lottery Commission must deduct and withholding State income
taxes from payment of lottery winnings of $ 600 or more.
( Effective August 27, 2006, SB 602, s. 91( b), S. L. 2006- 264.)
S CORPORATION INCOME TAX
G. S. 105- 131.2 – Amendment to Adjustments Required by Shareholders of S
Corporations: Under prior law, a shareholder’s pro rata share of income from an S
corporation was subject to adjustments under either the corporate law ( G. S. 105- 130.5)
or the individual law ( G. S. 105- 134.6) depending on the shareholder’s residency status
and whether the income was attributable to North Carolina. As amended, a shareholder
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is subject only to the adjustments under individual law regardless of the shareholder’s
residency status or whether the income is attributable to this State.
( Effective for taxable years beginning on or after January 1, 2006; HB 1898, ss. 1 and 2,
S. L. 2006- 17.)
GIFT TAX
G. S. 105- 197.1 – Time for Reporting Federal Corrections Amended: Under prior
law, a taxpayer whose net gifts were corrected or otherwise determined by the federal
government had two years after being notified by the federal government to report the
changes to the Department of Revenue. As amended, the period for reporting the
federal corrections or determinations has been reduced to six months.
( Effective July 1, 2006 and applies to federal determinations made on or after that date;
HB 1892, s. 6, S. L. 2006- 18.)
JOB DEVELOPMENT INVESTMENT GRANT PROGRAM
G. S. 143B, Article 10, Part 2G – The Job Development investment Grant Program is
an economic development tool for new and expanding businesses in North Carolina
whereby eligible companies selected by an Economic Investment Committee of State
officials are provided a grant equal to a certain percentage of the company’s income tax
withholding payments. The statute was amended to extend the authority of the
Economic Investment Committee to enter into new agreements with eligible companies
until January 1, 2010 ( was January 1, 2008).
The maximum amount of total annual liability that may be agreed to by the Economic
Investment Committee in agreements entered into in 2006 was increased from $ 15
million to $ 30 million.
The statute was also amended to allow professional motorsports racing teams to qualify
to enter into grant program.
( Effective July 27, 2006; HB 2744; ss. 1.2 and 1.11, S. L. 2006- 168.)
CORPORATE, EXCISE AND INSURANCE TAXES
GROSS RECEIPTS AMUSEMENT TAX
G. S. 105- 40 – Additional Exemption: This section was amended by adding a new
subsection ( 12) to exempt from the gross receipts amusement tax all farm- related
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exhibitions, shows, attractions, or amusements offered on land used for bona fide farm
purposes as defined in G. S. 153A- 340.
( Effective retroactively to January 1, 1999 and applies to activities occurring on or after
that date; HB 143, s. 1, S. L. 06- 216.)
ALCOHOLIC BEVERAGE LICENSE AND EXCISE TAXES
G. S. 105- 113.81A – Increase in Wine Tax Proceeds Earmarked for Grape Growers
Council; Conforming Change: This section was amended twice. The first
amendment increased the amount of wine tax proceeds earmarked for the North
Carolina Grape Growers Council. Under prior law, the Department of Revenue credited
100% of the net proceeds of both unfortified and fortified wine bottled in North Carolina
to the Department of Commerce on a quarterly basis. The maximum to be credited was
$ 500,000 per fiscal year. As amended, the Department will credit $ 200,000 of the net
proceeds of the excise tax collected on unfortified wine to the Department of Commerce
each quarter. The second change is a conforming change to recognize that the Grape
Growers Council’s name was changed to the North Carolina Wine and Grape Growers
Council.
( Increase in earmarking effective July 1, 2007; HB 1025, s. 14, S. L. 06- 227; conforming
change effective August 27, 2006, SB 602, s. 98.3( b), S. L. 06- 264.)
G. S. 105- 113.82 – Conforming Change: This section was amended to recognize that
the Grape Growers Council was transferred from the Department of Agriculture and
Consumer Services to the Department of Commerce.
( Effective July 24, 2006; HB 1963, s. 1, S. L. 06- 162.)
FRANCHISE TAX
G. S. 105- 114 – Definition of Corporation Expanded; Conforming and Technical
Changes: Two amendments were made to this section. First, subdivision ( b)( 2) was
amended to expand the definition of “ corporation.” Under prior law, the term did not
include limited liability companies ( LLCs). Therefore, LLCs were not subject to the
general business franchise tax imposed under G. S. 105- 122. As amended, the term
“ corporation” includes LLCs that elect to be taxed as C corporations for federal income
tax purposes and those LLCs are now subject to the general business franchise tax.
The amendment is effective for taxable years beginning on or after January 1, 2007.
Because the general business franchise tax imposed in G. S. 105- 122 is for the tax year
in which the tax becomes due, this amendment will impact the franchise tax reported on
the 2006 income and franchise tax return since it is due on or after March 15, 2007.
Second, subdivision ( b)( 4) was amended to conform to the recodification of the
definition of income year in G. S. 105- 130.2. The technical change corrected the
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introductory language of section 59.2( a) of S. L. 2005- 435, which erroneously referred to
G. S. 105- 114( a4) as G. S. 105- 114.1( a4).
( Expansion of definition of corporation effective for taxable years beginning on or after
January 1, 2007; SB 1741, s. 24A. 2( a), S. L. 06- 66; conforming change effective July 24,
2006; HB 1963, s. 2, S. L. 06- 162; technical change effective July 24, 2006; HB 1963, s.
22, S. L. 06- 162.)
G. S. 105- 114.1 – Conforming Changes: This statute requires a corporation or
affiliated group of corporations that own more than 50% of the capital interest in an LLC
to include the same percentage of the LLC’s assets in its three franchise tax bases.
Subdivision ( a)( 5) was added to define “ noncorporate limited liability company” as a
limited liability company that does not elect to be taxed as a C corporation for federal
income tax purposes and subsections ( b) through ( g) were amended to refer to
noncorporate LLCs to conform to the imposition of the general business franchise tax
on LLCs that elect to be taxed as corporations for federal income tax purposes. As a
result, the attribution rules of this section do not apply to LLCs that are subject to
franchise tax. The amendment is effective for taxable years beginning on or after
January 1, 2007. Because the general business franchise tax imposed in G. S. 105- 122
is for the tax year in which the tax becomes due, this amendment will impact the
franchise tax reported on the 2006 income and franchise tax return since it is due on or
after March 15, 2007.
( Effective for taxable years beginning on or after January 1, 2007; SB 1741, s. 24A. 2( b),
S. L. 06- 66.)
G. S. 105- 116( b) – Time for Paying Tax by Electric Power Companies; Technical
Change: Under prior law, an electric power company paid its franchise tax due under
G. S. 105- 116 quarterly, monthly, or semimonthly based on when it was required to pay
its sales and use tax.
As amended, an electric power company that is consistently liable for less than $ 100
per month in franchise tax is required to pay its tax on a quarterly basis. The tax is due
at the same time the quarterly return is due. An electric power company that is
consistently liable for more than $ 100 per month in franchise tax is required to pay its
tax on a monthly basis. The tax is due by the 20th day of the month following the
calendar month for which the payment applies. In addition, if an electric power
company’s liability is consistently at least $ 10,000 per month, the electric power
company must prepay the next month’s tax liability at the same time that it is paying the
current month’s liability. The prepayment must equal at least 65% of any of the
following:
• The amount of tax due for the current month.
• The amount of tax due for the same month in the preceding year.
• The average monthly amount of tax due in the preceding calendar year.
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The technical change corrected the prefatory language of section 10 of S. L. 2006- 33,
which erroneously referred to G. S. 105- 116( b) as G. S. 105- 113( b).
( Amendment to time for payment effective October 1, 2007; HB 1915, s. 10, S. L. 06- 33;
technical change effective July 24, 2006; HB 1963, s. 31, S. L. 06- 162.)
G. S. 105- 120.2( c) – Definition of Holding Company for Franchise Tax Purposes
Revised: This subsection was rewritten to amend the definition of “ holding company”
for franchise tax purposes to conform with the amendment to G. S. 105- 114 that
subjects LLCs that elect to be taxed as a corporation for federal income tax purposes to
the State’s general business franchise tax. The amendment to the definition allows a
corporation, when determining if it is a holding company for franchise tax purposes, to
include gross income from LLCs that are taxed as a corporation in the numerator of the
fraction if the corporation owns more than 50% of the voting capital interest in the LLC.
( Effective for taxable years beginning on or after January 1, 2007; HB 1891, s. 9, S. L.
06- 196.)
G. S. 105- 122( b) – Clarifying the Treatment of Deferred Tax Assets in the
Calculation of the Franchise Tax Capital Stock Base: This subsection was
amended to make stylistic changes and to statutorily adopt the Department of
Revenue’s intended administrative practice with respect to reducing the taxpayer’s
deferred tax liability account by its deferred tax asset account announced in Technical
Advice Memorandum CTAM 97- 4. A taxpayer is not allowed to reduce its capital stock
base by its deferred tax liability account because those liabilities are not definite and
accrued. Subdivision ( b)( 3) allows the taxpayer to reduce the deferred tax liability
account by its deferred tax asset account. The reduction may not decrease the
deferred tax liability account below zero. No other deferred liabilities may be reduced
by the deferred tax asset account. The amendment is effective for taxable years
beginning on or after January 1, 2007. Because the general business franchise tax
imposed in G. S. 105- 122 is for the tax year in which the tax becomes due, this
amendment will impact the franchise tax reported on the 2006 income and franchise tax
return since it is due on or after March 15, 2007.
( Effective for taxable years beginning on or after January 1, 2007; SB 1283, s. 1.1, S. L.
06- 95.)
G. S. 105- 122( d) – Technical and Stylistic Changes: This subsection was amended
to delete an obsolete reference to intangible property in the appraised value franchise
tax base and to make stylistic changes. The reference to the appraised value of
intangible property became obsolete with the repeal of the intangibles tax effective for
taxable years beginning on or after January 1, 1995.
( Effective July 24, 2006; HB 1963, s. 2, S. L. 06- 162.)
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G. S. 105- 122.1 – Tax credit for LLCs Subject to Franchise Tax: When LLCs were
first recognized as legal entities in this State, the annual report fee was set at $ 200 and
was set at this higher amount in lieu of subjecting LLCs to the franchise tax. Pursuant
to the amendment to G. S. 105- 114 described above, LLCs that elect to be taxed as
corporations for federal income tax purposes are now subject to the general business
franchise tax. This section allows LLCs subject to franchise tax a tax credit equal to the
difference between the annual report fee on LLCs and the annual report fee on
corporations. The credit may not exceed the LLC’s franchise tax liability for the year
and any unused credit may not be carried forward. The amendment is effective for
taxable years beginning on or after January 1, 2007. Because the general business
franchise tax imposed in G. S. 105- 122 is for the tax year in which the tax becomes due,
this amendment will impact the franchise tax reported on the 2006 income and franchise
tax return since it is due on or after March 15, 2007.
( Effective for taxable years beginning on or after January 1, 2007; SB 1741, s. 24A. 2( c),
S. L. 06- 66.)
CORPORATION INCOME TAX
G. S. 105- 130.2 – Definition of Gross Income Added; Conforming Change: The
definition for “ Income year” was recodified from subsection ( 4a) to subsection ( 4b).
New subsection ( 4a) defines “ Gross income” for corporate income tax purposes by
cross- reference to section 61 of the Internal Revenue Code. This definition conforms to
the Department’s administrative practice.
( Effective July 24, 2006; HB 1963, s. 3( a), S. L. 06- 162.)
G. S. 105- 130.5( a)( 18) – Addition for Expenses Used to Calculate Credit for a Film
or Television Production Repealed: This subdivision, which required an addition to
federal taxable income for qualifying expenses for which a taxpayer claimed a credit
under G. S. 105- 130.47, was repealed.
( Effective for taxable years beginning on or after January 1, 2007; HB 1522, s. 1, S. L.
06- 220.)
G. S. 105- 130.7A – Royalty Reporting Option Expanded; Additional Exception to
Addback Requirement: This section was enacted in 2001 to ( 1) provide a reporting
option to recipients and payers of royalties on trademarks if the recipient and payer
were related members and ( 2) to require the payer, with certain exceptions, to add to
federal taxable income the amount of royalties deducted if the recipient did not include
the income on a North Carolina income tax return.
As amended, this section was expanded to apply to royalty payments from copyrights
and patents in addition to trademarks. Subsection ( a) was rewritten to provide that the
purpose of the statute applies to royalty payments received from the use of intangible
property ( formerly only trademarks). Subdivision ( 1a) was added to subsection ( b) to
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define “ intangible property” as copyrights, patents, and trademarks. Conforming
changes were made to subdivisions ( 2) and ( 8) of subsection ( b). Subsection ( c) was
rewritten to add another exception to the requirement for the payer to add to federal
taxable income the amount of royalties deducted. Subdivision ( c)( 3) allows the payer to
forego the addback if the recipient related member is organized under the laws of
another country, the country has a comprehensive income tax treaty with the United
States, and the country imposes a tax on the royalty income of the recipient at a rate
that is equal to or exceeds the State’s corporate income tax rate.
( Expansion of royalty reporting option effective for taxable years beginning on or after
January 1, 2006; SB 1741, s. 24A. 3( a), S. L. 06- 66; additional exception effective for
taxable years beginning on or after January 1, 2006; HB 1891, s. 10, S. L. 06- 196.)
G. S. 105- 130.9( 4) – Conforming Change: This subsection was amended to conform
to the provisions of the new tax credit for recycling oyster shells. A taxpayer claiming
the tax credit is not entitled to claim a contribution for the donation. The taxpayer is also
not required to add the amount of the tax credit to taxable income under G. S. 105-
130.5( a)( 10).
( Effective for taxable years beginning on or after January 1, 2006 and expires for
taxable years beginning on or after January 1, 2011; SB 1741, s. 24.18( b), S. L. 06- 66.)
G. S. 105- 130.17( g) – Time for Filing Returns by Foreign Corporations Amended:
This subsection was enacted to conform the filing date for certain foreign corporations
to the date those corporations are required to file federal income tax returns. Under
Code section 6072( c), foreign corporations, other than those having an office or place of
business in the United States or a FSC or former FSC, are required to file their income
tax returns by the fifteenth day of the sixth month instead of by the fifteenth day of the
third month. Under prior law, foreign corporations were required to file their State
income tax returns by the fifteenth day of the third month.
( Effective for taxable years beginning on or after January 1, 2006; HB 1892, s. 7, S. L.
06- 18.)
G. S. 105- 130.20 – Time for Reporting Federal Corrections Amended: Under prior
law, a corporation whose federal taxable income was corrected or otherwise determined
by the federal government had two years after being notified by the federal government
of the corrections or determination to report the federal corrections or determination to
the Department of Revenue. As amended, the period for reporting federal corrections
or determinations has been reduced to six months.
( Effective July 1, 2006 for federal determinations made on or after that date; HB 1892,
S. 4, S. L. 06- 18.)
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G. S. 105- 130.46 – New Credit for Manufacturing Cigarettes for Exportation While
Increasing Employment and Utilizing State Ports: Part 1 of Article 4 was amended
to enact a new tax credit for manufacturing cigarettes for exportation. This credit is
similar to the credit allowed under G. S. 105- 130.45 in most respects. However, this
credit differs from the credit in G. S. 105- 130.45 in three major respects. First, to be
eligible for this credit, a taxpayer must maintain an employment level in this State at the
end of a taxable year that exceeds the taxpayer’s employment level in this State at the
end of the 2004 calendar year by at least 800 full- time jobs. Second, the maximum
eligible credit for cigarettes exported during a taxable year is ten million dollars. Third,
this credit may be claimed against either franchise tax or income tax.
Subsection ( a) explains the purpose of this credit.
Subsection ( b) provides definitions for employment level, exportation, full- time job, and
successor in business. Employment level is defined as the total number of full- time jobs
and part- time jobs converted into full- time equivalents. Exportation has the same
meaning as in G. S. 105- 130.45 prior to the change to subdivision ( a)( 2) described
above. Therefore, a foreign country is a qualifying exportation destination but a
possession of the United States and a commonwealth of the United States that is not a
state are not. A full- time job is a position that requires at least 1,600 hours of work per
year and is intended to be held by one employee during the entire year. A successor in
business has the same definition as in G. S. 105- 130.45( a)( 3) described above. A
substantive change to this subsection was subsequently made to permit a job to be
included in the employment level for a year only if the job is located in the State for
more than six months during the year.
Subsection ( c) addresses the employment level requirements to claim the credit. To
first be eligible for a credit under this section, a taxpayer must have at least 800 more
full- time jobs in this State at the end of the taxable year than the taxpayer had in this
State on December 31, 2004. The taxpayer is eligible for full credits under this section
in future years if the taxpayer maintains an employment level in this State at the end of
the taxable year that exceeds the employment level in this State on December 31, 2004
by 800 or more employees. A successor in business’s employment level is compared
to the combined employment level of the successor and all of its predecessors. A job is
located in this State if more than 50% of the employee’s duties are performed in this
State.
Subsection ( d) provides three requirements to qualify for a credit under this section.
Those three requirements are:
• the corporation satisfies the employment level requirements in subsection ( b);
• the corporation is engaged in the business of manufacturing cigarettes for export;
and
• the taxpayer exports cigarettes and other tobacco products through the North
Carolina state ports during the taxable year.
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A corporation that meets all three requirements is entitled to a credit equal to 40 cents
per one thousand cigarettes exported. The maximum credit for cigarettes exported
during the taxable year is ten million dollars.
Subsection ( e) provides for a reduction in the credit in subsequent years if a taxpayer
that has previously satisfied the employment level requirements in subsection ( b) fails to
satisfy the employment level requirements in the subsequent year. The reduced credit
is calculated by multiplying the credit that would have been allowed if the employment
level in this State had been maintained by a fraction. The numerator of the fraction is
the number of full- time jobs by which the taxpayer’s employment level in this State
exceeds the employment level in this State in 2004 and the denominator of the fraction
is 800. A technical change was subsequently made to this subsection to correct an
erroneous cross- reference.
Subsection ( f) provides for allocation of the credit against corporate income tax and
franchise tax. At the time the taxpayer files the return on which the credit is claimed, the
taxpayer elects the percentage of the credit to be applied against each of the two taxes.
That election is binding for that year and for all carryforwards of that credit. The
taxpayer can elect a different percentage for each year in which it qualifies for the credit.
Subsection ( g) provides that the amount of credit that may be taken in a taxable year is
limited to the lesser of ten million dollars or fifty percent of the amount of tax against
which the credit is taken reduced by the sum of all other credits against the tax except
tax payments made by or on behalf of the taxpayer. The limitation applies to the
cumulative amount of credit allowed, including carryforwards of this credit or the credit
claimed under G. S. 105- 130.45 for previous years. A technical change was
subsequently made to this subsection to correct an erroneous cross- reference.
Subsection ( h) provides for a ten- year carryforward of any unused portion of this credit.
The carryforward must be claimed against the tax against which the credit was originally
claimed. A successor in business is entitled to claim carryforwards of credits originally
claimed by predecessor corporations.
Subsection ( i) requires a taxpayer that claims this credit to include with its tax return the
following information:
• A statement of the exportation volume on which the credit is based.
• A list of the monthly export volumes reported to the Alcohol and Tobacco Tax
and Trade Bureau of the United States Treasury for the year in which the credit is
claimed.
• Any other information required by the Department of Revenue.
Subsection ( j) prohibits the taxpayer from claiming both this credit and the credit under
G. S. 105- 130.45 for the same activity.
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Subsection ( k) requires a corporation that takes this credit to file annual reports with the
Senate and House Appropriations and Finance Committees and the Fiscal Research
Division of the General Assembly by May 1 of each year. The report must state the
amount of credit earned by the corporation during the previous year, the amount of
credit, including carryforwards, claimed by the corporation during the previous year, and
the percentage of domestic leaf content in cigarettes produced by the corporation during
the previous year. The first reports are due by May 1, 2006.
( Effective for taxable years beginning on or after January 1, 2006, and expires for
exports occurring on or after January 1, 2018; HB 2, s. 6.1, S. L. 03- 435 [ second extra
session]; subsequent substantive change to subsection ( b) and technical changes to
subsections ( e) and ( g) effective for taxable years beginning on or after January 1,
2006, and expires for exports occurring on or after January 1, 2018; SB 1145, s. 16( a),
S. L. 04- 170.)
G. S. 105- 130.47( a) – Film Incentives Tax Credit Definitions Amended: Subdivisions
( 1), ( 2), and ( 4) of subsection ( a) were amended to revise the definitions of “ highly
compensated individual,” “ live sporting event,” and “ qualifying expenses.” The definition
of “ highly compensated individual” in subdivision ( a)( 1) was rewritten to apply to an
individual who receives compensation in excess of $ 1,000,000 for personal services
with respect to a single production, regardless of whether the individual receives the
compensation directly from the production company or indirectly from a personal service
company or an employee leasing company and regardless of whether the
compensation is considered wages or nonemployee compensation. The definition of
“ live sporting event” in subdivision ( a)( 2) was amended to make stylistic changes. The
definition of “ qualifying expenses” in subdivision ( a)( 4) was rewritten to move the
reference to “ highly compensated individual from subparagraph b to the introductory
language of the subdivision to conform with the change to the definition of “ highly
compensated individual” in subsection ( a)( 1) regarding compensation being either
wages or nonemployee compensation. Subparagraph b of subdivision ( a)( 4) was also
rewritten to clarify that the withholding of income tax from wages does not have to be
done by the production company to conform with the change to the definition of “ highly
compensated individual” regarding the receipt of compensation directly from the
production company or indirectly from a personal service company or an employee
leasing company.
( Effective for taxable years beginning on or after January 1, 2006: HB 1963, s. 4( a), S. L.
06- 162.)
G. S. 105- 130.47( i) - Addition for Expenses Used to Calculate Credit for a Film or
Television Production Repealed: This subsection, which provided that a taxpayer
cannot claim both a tax credit under G. S. 105- 130.47 and a deduction for the same
expenses and required a taxpayer claiming a credit under this section to make an
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addition to federal taxable income for the expenses used to calculate the credit as
provided in G. S. 105- 130.5( a)( 18), was repealed.
( Effective for taxable years beginning on or after January 1, 2007; HB 1522, s. 2, S. L.
06- 220.)
G. S. 105- 130.48 – Tax Credit for Recycling Oyster Shells: This section was added
to provide a tax credit to a taxpayer who donates oyster shells to the Division of Marine
Fisheries of the Department of Environment and Natural Resources. The credit is $ 1.00
per bushel of oyster shells donated. The credit may not exceed the amount of tax
against which it is claimed for the taxable year reduced by the sum of all other credits,
except payment of tax made by or on behalf of the taxpayer. Any unused portion of the
credit can be carried forward for the succeeding five years. To support the credit, a
taxpayer must obtain a certification by the Department of Environment and Natural
Resources stating the number of bushels of oyster shells that were donated.
A taxpayer who claims the credit must add back to taxable income any amount
deducted under the Code for the donation of the oyster shells.
( Effective for taxable years beginning on or after January 1, 2006 and expires for
taxable years beginning on or after January 1, 2011; SB 1741, s. 24.18( a), S. L. 06- 66.)
PIPED NATURAL GAS TAX
G. S. 105- 187.43 – Time for Paying Piped Natural Gas Tax: Under prior law, a
taxpayer subject to the piped natural gas tax paid the tax twice a month, on the 25th day
of the current month and the 10th day of the next month.
As amended, the piped natural gas tax is payable monthly, on the 20th day of the month
following the calendar month in which the liability for the tax accrues. In addition, if a
taxpayer’s piped natural gas tax liability is consistently at least $ 10,000 per month, the
taxpayer must prepay the next month’s tax liability at the same time that it is paying the
current month’s liability. The prepayment must equal at least 65% of any of the
following:
• The amount of tax due for the current month.
• The amount of tax due for the same month in the preceding year.
• The average monthly amount of tax due in the preceding calendar year.
( Effective October 1, 2007; HB 1915, s. 13, S. L. 06- 33.)
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INSURANCE GROSS PREMIUMS TAX
G. S. 58- 6- 25 – Insurance Regulatory Charge: The percentage rate to be used in
calculating the insurance regulatory charge under this statute is 5.5% for the 2006
calendar year. This charge is a percentage of gross premiums tax liability.
( Effective July 10, 2006; SB 1741, s. 26.2, S. L. 06- 66.)
G. S. 105- 228.5 - Clarification and Simplification of the Additional Gross Premiums
Taxes on Fire and Lightning Coverage: Under prior law, the State imposed
additional gross premiums taxes at the State ( G. S. 105- 228.5( d)( 3)) and local ( G. S.
105- 228.5( d)( 4)) levels on insurance carriers for policies that covered fire and lightning
damage. For many years, the Department of Revenue ( and previously the Department
of Insurance) instructed taxpayers to calculate the tax on a taxable percentage of the
premiums on different types of insurance contracts that included coverage for fire and
lightning damage. Premiums for contracts providing auto and marine coverages were
exempt from the additional Statewide tax but were taxable for the additional local tax.
After consulting with the Department of Insurance and the Attorney General’s Office, the
Department of Revenue recently concluded that the law did not authorize the use of
taxable percentages; instead, all premiums for contracts that included coverage for fire
and lightning damage should have been subject to the tax. The Department notified the
Legislature of its conclusion and asked for legislation to clarify how the Legislature
intended for insurance companies to be taxed on fire and lightning coverage.
As a result, G. S. 105- 228.5( d)( 3) was changed twice. The first change, which is
effective only for taxable years 2006 and 2007, statutorily adopted the taxable
percentages used by the Department. Auto and marine coverages remain exempt from
the additional Statewide tax and the additional Statewide tax rate remains at 1.33% for
those two years.
Effective for taxable years beginning on or after January 1, 2008, G. S. 105- 228.5( b)( 2)
and G. S. 105- 228.5( d)( 4), which defined and imposed an additional local fire and
lightning tax, were repealed. G. S. 105- 228.5( d)( 3) was renamed to be an additional tax
on property coverage contracts with no reference to fire and lightning coverage. The
rate was reduced to 0.85%. The tax is imposed on 10% of the gross premiums from
automobile physical damage policies, as defined in subparagraph ( a), and 100% of the
gross premiums from all other property coverage policies, as defined in subparagraph
( b). Conforming changes were made to subsections ( e) and ( f) of G. S. 105- 228.5 to
reflect the repeal of the additional local fire and lightning tax.
( Amendment clarifying the taxable percentages effective for taxable years beginning on
or after January 1, 2006; HB 1891, s. 1; repeal of additional local fire and lightning tax
statutes effective for taxable years beginning on or after January 1, 2008; HB 1891, s. 2;
amendments to G. S. 105- 228.5( d)( 3) imposing an additional tax on property coverage
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contracts effective for taxable years beginning on or after January 1, 2008; HB 1891, s.
3; conforming changes effective for taxable years beginning on or after January 1, 2008;
HB 1891, ss. 4 and 5, S. L. 06- 196.)
TAX CREDITS
TAX INCENTIVES FOR NEW AND EXPANDING BUSINESSES
G. S. 105- 129.2 – Conforming Change to Definitions: Former subsection ( 1), which
defines air courier services, was recodified as subdivision ( 1a) and new subdivision ( 1)
was added to define agrarian growth zone by reference to G. S. 105- 129.3B.
( Effective for taxable years beginning on or after January 1, 2006 for business activities
occurring on or after that date; SB 1741, s. 24.16( b), S. L. 06- 66.)
G. S. 105- 129.2A( a) – Sunset Moved Up: This subsection was amended to repeal
Article 3A in general effective for business activities that occur on or after January 1,
2007. That date coincides with the effective date of the new Article 3I, which is intended
to replace Article 3A. ( Note: Subsections ( a1) through ( a4) provide exceptions to the
general sunset of this Article.)
( Effective August 17, 2006; HB 2170, s. 1.3, S. L. 06- 252.)
G. S. 105- 129.2A( a2) – Extension of Deadline for a Taxpayer to Qualify as an
Eligible Major Industry: This subsection provides an exception to the sunset of the
Article 3A credits for a taxpayer that qualifies as an eligible major industry. In that case,
the Article 3A credits expire for business activities that occur on or after January 1,
2010, instead of the general sunset date of January 1, 2007, found in G. S. 105-
129.2A( a).
Under current law, the taxpayer had to qualify as an eligible major industry by January
1, 2006 to be entitled to the extended sunset. As amended, the taxpayer must qualify
by January 1, 2008.
( Effective July 27, 2006; HB 2744, s. 2.1, S. L. 06- 168.)
G. S. 105- 129.2A( a4) – Sunset for Taxpayers That Sign a Letter of Commitment:
This subsection was added to extend the sunset of Article 3A through December 31,
2007 if the taxpayer signs a letter of commitment with the Department of Commerce on
or before December 31, 2006 stating the taxpayer’s intent to create new jobs or make
new investments with respect to machinery and equipment, central office or aircraft
facility property, or substantial investment in other real property at a specific site in this
State in 2007. If the taxpayer has a letter of commitment and conducts an activity that
qualifies for one of the Article 3A credits, the taxpayer may not take any Article 3I credits
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with respect to an establishment if the taxpayer claims Article 3A credits for activities at
that establishment in 2007.
( Effective August 17, 2006; HB 2170, s. 1.3, S. L. 06- 252.)
G. S. 105- 129.3A( a) – Definition of Development Zone Expanded: This subdivision
was amended to expand the definition of a development zone to include an area
comprised of an economic development and training district as defined by G. S. 153A-
317.12.
( Effective retroactively for taxable years beginning on or after January 1, 2004; SB
1741, s. 24.5( a), S. L. 06- 66.)
G. S. 105- 129.3B – Agrarian Growth Zone Designation: This new section was added
to Article 3A to define an agrarian growth zone and to set out the procedure for
designating an area of land as an agrarian growth zone. The purpose of these zones is
to revitalize counties by making the enhancements to Article 3A tax credits that are
available to development zones also available to agrarian growth zones.
Subsection ( a) defines an agrarian growth zone as an area comprised of one or more
contiguous census tracts, census block groups, or both, in the most recent federal
decennial census that meets all of the following conditions. A county can have only one
agrarian growth zone.
• All land within the zone is located wholly within a county that has no municipality
with a population in excess of 10,000.
• Every census tract and census block group that is part of the zone has more than
20% of its population below the poverty level according to the most recent federal
decennial census.
• The area of the zone less the smallest census tract included in the zone does not
exceed 5% of the total area of the county in which the zone is located.
Subsection ( b) authorizes the Secretary of Commerce to make a written determination
of whether an area is an agrarian growth zone upon written request of a local
government. A determination is effective until December 31 of the year following the
year in which the determination is made. The Department of Commerce will publish
annually a list of all agrarian growth zones with a description of their boundaries.
Subsection ( c) defines when a parcel of property that is partially in an agrarian growth
zone is considered to be entirely within the agrarian growth zone and, therefore, eligible
for the Article 3A enhancements for agrarian growth zones. All of the following
conditions must be satisfied for the parcel of property to be considered entirely within
the agrarian growth zone:
• At least fifty percent of the parcel is located within the zone.
• The parcel was in existence and under common ownership prior to the most
recent federal decennial census.
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• The parcel is a portion of land made up of one or more tracts or tax parcels of
land that is surrounded by a continuous perimeter boundary.
Subdivision ( d) provides that an agrarian growth zone is considered an enterprise tier
one area for purposes of the wage standard, the credit for investing in machinery and
equipment, and the credit for worker training. For all other credits, an agrarian growth
zone has the same tier designation as the county in which it is located.
( Effective for taxable years beginning on or after January 1, 2006 for business activities
occurring on or after that date; SB 1741, s. 24.16( a), S. L. 06- 66.)
G. S. 105- 129.4( b) – Exception to the Definition of Location: This subsection was
amended to provide an exception to the definition of location. To be eligible for most of
the tax credits included in Article 3A, the taxpayer must meet a wage standard. To
determine if the taxpayer meets the wage standard, the taxpayer must calculate the
average wage it pays its employees at the location with respect to which the credit is
claimed. Location means a specific establishment. The amendment makes an
exception to the definition of location for purposes of the wage standard for a fiber, yarn,
or thread mill that uses a sequential manufacturing process in which separate parts of
the sequential manufacturing process are performed in different facilities within the
same county. Under those parameters, a location may mean either the specific
establishment or all facilities in the county in which parts of the process are performed.
( Effective retroactively for taxable years beginning on or after January 1, 1996; SB
1741, s. 24.14( a), S. L. 06- 66.)
G. S. 105- 129.6( a1) – Conforming Change: This subsection was amended to make a
conforming change to recognize the creation of agrarian growth zones in G. S. 105-
129.3B.
( Effective for taxable years beginning on or after January 1, 2006 for business activities
occurring on or after that date; SB 1741, s. 24.16( c), S. L. 06- 66.)
G. S. 105- 129.7( b)( 1) – Conforming Change: This subdivision was amended to make
a conforming change to recognize the creation of agrarian growth zones in G. S. 105-
129.3B.
( Effective for taxable years beginning on or after January 1, 2006 for business activities
occurring on or after that date; SB 1741, s. 24.16( d), S. L. 06- 66.)
G. S. 105- 129.8 – Conforming Change: Subsections ( a), ( a3) and ( d) were amended
to make a conforming change to recognize the creation of agrarian growth zones in
G. S. 105- 129.3B.
( Effective for taxable years beginning on or after January 1, 2006 for business activities
occurring on or after that date; SB 1741, s. 24.16( e), S. L. 06- 66.)
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G. S. 105- 129.9 – Conforming Change: Subsections ( d) and ( e) were amended to
make a conforming change to recognize the creation of agrarian growth zones in G. S.
105- 129.3B.
( Effective for taxable years beginning on or after January 1, 2006 for business activities
occurring on or after that date; SB 1741, s. 24.16( f), S. L. 06- 66.)
G. S. 105- 129.10 – Sunset: This section was rewritten to cause the credits for research
and development in Article 3A sunset effective for taxable years beginning on or after
January 1, 2006.
( Sunset effective for taxable years beginning on or after January 1, 2006; HB 1414, s.
32D. 4, S. L. 04- 124.)
BUSINESS AND ENERGY TAX CREDITS
G. S. 105- 129.15 – Definition of Renewable Biomass Resources and Renewable
Energy Property Expanded: There were two changes to this section. The first
change amended subdivision ( 6) to expand the definition of renewable biomass
resources by identifying spent pulping liquor as an example of organic matter produced
by terrestrial and aquatic plants and animals.
The second change to this section amended subdivision ( 7) a to expand the definition of
renewable energy property. Biomass equipment is renewable energy property if it uses
renewable biomass resources for certain purposes. Under prior law, one of those
purposes was electrical generation if the electrical generation was from the use of
renewable energy crops or wood waste materials. As amended, the requirement to use
renewable energy crops or wood waste materials was deleted so that any kind of
renewable biomass resources can be used.
( Effective for taxable years beginning on or after January 1, 2006; SB 1149, s. 4, S. L.
05- 413.)
G. S. 105- 129.15 – Technical Change: The introductory language of section 4 of S. L.
2005- 413, which erroneously referred to G. S. 105- 129.15( 6) and ( 7) as just G. S. 105-
129.15( 7), was corrected.
( Effective July 24, 2006; HB 1963, s. 23, S. L. 06- 162.)
G. S. 105- 129.16A – Credit for Investing in Renewable Energy Property; Ceiling for
Nonresidential Property Raised, Pool Heating System Qualifies, Sunset Extended:
Three amendments were made to this section. The first two changes amended
subsection ( c). The credit ceiling for renewable energy property placed in a
nonresidential property in subdivision ( 1) was raised from $ 250,000 to $ 2,500,000.
Subparagraph ( 2) a was amended to make a system that heats a pool eligible for the
$ 1,400 credit for solar energy equipment that provides domestic water heating. The
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third change adds subsection ( e) to provide that the credit sunsets for renewable energy
property placed in service on or after January 1, 2011.
( Effective for taxable years beginning on or after January 1, 2006; SB 1149, s. 5, S. L.
05- 413.)
G. S. 105- 129.16D – Addition of Alternative Production Credit; Conforming
Changes; Sunset Extended; Extended Carryover: This section was amended by
adding a new subsection ( b1) to provide an alternative production credit in lieu of the
production credit in subsection ( b), to make conforming changes in subsection ( c), and
to extend the sunset in subsection ( d). Subsection ( b1) was subsequently amended to
extend the carryover period for the alternative production credit.
Subsection ( b1) provides an alternative production credit to a taxpayer that invests at
least $ 400,000,000 to construct and place in service in this State three or more
commercial facilities for processing renewable fuel. The allowable credit is 35% of the
cost to the taxpayer of constructing and equipping the facilities. To claim the credit, the
taxpayer must obtain a written determination from the Department of Commerce that
the taxpayer is expected to invest at least $ 400,000,000 in three facilities within a five-year
period. The tax credit is taken in seven equal annual installments beginning with
the taxable year in which the first facility is placed in service. A taxpayer forfeits
remaining installments of a credit if a facility is disposed of or taken out of service and
the investment requirements of this subsection are no longer met but may continue to
take any unused portion of previous installments. If the taxpayer forfeits the tax credit
under this subsection, the taxpayer is prohibited from taking the credit under subsection
( b) with respect to the same property. This subsection also provides an exception to the
rule in G. S. 105- 129.17 that the credits in Article 3B can be claimed against either
income tax or franchise tax. The alternative production credit may be claimed only
against income tax. This subsection was subsequently amended to provide that a
taxpayer might carry forward any unused installments of the credit for the succeeding
ten years. The general rule in G. S. 105- 129.17 is that unused installments of Article 3B
can be carried forward for five years.
Subsection ( c) was rewritten to make conforming changes because of the new credit in
subdivision ( b1).
Subsection ( d) was rewritten to extend the sunset of the credits in G. S. 105- 129.16D
from January 1, 2008 to January 1, 2011.
( New credit, conforming changes, and extension of sunset effective for taxable years
beginning on or after January 1, 2006; SB 1741, s. 24.7( a), S. L. 06- 66; extension of
carryover effective for taxable years beginning on or after January 1, 2006; SB 1523, s.
19.5( a), S. L. 06- 259.)
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G. S. 105- 129.16E – Credit for Small Business Employee Health Insurance: This
section was added to Article 3B to provide a tax credit to a small business that provides
health insurance for all of its eligible employees during the taxable year.
Subsection ( a) provides that a taxpayer provides health benefits if it pays at least 50%
of the premiums for health care coverage that equals or exceeds the minimum
provisions of the basic health care plan of coverage recommended by the Small
Employer Carrier Committee pursuant to G. S. 58- 50- 125 or if its employees have
qualifying existing coverage. The credit is limited to insurance paid for an eligible
employee whose total wages or salary from the business does not exceed $ 40,000 on
an annual basis. The amount of credit per employee is the lesser of $ 250 or the
taxpayer’s actual cost of providing health benefits for the taxable year.
Subsection ( b) requires nonresident or part- year resident individuals and multistate
corporations to reduce the credit calculated under subsection ( a). An individual
determines his credit by multiplying the calculated credit in subsection ( a) by the
percentage of total income subject to North Carolina tax determined pursuant to G. S.
105- 134.5( b) or ( c). A corporation determines its credit by multiplying the calculated
credit in subsection ( a) by the apportionment of apportionable income percentage
determined pursuant to G. S. 105- 130.4.
Subsection ( c) provides definitions for “ eligible employee,” “ qualifying existing
coverage,” and “ small business.” “ Eligible employee” is defined by cross- reference to
G. S. 58- 50- 110. “ Qualifying existing coverage” is defined by cross- reference to G. S.
58- 50- 130( a)( 4a). “ Small business” is defined as a taxpayer that employs no more than
25 eligible employees throughout the taxable year.
Subsection ( d) provides that the credit expires for taxable years beginning on or after
January 1, 2009.
( Effective for taxable years beginning on or after January 1, 2007; SB 1741, s. 24.4( a),
S. L. 06- 66.)
G. S. 105- 129.16F – New Tax Credit for Biodiesel Producers: This section was
added to Article 3B to provide a tax credit to biodiesel providers that produce at least
100,000 gallons of biodiesel during the taxable year. The credit is equal to the per
gallon excise tax the producer paid on the biodiesel under Article 36C of Chapter 105.
“ Biodiesel” is defined for purposes of this section as “ liquid fuel derived in whole from
agricultural products, animal fats, or wastes from agricultural products or animal fats.”
The credit does not apply to tax paid on diesel fuel included in a biodiesel blend. The
maximum annual credit is $ 500,000. The credit expires for taxable years beginning on
or after January 1, 2010.
( Effective for taxable years beginning on or after January 1, 2008; SB 1741, s. 24.8( a),
S. L. 06- 66.)
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HISTORIC REHABILITATION TAX CREDITS
G. S. 105- 129.35( a) – Credit for Rehabilitating an Income- producing Historic
Structure Expanded: Under current law, the tax credit for rehabilitating an income-producing
historic structure is equal to 20% of qualifying expenditures. As amended,
the tax credit is 40% of qualifying expenditures if the certified historic structure is a
facility that at one time served as a State training school for juvenile offenders.
( Effective for taxable years beginning on or after January 1, 2006 for eligible sites
placed into service on or after July 1, 2006; HB 474, s. 2, S. L. 06- 40.)
G. S. 105- 129.36( a) – Credit for Rehabilitating a Nonincome- producing Historic
Structure Expanded: Under current law, the tax credit for rehabilitating a nonincome-producing
historic structure is equal to 30% of qualifying expenditures. As amended,
the tax credit is 40% of qualifying expenditures if the certified historic structure is a
facility that at one time served as a State training school for juvenile offenders.
( Effective for taxable years beginning on or after January 1, 2006 for eligible sites
placed into service on or after July 1, 2006; HB 474, s. 3, S. L. 06- 40.)
G. S. 105- 129.36( b)( 1) – Definition of Certified Rehabilitation for Nonincome-producing
Historic Structure Amended: Under current law, repairs and alterations
had to be certified by the State Historic Preservation Officer prior to commencement of
the work to qualify as certified rehabilitation for purposes of the tax credit for
rehabilitating nonincome- producing historic property. As amended, the rehabilitation is
no longer required to be certified prior to the commencement of the work.
( Effective for taxable years beginning on or after January 1, 2006 for eligible sites
placed into service on or after July 1, 2006; HB 474, s. 4, S. L. 06- 40.)
RESEARCH AND DEVELOPMENT TAX CREDITS
G. S. 105- 129.51( a) – Conforming Change - This subsection was amended to conform
with the enactment of Article 3I, which replaces Article 3A.
( Effective January 1, 2007; HB 2170, s. 2.20, S. L. 06- 252.)
G. S. 105- 129.55( a) – Conforming Change: This subsection was amended to conform
with the enactment of Article 3I, which separates the State’s counties into development
tiers instead of enterprise tiers.
( Effective January 1, 2007; HB 2170, s. 2.1, S. L. 06- 252.)
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MILL REHABILITATION TAX CREDIT
New Article 3H – Tax Credit for Mill Rehabilitation: This new Article was enacted to
provide a tax credit for revitalization of historic mill facilities. The Article consists of
sections G. S. 105- 129.70 through G. S. 105- 129.75.
G. S. 105- 129.70 – Definitions: This section sets out the definitions that apply to Article
3H. Definitions are provided for the terms “ Certified historic structure,” “ Certified
rehabilitation,” “ Cost certification,” “ Eligibility certification,” “ Eligible site,” “ Enterprise tier
area,” “ Pass- through entity,” “ Qualified rehabilitation expenditures,” “ Rehabilitation
expenses,” “ State- certified historic structure,” and “ State Historic Preservation Officer.”
Subdivision ( 1) defines “ Certified historic structure” by cross- reference to the definition
of that term in section 47 of the Internal Revenue Code.
Subdivision ( 2) defines “ Certified rehabilitation” by cross- reference to the definition of
that term in G. S. 105- 129.36.
Subdivision ( 3) defines “ Cost certification” as the certification obtained by the State
Historic Preservation Officer from the taxpayer of the amount of the qualified
rehabilitation expenditures or the rehabilitation expenses incurred with respect to an
eligible site.
Subdivision ( 4) defines “ Eligibility certification” as the certification obtained from the
State Historic Preservation Officer that the applicable facility comprises an eligible site
and that the rehabilitation is a certified rehabilitation.
Subdivision ( 5) defines “ Eligible site” as a site located in this State that satisfies all of
the following conditions:
• It was used as a manufacturing facility or for purposes ancillary to manufacturing,
as a warehouse for selling agricultural products, or as a public or private utility.
• It is a certified historic structure or a State- certified historic structure.
• It has been at least 80% vacant for a period of at least two years immediately
preceding the date the eligibility certification is made.
• The cost certification documents that the qualified rehabilitation expenditures for
a site for which a taxpayer is allowed a credit under section 47 of the Code or the
rehabilitation expenses for a site for which the taxpayer is not allowed a credit
under section 47 of the Code exceed $ 3,000,000 for the site as a whole.
Subdivision ( 6) defines “ Enterprise tier area” by cross- reference to the definition of that
term in G. S. 105- 129.3.
Subdivision ( 7) defines “ Pass- through entity” by cross- reference to the definition of that
term in G. S. 105- 228.90.
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Subdivision ( 8) defines “ Qualified rehabilitation expenditures” by cross- reference to the
definition of that term in section 47 of the Internal Revenue Code.
Subdivision ( 9) defines “ Rehabilitation expenses” by cross- reference to the definition of
that term in G. S. 105- 129.36.
Subdivision ( 10) defines “ State- certified historic structure” by cross- reference to the
definition of that term in G. S. 105- 129.36.
Subdivision ( 11) defines “ State Historic Preservation Officer” by cross- reference to the
definition of that term in G. S. 105- 129.36.
Subdivision ( 3a) defining “ development tier area by cross- reference to the meaning of
that term as defined in G. S. 143B- 437.08 was subsequently added and subdivision ( 6)
was subsequently repealed to conform to the new Article 3I.
G. S. 105- 129.71 – Credit for income- producing rehabilitated mill property:
Subsection ( a) provides that a taxpayer who is allowed a federal income tax credit
under Code section 47 for making qualified rehabilitation expenditures with respect to
an eligible site is allowed a State tax credit equal to a percentage of the expenditures
that qualify for the federal credit. The credit may be claimed in the year the eligible site
is placed in service. If the eligible site is placed in service in phases in different years,
the credit may be claimed for each year based on the qualified expenditures associated
with the phase placed in service during that year. To be eligible for the credit, the
taxpayer must provide a copy of the eligibility certification and the cost certification. If
the eligible site is located in a tier one, two, or three area on the date of certification, the
amount of credit is 40% of the expenditures; if the eligible site is in a tier four or five
county, the amount of credit is 30%.
Subsection ( a) was subsequently amended to conform to the new Article 3I.
Subsection ( b) allows a pass- through entity that qualifies for the credit to allocate the
credit among any of its owners in its discretion as long as an owner's adjusted basis in
the pass- through entity at the end of the taxable year in which the eligible site is placed
in service is at least 40% of the amount of credit allocated to that owner. This differs
from the allocation principles in G. S. 105- 131.8 and G. S. 105- 269.15 that apply to other
tax credits. Under the general allocation provisions, tax credits are allocated among S
corporation shareholders in accordance with their pro rata share of the corporation,
which is determined on the basis of stock ownership, and tax credits are allocated
among partners in a partnership in accordance with the partnership agreement. The
allocation made by the partnership must have a substantial economic effect, which
means that the allocation agreement must reflect the economic interests of the partners
in the partnership and cannot be based solely on tax consequences. A statement of the
allocation made under the special provision for this credit and the allocation that would
have been required if this provision were not law must be included with the tax returns
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filed by the pass- through entity and the owners for each year in which the allocated
credit is claimed.
Subsection ( c) requires an owner of a pass- through entity to forfeit a portion of the credit
for rehabilitating income- producing mill property if the owner disposes of more than one-third
of the owner’s interest in the pass- through entity within five years from the date the
eligible site is placed in service. The forfeiture amount is determined by multiplying the
amount of the credit by the percentage reduction in ownership and then multiplying that
product by the federal recapture percentage found in Code section 50( a)( 1)( B).
Subsection ( d) provides two exceptions to the forfeiture provisions in subsection ( c).
Forfeiture is not required if the change in ownership is the result of either ( 1) the death
of the owner, or ( 2) a merger, consolidation, or similar transaction requiring approval by
the shareholders, partners or members of the taxpayer under applicable State law, to
the extent the taxpayer does not receive cash or tangible property in the merger,
consolidation, or other similar transaction.
Subsection ( e) provides that an owner of a pass- through entity that forfeits a credit
pursuant to subsection ( c) is liable for all past taxes avoided as the result of claiming the
credit, plus interest at the rate established under G. S. 105- 241.1( i) computed from the
date the taxes would have been due if the credit had not been allowed. The past taxes
and interest are due 30 days after the date the credit is forfeited. If the taxes and
interest are not paid by the due date, the taxpayer is subject to the penalties provided in
G. S. 105- 236.
G. S. 105- 129.72 - Credit for nonincome- producing rehabilitated mill property:
Subsection ( a) provides that a taxpayer who is not allowed a federal income tax credit
under Code section 47 and who makes qualified rehabilitation expenses with respect to
an eligible site is allowed a State tax credit equal to a percentage of the rehabilitation
expenses. The credit may be claimed in five equal installments beginning in the year
the eligible site is placed in service. If the eligible site is placed in service in phases in
different years, the credit may be claimed for each year based on the qualified
expenses associated with the phase placed in service during that year. To be eligible
for the credit, the taxpayer must provide a copy of the eligibility certification and the cost
certification. If the eligible site is located in a tier one, two, or three area on the date of
certification, the amount of credit is 40% of the expenditures; no credit is allowed if the
eligible site is in a tier four or five county.
Subsection ( a) was subsequently amended to conform to the new Article 3I.
Subsection ( b) allows a pass- through entity that qualifies for the credit to allocate the
credit among any of its owners in its discretion as long as an owner's adjusted basis in
the pass- through entity at the end of the taxable year in which the eligible site is placed
in service is at least 40% of the amount of credit allocated to that owner. This differs
from the allocation principles in G. S. 105- 131.8 and G. S. 105- 269.15 that apply to other
tax credits. Under the general allocation provisions, tax credits are allocated among S
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corporation shareholders in accordance with their pro rata share of the corporation,
which is determined on the basis of stock ownership, and tax credits are allocated
among partners in a partnership in accordance with the partnership agreement. The
allocation made by the partnership must have a substantial economic effect, which
means that the allocation agreement must reflect the economic interests of the partners
in the partnership and cannot be based solely on tax consequences. A statement of the
allocation made under the special provision for this credit and the allocation that would
have been required if this provision were not law must be included with the tax returns
filed by the pass- through entity and the owners for each year in which the allocated
credit is claimed.
Subsection ( c) requires an owner of a pass- through entity to forfeit a portion of the credit
for rehabilitating nonincome- producing mill property if the owner disposes of more than
one- third of the owner’s interest in the pass- through entity within five years from the
date the eligible site is placed in service. The forfeiture amount is determined by
multiplying the amount of the credit by the percentage reduction in ownership and then
multiplying that product by the federal recapture percentage found in Code section
50( a)( 1)( B). The remaining allocable credit is allocated equally among the five years in
which the credit is claimed.
Subsection ( d) provides two exceptions to the forfeiture provisions in subsection ( c).
Forfeiture is not required if the change in ownership is the result of either ( 1) the death
of the owner, or ( 2) a merger, consolidation, or similar transaction requiring approval by
the shareholders, partners or members of the taxpayer under applicable State law, to
the extent the taxpayer does not receive cash or tangible property in the merger,
consolidation, or other similar transaction.
Subsection ( e) provides that an owner of a pass- through entity that forfeits a credit
pursuant to subsection ( c) is liable for all past taxes avoided as the result of claiming the
credit, plus interest at the rate established under G. S. 105- 241.1( i) computed from the
date the taxes would have been due if the credit had not been allowed. The past taxes
and interest are due 30 days after the date the credit is forfeited. If the taxes and
interest are not paid by the due date, the taxpayer is subject to the penalties provided in
G. S. 105- 236.
G. S. 105- 129.73 – Tax credited; cap: Subsection ( a) provides that the tax credits
allowed in Article 3H may be claimed against one of the following taxes: ( 1) franchise
tax, ( 2) income tax, or ( 3) gross premiums tax. The taxpayer must elect the tax against
which the credit will be claimed when filing the return on which it is claimed. The
election is binding, including both installments and carryforwards of unused credits.
Subsection ( b) provides that a credit claimed under Article 3H may not exceed the
amount of tax against which it is claimed for the taxable year reduced by the sum of all
other credits, except payment of tax made by or on behalf of the taxpayer. Any unused
credit may be carried forward for the succeeding nine years.
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G. S. 105- 129.74 – Coordination with Article 3D: This section includes two provisions
to coordinate with the tax credits for rehabilitating historic structures under Article 3D.
First, a taxpayer claiming a credit under Article 3H cannot also claim a credit under
Article 3D with respect to the same activity. Second, the authority given to the North
Carolina Historical Commission in Article 3D to establish rules and fees also applies to
this Article.
G. S. 105- 129.75 – Sunset: Article 3H expires for qualified rehabilitation expenditures
and rehabilitation expenses incurred on or after January 1, 2011.
( With the exception of the addition of G. S. 105- 129.70( 3a), the repeal of G. S. 105-
129.70( 6), and the conforming changes to G. S. 105- 129.71( a) and G. S. 105- 129.72( a),
these provisions are effective for taxable years beginning on or after January 1, 2006 for
eligible sites placed into service on or after July 1, 2006; HB 474, s. 1, S. L. 06- 40; the
addition of G. S. 105- 129.70( 3a) and the repeal of G. S. 105- 129.70( 6) are effective
January 1, 2007; HB 2170, s. 2.22, S. L. 06- 252; conforming changes to G. S. 105-
129.71( a) and G. S. 105- 129.72( a) effective January 1, 2007; HB 2170, ss. 2.23 and
2.24, respectively, S. L. 06- 252.)
TAX CREDITS FOR GROWING BUSINESSES
New Article 3I – Tax Credits for Growing Businesses: This new Article was enacted
to replace the tax credits generally available under Article 3A of Chapter 105 with more
narrowly focused credits for job creation and business investment. The Article consists
of sections G. S. 105- 129.80 through G. S. 105- 129.89. The Article is effective for
taxable years beginning on or after January 1, 2007.
G. S. 105- 129.80 – Legislative Findings: This subsection sets out the legislative
findings for why the tax credits in this Article are warranted.
G. S. 105- 129.81 – Definitions: This section sets out the definitions that apply to Article
3I.
Subdivision ( 1) defines “ agrarian growth zone” by cross- reference to the definition of
that term in G. S. 143B- 437.10.
Subdivision ( 2) defines “ aircraft maintenance and repair” as “ the provision of specialized
maintenance or repair services for commercial aircraft or the rebuilding of commercial
aircraft.”
Subdivision ( 3) defines “ air courier services” as “ the furnishing of air delivery of
individually addressed letters and packages for compensation, in interstate commerce,
except by the United States Postal Service.”
Subdivision ( 4) defines “ business property” as “ tangible personal property that is used in
a business and capitalized under the Code.”
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Subdivision ( 5) defines “ company headquarters” as “ a corporate, subsidiary, or regional
managing office, as defined by NAICS in United States industry 551114, that is
responsible for strategic or organizational planning and decision making for the
business on an international, national, or multistate regional basis.”
Subdivision ( 6) defines “ cost.” For property owned by the taxpayer, cost is determined
pursuant to regulations adopted under Code section 1012. For property that the
taxpayer leases from others, cost is the value as determined pursuant to G. S. 105-
130.4( j)( 2).
Subdivision ( 7) defines “ customer service call center” as “ the provision of support
service by a business to its customers by telephone or other electronic means to
support products or services of the business. For the purposes of this definition, an
establishment is primarily engaged in providing support services by telephone or other
electronic means only if at least sixty percent ( 60%) of its calls are incoming or at least
sixty percent ( 60%) of its other electronic communications are initiated by its
customers.”
Subdivision ( 8) defines “ development tier” as “ the classification assigned to an area
pursuant to G. S. 143B- 437.08.”
Subdivision ( 9) defines “ electronic shopping and mail order houses” as “ an industry in
electronic shopping and mail order houses industry group 4541 as defined by NAICS.”
Subdivision ( 10) defines “ establishment” by cross- reference to the definition of that term
in 29 C. F. R. § 1904.46, as it existed on January 1, 2002.
Subdivision ( 11) defines “ full- time job” as “ a position that requires at least 1,600 hours of
work per year and is intended to be held by one employee during the entire year. A full-time
employee is an employee who holds a full- time job.”
Subdivision ( 12) defines “ hub” by cross- reference to the definition of that term in G. S.
105- 164.3.
Subdivision ( 13) defines “ information technology and services” as “ an industry in one of
the following:
• Internet service providers, Web search portals, and data processing subsector
518 as defined by NAICS.
• Software publishers industry group 5112 as defined by NAICS.
• Computer systems design and related services industry group 5415 as defied by
NAICS.”
Subdivision ( 14) defines “ long- term unemployed worker” as “ an individual that has been
totally unemployed for at least the preceding 26 consecutive weeks as evidenced by
records maintained by the Employment Security Commission.”
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Subdivision ( 15) defines “ manufacturing” as “ an industry in manufacturing sectors 31
through 33, as defined by NAICS, but not including quick printing or retail bakeries.”
Subdivision ( 16) defines “ motorsports facility” as “ a motorsports racetrack classified in
the United States racetrack national industry 711212, as defined by NAICS.”
Subdivision ( 17) defines “ motorsports racing team” as “ a professional racing team
primarily engaged in the research and development, design, manufacture, repair,
maintenance, and operation of motor vehicles used in live motorsports racing events
before a paying audience.”
Subdivision ( 18) defines “ NAICS” as “ the North American Industry Classification System
adopted by the United States Office of Management and Budget as of December 31,
2002.”
Subdivision ( 19) defines “ new job” as “ a full- time job that represents a net increase in
the number of the taxpayer’s employees statewide. A new employee is an employee
who holds a new job. The term does not include a job currently located in this State that
is transferred to the business from a related member of the business.”
Subdivision ( 20) defines “ overdue tax debt” by cross- reference to the term as defined in
G. S. 105- 243.1.”
Subdivision ( 21) defines “ purchase” by cross- reference to the term as defined in Code
section 179.
Subdivision ( 22) defines “ related member” by cross- reference to the term as defined in
G. S. 105- 130.7A.
Subdivision ( 23) defines “ research and development” as “ an industry in scientific
research and development services industry group 5417 as defined by NAICS.”
Subdivision ( 24) defines “ urban progress zone” as “ the classification assigned to an
area pursuant to G. S. 143B- 437.09.”
Subdivision ( 25) defines “ warehousing” as “ an industry in warehousing and storage
subsector 493 as defied by NAICS.”
Subdivision ( 26) defines “ wholesale trade” as “ an industry in wholesale trade sector 42
as defined by NAICS.”
G. S. 105- 129.82 – Sunset; studies: Subsection ( a) of this section provides that this
Article is repealed effective for business activities that occur on or after January 1, 2011.
Subsections ( b), ( c), and ( d) require the Department of Commerce to study the effect of
this Article’s tax credits on tax equity and the effectiveness of the credits and to report
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the results and any recommendations to the General Assembly biennially beginning
June 1, 2009.
G. S. 105- 129.83 – Eligibility; forfeiture: Subsection ( a) of this section provides that a
taxpayer is eligible for a credit under this Article only with respect to activities occurring
at an establishment whose primary activity is one of the twelve listed below. The
primary activity of an establishment is determined based on the establishment’s
principal product or group of products produced or distributed, or services rendered.
The twelve primary activities are:
• aircraft maintenance and repair.
• air courier services hub.
• company headquarters, but only if the additional eligibility requirements of
subsection ( b) of this section are satisfied.
• customer service call centers.
• electronic shopping and mail order houses.
• information technology and services.
• manufacturing.
• motorsports facility.
• motorsports racing team.
• research and development.
• warehousing.
• wholesale trade.
Subsection ( b) provides additional eligibility requirements for company headquarters.
The taxpayer must create at least 75 new jobs at the company headquarters within a
24- month period. Meeting the job creation requirement makes the taxpayer eligible for
credits with respect to the company headquarters for three taxable years beginning with
the year in which the job creation requirement is satisfied. After the three- year eligibility
period expires, the taxpayer can qualify for a new three- year eligibility period by creating
an additional 75 new jobs within a 24- month period. Creating an additional 75 jobs
during a three- year eligibility period does not extend the eligibility period.
Subsection ( c) requires a taxpayer to meet a wage standard to be eligible for credits in a
development tier two or three area. If the activity occurs in a tier one area, the taxpayer
does not have to meet a wage standard.
Jobs that are in tier two or three areas that are also within an urban progress zone or an
agrarian growth zone must pay an average weekly wage that is at least equal to 90% of
the lesser of the average wage for all private employers in the State and the average
wage for all private employers in the county. Jobs that are in tier two or three areas and
are not within an urban progress zone or an agrarian growth zone must pay an average
weekly wage that is at least equal to the lesser of 110% of the average wage for all
private employers in the State and 90% of the average wage for all private employers in
the county. The Department of Commerce will publish the wage standard for each
county on an annual basis.
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In making the wage calculation, the taxpayer must include any jobs that were filled for at
least 1,600 hours during the calendar year the taxpayer engages in the activity that
qualifies for the credit even if those jobs were not filled at the time the taxpayer claims
the credit. Only full- time jobs are included in the calculation. A taxpayer with a taxable
year other than a calendar year must use the wage standard for the calendar year in
which the taxable year begins.
Subsection ( d) requires a taxpayer to provide health insurance for all of the full- time jobs
at the establishment with respect to which a credit is claimed when the taxpayer
engages in the activity that qualifies for the credit and for each subsequent year in
which an installment or carryforward of a credit is claimed. If the taxpayer ceases to
provide health insurance for the jobs during a taxable year, the credit expires and the
taxpayer may not take any remaining installments or carryforwards of the credit. A
taxpayer provides health insurance if it pays at least 50% of the premiums for health
care coverage that equals or exceeds the minimum provisions of the basic health care
plan of coverage recommended by the Small Employer Carrier Committee pursuant to
G. S. 58- 50- 125.
Subsection ( e) requires a taxpayer to have a good environmental record. Having a
good environmental record means that, at the time the taxpayer claims a credit, there is
no pending administrative, civil, or criminal enforcement action against the taxpayer
based on alleged significant violations of an environmental program administered by the
Department of Environment and Natural Resources and there has been no final
determination of the taxpayer's responsibility for one of these violations within the last
five years.
Subsection ( f) requires a taxpayer to have a good OSHA record. Having a good OSHA
record means that, at the time the taxpayer claims a credit, there are no citations
against the taxpayer under the Occupational Safety and Health Act at the establishment
for which the credit is claimed that have become final orders within the past three years
for willful serious violations or for failing to abate serious violations.
Subsection ( g) provides that a taxpayer is ineligible for an Article 3I tax credit if the
taxpayer has an overdue tax debt at the time the taxpayer claims an installment or
carryforward of a credit.
Subsection ( h) provides for expiration of the credits allowed under this Article if, during
the period that installments of a credit accrue, the taxpayer is no longer engaged in an
eligible business at the establishment or if the number of jobs of an eligible company
headquarters falls below the minimum number required in subsection ( b). If credits
expire, the taxpayer may not take any future installments of the credits but may continue
to claim any unused installments of the credits carried forward from earlier years. A
change in the development tier designation of the location of an establishment does not
result in expiration of credits.
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Subsection ( i) provides for forfeiture of the credits allowed under this Article if the
taxpayer was not eligible for the credits for the calendar year in which the taxpayer
engaged in the activity for which the credit was claimed. A taxpayer forfeits the credit
for investment in real property ( G. S. 105- 129.89) if the taxpayer fails to timely create the
number of required new jobs or to timely make the required level of investment. A
taxpayer that forfeits a credit is liable for all past taxes avoided as the result of claiming
the credit, plus interest at the rate established under G. S. 105- 241.1( i) computed from
the date the taxes would have been due if the credit had not been allowed. The past
taxes and interest are due 30 days after the date the credit is forfeited. If the taxes and
interest are not paid by the due date, the taxpayer is subject to the penalties provided in
G. S. 105- 236.
Subsection ( j) addresses change in ownership of a business. For purposes of this
subsection, the term “ business” means a taxpayer or an establishment. The sale,
merger, consolidation, conversion, acquisition or bankruptcy of a business or any
transaction by which a business reformulates itself as another business does not create
new eligibility with respect to credits for which the predecessor was not eligible. The
successor business can take any credit or carried- over portion of a credit that its
predecessor could have taken if the predecessor had a tax liability.
The acquisition of a business is a new investment that creates new eligibility for credits
if ( 1) the business closed before it was acquired; ( 2) the business was required to file a
notice of plant closing or mass layoff under the federal Worker Adjustment and
Retraining Notification Act before it was acquired; or ( 3) the business was acquired by
its employees directly or indirectly through an acquisition company under an employee
stock option transaction.
Subsection ( k) provides that a taxpayer can request in writing from the Department of
Revenue specific advice regarding eligibility for a credit under this Article. A taxpayer
may not legally rely upon advice offered by any other State or local government official
or employee regarding eligibility for a credit.
Subsection ( l) authorizes a taxpayer to sign a letter of commitment with the Department
of Commerce to undertake specific activities at a specific site within the next two years.
The letter of commitment must be signed after the Department of Commerce calculates
the development tier designations for the next year but before the beginning of the year.
If the taxpayer engages in activities within the next two years as provided in the letter of
commitment, the taxpayer can calculate its credits based on the establishment’s
development tier designation and urban progress zone or agrarian growth zone
designation in the year in which the letter of commitment was signed. If the taxpayer
does not meet the terms of the letter of commitment, it may still qualify for credits but
must use the development tier designation and urban progress zone or agrarian growth
zone designation in effect at the time the taxpayer engages in the activity.
G. S. 105- 129.84 – Tax Election; Cap; Carryforwards; Limitations: Subsection ( a)
provides that the tax credits in this Article may be claimed against the franchise tax, the
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corporate or individual income tax, and the gross premiums tax. The taxpayer may
divide a credit among those taxes. Carryforwards of a credit may also be divided
among those taxes without regard to which taxes the credit was claimed against in
earlier years.
Subsection ( b) provides that the credits may not exceed 50% of the cumulative amount
of taxes against which they may be claimed, reduced by the sum of all other tax credits
allowed against those taxes. This limitation applies to the cumulative amount of credit,
including carryforwards.
Subsection ( c) provides that, as a general rule, the unused portion of the credit for
creating jobs or the credit for investing in business property may be carried forward for
five years and the unused portion of the credit for investing in real property may be
carried forward for fifteen years. A twenty- year carryforward applies if the taxpayer
obtains a written determination from the Department of Commerce that the taxpayer is
expected to purchase or lease, and place in service in connection with an eligible
business within a two- year period, at least $ 150,000,000 worth of business and real
property. If the taxpayer does not make the required level of investment, the
carryforward period is reduced from twenty to five years.
Subsection ( d) establishes a special statute of limitations for claming tax credits under
this Article. A taxpayer must claim a credit within six months after the date set by
statute for the filing of the return that coincides with the year that the taxpayer qualified
for the credit, including any extensions of that date.
G. S. 105- 129.85 – Fees and Reports: Subsection ( a) imposes a fee of $ 500.00 for
each type of credit the taxpayer intends to claim with respect to an establishment.
There is no fee for a credit in an enterprise tier one or tier two area. The fee is due at
the time the return is due for the taxable year in which the taxpayer engaged in an
activity for which the taxpayer is eligible for a credit. No credit will be allowed for a
taxable year until all outstanding fees have been paid.
Subsection ( b) requires the Department of Revenue to publish a report by May 1 of
each year providing the following information itemized by credit and by taxpayer for the
12- month period ending the preceding December 31:
• The number and amount of credits generated and taken for each credit allowed
in this Article.
• The number and development tier area of new jobs with respect to which credits
were generated and to which credits were taken.
• The cost and development tier area of business property with respect to which
credits were generated and to which credits were taken.
• The cost and development tier area of real property with respect to which credits
were generated and to which credits were taken.
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G. S. 105- 129.86 – Substantiation: Subsection ( a) requires a taxpayer claiming a tax
credit under Article 3I to maintain and make available for inspection any information or
records required by the Secretary of Revenue. The burden of proving eligibility for a
credit and the amount of the credit rests upon the taxpayer.
Subsection ( b) requires a taxpayer claiming a tax credit under Article 3I to provide, in a
form prescribed by the Department of Revenue, certain qualifying information
demonstrating that the taxpayer has met the conditions for qualifying for a credit and
any carryforwards under affirmation with the tax return.
G. S. 105- 129.87 – Credit for Creating Jobs: Subsection ( a) provides a tax credit for
creating jobs to a taxpayer that meets the eligibility requirements in G. S. 105- 129.83
and satisfies the threshold requirements for new jobs in subsection ( b). The amount of
credit for each new job is $ 12,500 if the job is in a development tier one county; $ 5,000
if the job is in a development tier two county; and $ 750 if the job is in a development tier
three county. The amount of credit is increased by $ 1,000 if the job is located in an
urban progress zone or an agrarian growth zone. The amount of credit is increased by
an additional $ 2,000 if a job located in an urban progress zone or an agrarian growth
zone is filled by a resident of that zone or by a long- term unemployed worker.
Subsection ( b) sets out the threshold requirements for new job creation that a taxpayer
must meet to be eligible for the credit. A taxpayer must create at least 5 new jobs if the
establishment is in a development tier one county; 10 new jobs if the establishment is in
a development tier two county; and 15 new jobs if the establishment is in a development
tier three county. If the new job is located in an urban progress zone or an agrarian
growth zone, then the development tier one threshold applies. If a taxpayer creates
new jobs at more than one establishment in the same county during the year, the
threshold applies to the aggregate number of jobs created. If a taxpayer creates new
jobs at eligible establishments in more than one county during the year, the threshold
applies separately to the aggregate number of jobs created in each county.
Subsection ( c) provides that a job is considered located in a county, an urban progress
zone or an agrarian growth zone if more than 50% of the employee’s duties are
performed in the county or the zone. The taxpayer determines the number of new jobs
created during the taxable year by subtracting the average number of full- time
employees the taxpayer had in this State during the 12- month period preceding the
beginning of the taxable year from the average number of full- time employees the
taxpayer has in the State during the taxable year.
Subsection ( d) provides that the credit may be taken in four equal installments
beginning in the tax year following the year in which the new jobs were created. If a job
is no longer filled during any of the four installment years, the credit related to that job
expires and the taxpayer may not take any remaining installments of the credit with
respect to that job. If, in one of the installment years, the number of the taxpayer’s full-time
employees falls below the sum of the applicable threshold in subsection ( b) and the
number of full- time employees the taxpayer had in the year before the year in which the
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taxpayer qualified for the credit, the credits with respect to all of the new jobs expire and
the taxpayer may not take any remaining installments of the credits. The taxpayer may
continue to claim any unused portions of previous installments of the credit that are
carried forward under G. S. 105- 129.84.
Subsection ( e) addresses transferred jobs. Jobs that are transferred by the taxpayer
from one area of the State to another area or are transferred to the taxpayer from a
related member of the taxpayer are not considered new jobs. If in one of the four
installment years a job for which a credit is claimed is moved to an area in a higher-numbered
development tier or out of an urban progress zone or an agrarian growth
zone, the remaining installments are allowed only to the extent they would have been
allowed if the job was initially created in the area to which it was moved. If the job is
moved to a lower- numbered development tier or into an urban progress zone or an
agrarian growth zone, the remaining installments are calculated as if the job was initially
created in the area to which it was moved.
Subsection ( f) provides that, for purposes of the new jobs credit, the taxpayer satisfies
the wage standard requirement only if the taxpayer satisfies the requirement with
respect to both the new jobs, considered collectively, for which a credit is claimed and
all of the jobs at the establishment, considered collectively, with respect to which a
credit is claimed.
Subsection ( g) prohibits a taxpayer from claiming a credit under this section with respect
to jobs for which the taxpayer claimed a credit under G. S. 105- 129.8.
G. S. 105- 129.88 – Credit for Investing in Business Property: Subsection ( a)
provides a tax credit for investing in business property to a taxpayer that meets the
eligibility requirements in G. S. 105- 129.83, purchases or leases business property and
places it in service in this State during the taxable year, and satisfies the threshold
requirements in subsection ( c). Business property is eligible if it is not leased to
another. The amount of credit is equal to the applicable percentage of the excess of the
eligible investment amount over the applicable threshold. The applicable percentage is
7% in a development tier one county, 5% in a development tier two county, and 3.5% in
a development tier three county. If the business property is placed in service in an
urban progress zone or an agrarian growth zone, the applicable percentage is the same
as for a development tier one area. The credit may be taken in four equal installments
beginning in the tax year following the year in which the business property is placed in
service.
Subsection ( b) defines “ eligible investment amount” as the lesser of ( i) the cost of the
eligible business property and ( ii) the amount by which the cost of all of the taxpayer’s
eligible business property that is in service in the State on the last day of the taxable
year exceeds the cost of all of the taxpayer’s eligible business property that was in
service in the State on the last day of the base year. The base year is that year of the
preceding three taxable years in which the taxpayer had the most eligible business
property in service in the State.
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Subsection ( c) provides that the applicable threshold is $ 0 if the eligible business
property is placed in service in a development tier one county; $ 1,000,000 if the
business property is placed in service is in a development tier two county; and
$ 2,000,000 if the business property is placed in service in a development tier three
county. If the business property is placed in service in an urban progress zone or an
agrarian growth zone, the applicable percentage is the same as for a development tier
one area. If the taxpayer places eligible business property in service at more than one
establishment in the same county during the taxable year, the threshold applies to the
aggregate amount of eligible business property placed in service at all establishments in
the county. If a taxpayer places eligible business property in service at eligible
establishments in more than one county during the year, the threshold applies
separately to the aggregate amount of eligible business property placed in service in
each county. If a taxpayer places eligible business property in service at an eligible
establishment over a two- year period, the applicable threshold for the second taxable
year is reduced by the eligible investment amount for the preceding year.
Subsection ( d) provides for expiration of the credit if, in one of the four installment years,
the business property with respect to which the credit is claimed is disposed of. The
term “ disposed of” means disposed of, taken out of service, or moved out of State. In
that case, the taxpayer may not take any remaining installments of the credit for that
business property unless the cost of the disposed business property is offset in the
same taxable year by new investment in eligible business property placed in service in
the same county. Business property is considered offset if there has been a net
reduction in the cost of all of the taxpayer’s eligible business property in that county of
20% or less. The taxpayer does not include the cost of business property placed in
service during the taxable year for which the taxpayer claims an Article 3A or Article 3B
tax credit in the cost of all eligible business property in the county for purposes of
determining the net reduction. The taxpayer may continue to claim any unused portions
of previous installments of the credit that are carried forward under G. S. 105- 129.84.
Subsection ( e) addresses transferred property. If, in one of the four installment years,
business property with respect to which a credit is claimed is moved to an county in a
higher- numbered development tier or out of an urban progress zone or an agrarian
growth zone, the remaining installments are allowed only to the extent they would have
been allowed if the property was initially placed in service in the area to which it was
moved. If the business property is moved to a lower- numbered development tier or into
an urban progress zone or an agrarian growth zone, the remaining installments are
calculated as if the property was initially placed in service in the area to which it was
moved. Note: The law regarding moving property to a higher- numbered development
tier refers to moving property to an urban progress zone or an agrarian growth zone
instead of out of a zone. The Department will ask that the technical error be corrected
during the 2007 legislative session.
Subsection ( f) provides that, for purposes of the investment in business property credit,
the taxpayer satisfies the wage standard requirement only if the taxpayer satisfies the
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requirement with respect to all of the jobs at the establishment, considered collectively,
with respect to which a credit is claimed.
Subsection ( g) prohibits a taxpayer from claiming a credit under this section with respect
to business property for which the taxpayer claimed a credit under G. S. 105- 129.9 or
G. S. 105- 129.9A.
G. S. 105- 129.89 – Credit for Investing in Real Property: Subsection ( a) provides a
tax credit for investing in real property to a taxpayer that meets the eligibility
requirements in G. S. 105- 129.83 and in subsection ( b) of this section, purchases or
leases real property in a development tier one area, and begins to use the property in
an eligible business during the tax year. The allowable credit is equal to 30% of the
eligible investment amount. Property is located in a development tier one area if the
property was located in a development tier one area at the time the taxpayer applied to
the Department of Commerce for a determination as required under subsection ( b).
The eligible investment amount is the lesser of ( i) the cost of the property and ( ii) the
amount by which the cost of all of the real property that the taxpayer is using in an
eligible business in the State on the last day of the taxable year exceeds the cost of all
of the taxpayer’s real property that was in use in an eligible business in the State on the
last day of the base year. The base year is that year of the preceding three taxable
years in which the taxpayer was using the most real property in an eligible business in
the State. In the case of leased property, the cost of the property is considered to be
the taxpayer’s lease payments over a seven- year period, plus any expenditures made
by the taxpayer to improve the property before it is used by the taxpayer if the
expenditures are not reimbursed or credited by the lessor.
The credit may be taken in seven equal installments beginning in the tax year following
the year in which the real property is first used in an eligible business. When only a part
of the property is first used in an eligible business in one year and another part is first
used in a later year, the taxpayer is entitled to separate credits for the amounts used in
each year.
The basis in any real property for which a credit is allowed under this section is reduced
by the amount of allowable credit.
Subsection ( b) provides that a taxpayer is eligible for the credit for investing in real
property with respect to an establishment only if the taxpayer obtains a written
determination from the Department of Commerce that the taxpayer is expected to
purchase or lease and use in an eligible business at that establishment within a three-year
period at least $ 10,000,000 of real property and that the establishment will create
at least 200 new jobs within 2 years of the time the real property is first used in an
eligible business. If the taxpayer fails to timely make the required level of investment or
to create the required number of jobs, the taxpayer forfeits the credit.
Subsection ( c) addresses the mixed use of real property. If a taxpayer uses only part of
the property in an eligible business, the amount of the credit is reduced by multiplying
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the credit by the percentage of the total square footage of the property that is used in an
eligible business.
Subsection ( d) provides for expiration of the credit if, in one of the seven installment
years, the business property with respect to which the credit is claimed is no longer
used in an eligible business. In that case, the taxpayer may not take any remaining
installments of the credit for that