CHAPTER 5 ‑ CORPORATE FRANCHISE, INCOME, AND INSURANCE TAXES

 

SUBCHAPTER 5A ‑ DIVISIONAL RULES

 

17 NCAC 05A .0101         LOCATION

17 NCAC 05A .0102         GENERAL PURPOSE

17 NCAC 05A .0103         DIVISIONAL ORGANIZATION

 

History Note:        Authority G.S. 105‑114 to 105‑132; 105‑163.25 to 105‑163.37; 143B‑10; 143B‑221;

Eff. February 1, 1976;

Repealed Eff. October 1, 1993.

 

 

SUBCHAPTER 5B ‑ FRANCHISE TAX

 

SECTION .0100 ‑ GENERAL INFORMATION

 

17 NCAC 05B .0101          SCOPE AND NATURE

17 NCAC 05B .0102          CORPORATION DEFINED

17 NCAC 05B .0103          PERIOD COVERED

 

History Note:        Authority G.S. 105‑114; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .0104          INACTIVE CORPORATIONS

A corporation that is inactive and without assets is subject annually to a minimum franchise tax. A return is required containing a statement of the status of the corporation. Failure to file this return and pay the minimum tax will result in suspension of the articles of incorporation or certificate of authority.

 

History Note:        Authority G.S. 105‑114; 105‑262;

Eff. February 1, 1976;

Amended Eff. November 1, 1991; November 1, 1987;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05B .0105          DISSOLUTION OR WITHDRAWAL OF CORPORATE RIGHTS

Corporations are not subject to franchise tax after the end of the income year in which articles of dissolution or withdrawal are filed with the Secretary of State unless they engage in business activities not incidental to winding up their affairs. Therefore, no franchise tax is required with the income return filed for the year in which the application is filed or with any subsequent income returns that may be required in connection with winding up the affairs of the corporation.

 

History Note:        Authority G.S. 105‑114; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05B .0106          PAYMENT OF FRANCHISE TAXES

 

History Note:        Authority G.S. 105‑127; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 1, 1993.

 

17 NCAC 05B .0107          EXTENSION OF FILING DATE

Rule 17 NCAC 5C .2004 sets out the procedure for a corporation to obtain an extension of time to file its corporate franchise and income tax return.

 

History Note:        Authority G.S. 105-129; 105-262; 105-263;

Eff. February 1, 1976;

Amended Eff. July 1, 1999; January 1, 1994; April 1, 1991; January 1, 1978.

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05B .0108          electronic filing of general business franchise tax returns

 

History Note:        Authority G.S. 105‑262;

Eff. March 1, 2006;

Expired Eff. September 1, 2017 pursuant to G.S. 150B-21.3A.

 

SECTION .0200 ‑ RAILROADS

 

17 NCAC 05B .0201          BASIS FOR TAXATION

17 NCAC 05B .0202          DUE DATE OF THE TAX

 

History Note:        Authority G.S. 105‑115; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .0203          BILLED FOR THE TAX

 

History Note:        Authority G.S. 105‑115; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 1, 1993.

 

SECTION .0300 ‑ ELECTRIC: POWER: GAS: WATER AND SEWERAGE COMPANIES

 

17 NCAC 05B .0301          BASIS FOR TAXATION

17 NCAC 05B .0302          DUE DATE OF THE REPORT AND TAX

17 NCAC 05B .0303          FORM TO BE USED FOR FILING

17 NCAC 05B .0304          SPECIAL EXEMPTION

17 NCAC 05B .0305          DISTRIBUTION TO MUNICIPALITIES

 

History Note:        Authority G.S. 105‑116; 105‑262;

Eff. February 1, 1976;

Amended Eff. October 23, 1977;

Repealed Eff. October 31, 1981.

 

SECTION .0400 ‑ PULLMAN: SLEEPING: CHAIR AND DINING CARS

 

17 NCAC 05B .0401          BASIS FOR TAXATION

17 NCAC 05B .0402          DUE DATE OF THE REPORT AND TAX

 

History Note:        Authority G.S. 105‑117; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .0403          FORM TO BE USED FOR FILING

 

History Note:        Authority G.S. 105‑117; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Repealed Eff. December 1, 1997.

 

SECTION .0500 ‑ EXPRESS COMPANIES

 

17 NCAC 05B .0501          BASIS FOR TAXATION

17 NCAC 05B .0502          DUE DATE OF THE REPORT AND TAX

 

History Note:        Authority G.S. 105‑118; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .0503          FORM TO BE USED FOR FILING

 

History Note:        Authority G.S. 105‑118; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Repealed Eff. December 1, 1997.

 

SECTION .0600 ‑ TELEGRAPH COMPANIES

 

17 NCAC 05B .0601          BASIS FOR TAXATION

17 NCAC 05B .0602          DUE DATE OF THE REPORT AND TAX

 

History Note:        Authority G.S. 105‑119; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .0603          FORM TO BE USED FOR FILING

 

History Note:        Authority G.S. 105‑119; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Repealed Eff. July 1, 2000.

 

SECTION .0700 ‑ TELEPHONE COMPANIES

 

17 NCAC 05B .0701          BASIS FOR TAXATION

17 NCAC 05B .0702          DUE DATE OF THE REPORT AND TAX

17 NCAC 05B .0703          FORM TO BE USED FOR FILING

17 NCAC 05B .0704          DISTRIBUTION TO MUNICIPALITIES

 

History Note:        Authority G.S. 105‑120; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .0800 ‑ STREET TRANSPORTATION COMPANIES

 

17 NCAC 05B .0801          BASIS FOR TAXATION

17 NCAC 05B .0802          DUE DATE OF THE TAX

 

History Note:        Authority G.S. 105‑120.1; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .0803          CORPORATION BILLED FOR THE TAX

 

History Note:        Authority G.S. 105‑120.1; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Repealed Eff. July 1, 2000.

 

SECTION .0900 ‑ MUTUAL BURIAL ASSOCIATION

 

17 NCAC 05B .0901          BASIS FOR TAXATION

17 NCAC 05B .0902          DUE DATE OF THE TAX

 

History Note:        Authority G.S. 105‑121.1; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .0903          CORPORATION BILLED FOR THE TAX

 

History Note:        Authority G.S. 105‑121.1; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Repealed Eff. July 1, 2000.

 

SECTION .1000 ‑ GENERAL BUSINESS CORPORATIONS

 

17 NCAC 05B .1001          BASIS FOR THE TAX

17 NCAC 05B .1002          FRANCHISE TAX BASES

17 NCAC 05B .1003          CORPORATIONS REQUIRED TO FILE

17 NCAC 05B .1004          FORMS TO BE USED FOR FILING

17 NCAC 05B .1005          REPORT AND PAYMENT DUE

17 NCAC 05B .1006          TAX RATE

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .1100 ‑ CAPITAL STOCK: SURPLUS AND UNDIVIDED PROFITS BASE

 

17 NCAC 05B .1101          BASED ON THE YEAR ENDING BALANCE SHEET

17 NCAC 05B .1102          SURPLUS DEFINED

17 NCAC 05B .1103          ITEMS INCLUDABLE AND EXCLUDABLE

 

History Note:        Authority G.S. 105‑120.2; 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .1104          EXCLUSION OF RETAINED EARNINGS BY PARENT CORPORATION

A parent corporation may exclude any retained earnings of existing subsidiary corporations which it has capitalized or otherwise recorded on its books from the calculation of the capital stock, surplus and undivided profits base under G.S. 105-122.

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05B .1105          INVESTMENT IN SUBSIDIARY

For purposes of G.S. 105-122, the net worth base shall not be reduced by the amount invested in a subsidiary.

 

History Note:        Authority G.S. 105-122; 105-262;

Eff. February 1, 1976;

Amended Eff. July 1, 1999; January 1, 1994;

Readopted Eff. May 1, 2018.

 

17 NCAC 05B .1106          BORROWED CAPITAL TREATMENT: DEBTOR CORPORATION

17 NCAC 05B .1107          BORROWED CAPITAL TREATMENT: CREDITOR CORPORATION

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .1108          EXCLUSION PROVISION LIMITED TO INDEBTEDNESS OWED

The exclusion from the net worth base of indebtedness owed that is permitted the debtor corporation and the deduction permitted the creditor corporation in G.S. 105-122 are applicable only to indebtedness owed to or due from a parent, subsidiary, or affiliated corporation. These provisions do not apply where the indebtedness is only endorsed or guaranteed.

 

History Note:        Authority G.S. 105-122; 105-262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Readopted Eff. May 1, 2018.

 

17 NCAC 05B .1109          EQUITY CAPITAL NOT DEDUCTIBLE

The equity capital of a wholly owned subsidiary does not represent "indebtedness" owed to a parent corporation which the parent is entitled to deduct from its franchise tax base.

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05B .1110          RECIPROCAL INDEBTEDNESS BETWEEN AFFILIATES

A corporation that owes indebtedness to a parent, subsidiary, or affiliated corporation and at the same time is owed indebtedness by the same parent, subsidiary, or affiliated corporation shall net the payable and receivable for purposes of the indebtedness computation in arriving at the net worth base under G.S. 105-122. If the indebtedness is owed to one corporation and the receivable is due from another corporation, each amount shall be treated separately.

 

History Note:        Authority G.S. 105-122; 105-262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Readopted Eff. May 1, 2018.

 

17 NCAC 05B .1111          INDEBTEDNESS DEFINED

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 1, 1993.

 

17 NCAC 05B .1112          BORROWED CAPITAL DEFINED

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. November 2, 1992;

Repealed Eff. July 1, 2000.

 

17 NCAC 05B .1113          DEDUCTION FOR QUALIFIED RECYCLING FACILITIES

17 NCAC 05B .1114          HOLDING COMPANIES

 

History Note:        Authority G.S. 105‑120.2; 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .1115          CASH BASIS CORPORATIONS

 

History Note:        Authority G.S. 105‑122; 105‑258;

Eff. April 1, 1991;

Expired Eff. September 1, 2017 pursuant to G.S. 150B-21.3A.

 

SECTION .1200 ‑ MULTISTATE CORPORATIONS

 

17 NCAC 05B .1201          APPORTIONMENT FORMULA

17 NCAC 05B .1202          ALTERNATIVE APPORTIONMENT FORMULA

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. October 23, 1977;

Repealed Eff. October 31, 1981.

 

SECTION .1300 ‑ INVESTMENT IN TANGIBLE PROPERTIES IN NORTH CAROLINA BASE

 

17 NCAC 05B .1301          BASIS FOR THE INVESTMENT BASE

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .1302          WHAT IS INCLUDABLE IN THE INVESTMENT BASE

For purposes of G.S. 105-122, all tangible assets located in North Carolina shall be included in the Tangible Property Base at book value (original purchase price less reserve for depreciation permitted for income tax purposes). Typical items of tangible property would include: inventory, consigned inventories to be included by consignor, machinery and equipment, furniture and fixtures, containers, tools and supplies, land, buildings, leasehold improvements, and all other tangible assets.

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05B .1303          TREATMENT OF CONSTRUCTION IN PROGRESS

Construction in progress is excluded from the tangible properties base in G.S. 105-122 only if such property is not owned by the corporation filing the return.

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05B .1304          CARRIER OPERATIONS PROPERTY EXEMPT FROM INVESTMENT BASE

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Repealed Eff. October 1, 1998.

 

17 NCAC 05B .1305          INDEBTEDNESS DEDUCTION

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .1306          REFINANCING OF A LOAN

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; October 31, 1981;

Expired Eff. September 1, 2017 pursuant to G.S. 150B-21.3A.

 

17 NCAC 05B .1307          POLLUTION ABATEMENT FACILITIES

17 NCAC 05B .1308          DEDUCTION FOR QUALIFIED RECYCLING FACILITIES

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .1309          DETERMINATION OF INCLUSION BY DEPRECIATION

When two or more corporations are in doubt as to which should include property in the investment in tangible property base pursuant to G.S. 105-122, such property shall be included by the corporation allowed depreciation under the Internal Revenue Code.

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05B .1310          NO LIMITATION ON HOLDING COMPANIES

 

History Note:        Authority G.S. 105‑120.2; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 1, 1993.

 

SECTION .1400 ‑ APPRAISED VALUATION OF TANGIBLE AND INTANGIBLE PROPERTY BASE

 

17 NCAC 05B .1401          BASIS FOR TANGIBLE PROPERTY

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .1402          CARRIER OPERATIONS APPRAISED PROPERTY EXEMPT

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Repealed Eff. May 1, 1998.

 

17 NCAC 05B .1403          AVERAGE BANK BALANCE

17 NCAC 05B .1404          INTANGIBLE PROPERTY

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .1405          NO LIMITATION ON HOLDING COMPANIES

 

History Note:        Authority G.S. 105‑120.2; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 1, 1993.

 

17 NCAC 05B .1406          INVESTMENT BASE PROPERTY INCLUDED

A corporation including property in the investment in tangible property base shall also include the value of this property in the appraised valuation base, except for property acquired in the current tax year and not yet assessed for North Carolina property tax purposes.

 

History Note:        Authority G.S. 105-122; 105-262;

Eff. February 1, 1976;

Readopted Eff. May 1, 2018.

 

SECTION .1500 ‑ CHANGE OF INCOME YEAR

 

17 NCAC 05B .1501          COMPUTATION OF TAX

A change in income year automatically establishes a new franchise year. A combined franchise and income tax return is required for the short income period. Credit is permitted on such return against the franchise tax to the extent that the new franchise year overlaps the old year.

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05B .1502          COMPUTATION OF TAX WHEN MERGER IS INVOLVED

(a)  Since franchise tax is prepaid, a special computation is sometimes required to prevent a duplication of tax when two, or more, corporations with different income years merge or otherwise transfer the entire assets from one corporation to the other.

(b)  The surviving corporation shall be allowed to deduct from franchise tax computed on an annual basis the amount of franchise tax paid by the submerged corporation applicable to the period that overlaps the surviving corporation's income year.

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .1600 ‑ NEW CORPORATIONS

 

17 NCAC 05B .1601          INITIAL REQUIREMENTS

17 NCAC 05B .1602          FRANCHISE TAX PAYABLE IN ADVANCE

 

History Note:        Authority G.S. 105‑123; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .1700 ‑ CORPORATIONS CONDITIONALLY OR PARTIALLY EXEMPT

 

17 NCAC 05B .1701          NON‑PROFIT ORGANIZATIONS

17 NCAC 05B .1702          CORPORATIONS FULLY EXEMPT

 

History Note:        Authority G.S. 105‑125; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05B .1703          FRANCHISE MOTOR CARRIERS

 

History Note:        Authority G.S. 105‑122; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Repealed Eff. May 1, 1998.

 

17 NCAC 05B .1704          REGULATED INVESTMENT COMPANIES

 

History Note:        Authority G.S. 105‑125; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

 

 

SUBCHAPTER 05C ‑ CORPORATE INCOME TAX

 

SECTION .0100 ‑ CORPORATIONS SUBJECT TO THE TAX: TAX RATE AND ALLOCATION

 

17 NCAC 05C .0101         DOMESTIC AND FOREIGN CORPORATIONS REQUIRED TO FILE

(a)  A foreign corporation operating in North Carolina may be liable for income tax even if it is not required to obtain a certificate of authority to do business in North Carolina.

(b)  Even for a year in which a domestic corporation or a foreign corporation with a certificate of authority to do business in North Carolina conducted no business activity or did not earn any net income in the State, it must file an income tax return. Entities treated as corporations for federal income tax purposes are also subject to this requirement.

 

History Note:        Authority G.S. 105-130.3; 105-130.4; 105-130.16; 105-262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Readopted Eff. May 1, 2018.

 

17 NCAC 05C .0102         DOING BUSINESS DEFINED

(a)  For income tax purposes, the term "doing business" means the operation of any business enterprise or activity in North Carolina for economic gain, including, but not limited to, the following:

(1)           the maintenance of an office or other place of business in North Carolina;

(2)           the maintenance in North Carolina of an inventory of merchandise or material for sale, distribution or manufacture, regardless of whether kept on the premises of the taxpayer or in a public or rented warehouse;

(3)           the selling or distributing of merchandise to customers in North Carolina directly from a com­pany‑owned or operated vehicle when title to the merchandise is transferred from the seller or distributor to the customer at the time of the sale or distribution;

(4)           the rendering of a service to clients or customers in North Carolina by agents or employees of a foreign corporation;

(5)           the owning, renting, or operating of business or income‑producing property in North Carolina including, but not limited to, the following:

(A)          Realty;

(B)          Tangible personal property;

(C)          Trademarks, tradenames, franchise rights, computer programs, copyrights, patented processes, licenses.

(b)  Corporations who are partners in a partnership or joint venture operating in North Carolina are considered to be "doing business".

(c)  "Doing business" by an interstate motor carrier is defined as the performance of any of the following business activities in North Carolina:

(1)           The maintenance of an office in the State;

(2)           The operation of a terminal or other place of business in the State;

(3)           Having an employee working out of the office or terminal of another company;

(4)           Dropping off or gathering up shipments in the State.

 

History Note:        Authority G.S. 105‑130.3; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; November 2, 1992;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0103         CORPORATIONS OPERATING IN INTERSTATE COMMERCE

The fact that a foreign corporation's activities or operations in North Carolina are a part of its over‑all interstate business does not exempt the corporation from income tax liability. A corporation doing business in North Carolina in any of the capacities outlined in Rule .0102 ("Doing Business" Defined) is subject to income tax even if its only operations in this state are a part of its interstate business. A foreign corporation not domesticated in North Carolina whose only activity in this state is the solicitation of sales of tangible personal property by either resident or nonresident salesmen is not required to file income tax returns. However, if such a corporation maintains an office or other place of business in North Carolina, or if it owns business property in this state, it is subject to the tax.

 

History Note:        Authority G.S. 105‑130.3; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1995; January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0104         TAX RATE AND BASIS FOR THE TAX

17 NCAC 05C .0105         CORPORATIONS REQUIRED TO ALLOCATE INCOME

17 NCAC 05C .0106         WHEN IN DOUBT AS TO LIABILITY

17 NCAC 05C .0107         TAX FORMS MAILED TO TAXPAYER

17 NCAC 05C .0108         DUE DATE OF RETURN

 

History Note:        Authority G.S. 105‑130.3; 105‑130.4; 105‑130.17; 105‑130.22 through 105‑130.24; 105‑262;

Eff. February 1, 1976;

Amended Eff. December 23, 1979; October 23, 1977;

Repealed Eff. October 31, 1981.

 

SECTION .0200 ‑ TAX CREDIT FOR DWELLING UNITS FOR HANDICAPPED PERSONS

 

17 NCAC 05C .0201         PRELIMINARY STATEMENT

17 NCAC 05C .0202         AMOUNT OF CREDIT ALLOWABLE

17 NCAC 05C .0203         BUILDING CODE AND OTHER REQUIREMENTS

 

History Note:        Authority G.S. 105‑130.22; 105‑262;

Eff. February 1, 1976;

Amended Eff. October 4, 1979;

Repealed Eff. October 31, 1981.

 

SECTION .0300 ‑ COMPUTATION OF NET INCOME

 

17 NCAC 05C .0301         PRELIMINARY STATEMENT

17 NCAC 05C .0302         ADJUSTMENTS TO FEDERAL TAXABLE INCOME

17 NCAC 05C .0303         MISCELLANEOUS

 

History Note:        Authority G.S. 105‑130.3; 105‑130.5; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1980; October 4, 1979; October 23, 1977;

Repealed Eff. October 31, 1981.

 

17 NCAC 05C .0304         ATTRIBUTION OF EXPENSES TO NONTAXABLE INCOME

(a)  Direct Expenses ‑ All expenses directly connected with the production of income which is not subject to tax in this State shall be used to compute the net amount of such untaxed income.

(b)  Interest Expenses ‑ When a corporation earns income which is not taxed by this State (see examples), or holds property that does or will produce untaxed income, and incurs interest expense which is not specifically related to any particular income or property, it shall attribute a portion of the interest expense to such untaxed income and property in determining taxable income reported to this State. The formula used for computing the amount of interest expense to be attributed to untaxed income and property is as follows:

(1)           Value of assets:

(A)          Value of the tax return balance sheet of assets which produce or which would produce untaxed income; *

(B)          Value of all assets on the tax return balance sheet; **

(C)          Determine the ratio or percentage of Subparagraphs (b)(1)(A) to (B) of this Rule.

(2)           Income/Profits:

(A)          Gross untaxed income;

(B)          Total gross profits;

(C)          Determine the ratio or percentage of Subparagraphs (b)(2)(A) to (B) of this Rule.

(3)           Total of the ratios or percentages determined in Subparagraphs (b)(1) and (2) of this Rule;

(4)           Divide the total of Subparagraph (b)(3) of this Rule by two;

(5)           Apply average percentage determined in Subparagraph (b)(4) of this Rule to the total interest expense on the return filed in this state.

(c)  Examples of Untaxed Income are:

(1)           Dividend income classified as nonapportionable (G.S. 105-130.4);

(2)           Dividend income excludable by statute (G.S. 105-130.5);

(3)           Interest income classified as nonapportionable (G.S. 105-130.4);

(4)           Interest income earned on United States obligations and state of North Carolina obligations;

(5)           Other nonapportionable income or exempt income.

(d)  Expenses Connected with Interest Income from United States Obligations ‑ Under G.S. 105‑130.5(b)(1), interest income from obligations of the United States or its possessions is excludable from North Carolina taxable income to the extent such income is included in federal taxable income. Expenses incurred in producing the exempt income must be determined and subtracted from the gross amount earned during a taxable period before the deduction is made in computing the state taxable income. In the computation of expenses related to income from United States obligations, the formula described in Paragraph (b) of this Rule may be used with respect to interest expense.

(e)  Other Expenses Attributed to Nontaxable Income and to Nonapportionable Income and Property ‑ In the determination of expenses other than interest expense attributed to untaxed income, the procedure set forth in the Federal Code for determining expenses related to foreign source income generally referred to as stewardship and supportive expenses may be used to determine the expenses allocated to untaxed income and property producing or which would produce untaxed income. Alternatively, an income formula as outlined in Paragraph (b)(2) of this Rule relating to interest expenses may be used to determine the amount of supportive function expenses attributable to untaxed income. In the determination of "supportive function expenses", direct expenses incurred exclusively in a specific identifiable taxable or nontaxable activity shall be determined and excluded before application of the attribution percentage to expenses. If direct expenses are determinable for a particular activity resulting in an accurate computation of the net income or loss from such activity, the values of this activity shall be removed as elements of the ratio when computing the attribution percentage.

 

Note: * When the equity method of accounting is used, the increase or decrease in value as a result of such accounting method may be excluded from this value.

 

Note: ** Equity included in this value may be excluded and the reserve for depreciation reflected on the balance sheet may be restored to the asset value.

 

History Note:        Authority G.S. 105-130.4; 105-130.5; 105-262;

Eff. April 1, 1991;

Amended Eff. August 1, 2005; January 1, 2005; January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .0400 ‑ INTEREST INCOME ON GOVERNMENT OBLIGATIONS

 

17 NCAC 05C .0401         NORTH CAROLINA OBLIGATIONS

Net interest income received by a corporation on obligations of the State of North Carolina and any of its cities, towns or counties is exempt from income taxes imposed by this state.

 

History Note:        Authority G.S. 105‑130.5; 105‑262;

Eff. February 1, 1976;

Amended Eff. April 1, 1991;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0402         OBLIGATIONS OF OTHER STATES

Net interest income earned by a corporation on its investments in obligations issued by states and their political subdivisions other than the State of North Carolina, represents taxable income and is subject to this state's income tax.

 

History Note:        Authority G.S. 105‑130.5; 105‑262;

Eff. February 1, 1976;

Amended Eff. April 1, 1991;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0403         U.S. OBLIGATIONS

(a)  Net interest income earned on bonds, notes, or other obligations of the United States or its possessions is exempt from income taxation in this State so long as interest on obligations of the State of North Carolina and its political subdivisions is exempt from income taxes imposed by the United States. For the interest income to be deductible, the obligation shall be in writing, bear interest, be a binding promise by the United States to pay specific amounts at specific dates, and be specifically authorized by Congress.

(b)  Net interest from obligations that are backed, insured, or guaranteed by the United States, but are not direct obligations of the United States Government, shall not be deductible.

 

History Note:        Authority G.S. 105-130.5; 105-262;

Eff. February 1, 1976;

Amended Eff. January 1, 1995; April 1, 1991; October 23, 1977;

Readopted Eff. May 1, 2018.

 

17 NCAC 05C .0404         SALES OR EXCHANGES

(a)  Gain or loss realized on the sale or other disposition of any type of obligation of the United States or its possessions, the State of North Carolina (not exempted by the specific obligation), or its political subdivisions, any other state or its political subdivisions, or of any other government is a taxable transaction and must be included in the computation of a corporation's state taxable income.

(b)  Gain or loss realized on the sale or other disposition of obligations is not included in taxable income if North Carolina law under which obligations were issued specifically exempts the gain from taxation.

 

History Note:        Authority G.S. 105‑130.5; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1995;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0405         OBLIGATIONS OF FEDERAL NATIONAL MORTGAGE ASSOCIATION

Interest income or other income realized on obligations of Federal National Mortgage Association is taxable income since the obligations are not those of the United States.

 

History Note:        Authority G.S. 105-130.5; 105‑262;

Eff. October 23, 1977;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0406         MORTGAGE BACKED CERTIFICATE GUARANTEED BY GNMA

Interest paid by the issuer to the holder of a mortgage backed certificate guaranteed by Government National Mortgage Association (GNMA) is not income from an obligation of the United States and is taxable.

 

History Note:        Authority G.S. 105‑130.5; 105‑262;

Eff. October 23, 1977;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0407         REPURCHASE AGREEMENTS

Income attributable to or received from repurchase agreements of U.S. government securities, an agreement to repurchase securities at an agreed price and date, is not considered income derived directly from federal obligations and is taxable income.

 

History Note:        Authority G.S. 105-130.5; 105-262;

Eff. November 2, 1992;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .0500 ‑ ALLOCATION AND APPORTIONMENT PROCEDURES

 

17 NCAC 05C .0501         PRELIMINARY STATEMENT

17 NCAC 05C .0502         REPORTING NET INCOME OR LOSS TO NORTH CAROLINA

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .0600 ‑ TAXABLE IN ANOTHER STATE

 

17 NCAC 05C .0601         PRELIMINARY STATEMENT

A taxpayer must have income from business activity taxable by this state and at least one other state, to allocate and apportion income. Income from business activity includes apportionable or nonapportionable income. Thus, if a taxpayer has nonapportionable income taxable by one state and apportionable income taxable by another state, the taxpayer's income shall be allocated and apportioned in accordance with G.S. 105‑130.4. Where a corporation is not taxable in another state on its apportionable income but is taxable in another state only because of nonapportionable income, all apportionable income shall be attributed to this state.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0602         DEFINITION OF TAXPAYER

The word "taxpayer" includes any corporation subject to the tax imposed by Article 4 of Chapter 105 of the General Statutes.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0603         IN GENERAL

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 1, 1993.

 

17 NCAC 05C .0604         WHEN A TAXPAYER IS SUBJECT TO TAX

(a)  If the taxpayer voluntarily files and pays an income tax to a state other than North Carolina when not required to do so by the laws of that state or pays a minimal fee for qualification, organization or for the privilege of doing business in that state, but does not actually engage in business activities in that state, or does actually engage in some activity, not sufficient for nexus, and the minimum tax bears no relation to the corporation's activities within such state, the taxpayer is not subject to tax within that state and is therefore not taxable in another state. The filing of a unitary‑combined return in another state with other related corporations does not standing alone constitute business activity for purposes of determining if a corporation is subject to income tax in this State is allowed to allocate and apportion income.

(b)  In some states other types of taxes may be imposed as a substitute for an income tax. Therefore, only income tax or any tax measured by net income, shall be considered in determining whether the taxpayer is taxable in another state.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; November 2, 1992; October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0605         WHEN A STATE HAS JURISDICTION

In the case of any "state," as defined in G.S. 105‑130.4, other than a state of the United States or political subdivision of such state, the determination of whether such "state" has jurisdiction to subject the taxpayer to a net income tax shall be made as though the jurisdictional standards applicable to a state of the United States applied in that "state." If jurisdiction is otherwise present, such "state" is not considered as without jurisdiction by reason of the provisions of a treaty between that state and the United States.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .0700 ‑ APPORTIONABLE AND NONAPPORTIONABLE INCOME

 

17 NCAC 05C .0701         DIVISION OF INCOME: IN GENERAL

(a)  When a taxpayer has income from sources within this state as well as income from sources outside this state, the division of income and the resulting determination of the portion of the taxpayer's entire net income which has its source in this state shall be determined pursuant to the allocation and apportionment provisions set forth in G.S. 105‑130.4 and these Rules. The taxpayer shall determine which portion of its entire net income constitutes "apportionable income" and which portion constitutes "nonapportionable income". The various items of nonapportionable income shall be directly allocated to specific jurisdictions pursuant to the provisions of Subsections (d) to (h) of G.S. 105‑130.4. The apportionable income of the taxpayer other than public utilities and excluded corporations shall be divided between the jurisdictions in which the business is conducted pursuant to the property, payroll and sales apportionment factors set forth in Subsections (i) to (l) of G.S. 105-130.4. The sum of the items of nonapportionable income directly allocated to this state, plus the amount of apportionable income attributable to this state by the apportionment formula shall constitute the amount of the taxpayer's entire net income which is subject to tax under the income tax laws of this state.

(b)  The taxpayer shall classify income as apportionable or nonapportionable income on a consistent basis. In the event the taxpayer is not consistent in reporting, it shall disclose in its return to this state the nature and extent of the inconsistency.

(c)  The word "apportionment" refers to the division of net income between jurisdictions by the use of a formula containing apportionment factors, and the word "allocation" refers to the assignment of net income to a particular jurisdiction.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005; January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0702         BUSINESS AND NONBUSINESS INCOME DEFINED

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Repealed Eff. July 1, 2000.

 

17 NCAC 05C .0703         BUSINESS AND NONBUSINESS INCOME

 

History Note:        Authority G.S. 105‑130.4; 105‑262.

Eff. February 1, 1976;

Amended Eff. August 1, 2002; July 1, 2000; July 1, 1999; January 1, 1994; April 1, 1991; October 31, 1981;

Repealed Eff. August 1, 2003.

 

17 NCAC 05C .0704         PRORATION OF DEDUCTIONS

Any allowable deduction that is applicable both to apportionable and nonapportionable income or to more than one "trade or business" of the taxpayer shall be prorated to those classes of income or trades or businesses in determining income subject to tax. The taxpayer shall be consistent in the proration of such deduction or deductions in filing returns under these Rules.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005; January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .0800 ‑ PROPERTY FACTOR

 

17 NCAC 05C .0801         IN GENERAL

(a)  The property factor as provided in G.S. 105-130.4 shall include all real and tangible personal property owned or rented and used during the income year to produce apportionable income. The term "real and tangible personal property" includes land, buildings, machinery, stocks of goods, equipment, and other real and tangible personal property used in connection with the production of apportionable income but does not include coin or currency.

(b)  Property used in connection with the production of nonapportionable income that is allocated in accordance with Subsection (c) to (h) of G.S. 105-130.4 shall be excluded from the factor.

(c)  Property used in connection with the production of both apportionable and nonapportionable income shall be included in the factor only to the extent the property was used in connection with the production of apportionable income.

 

History Note:        Authority G.S. 105-130.4; 105-262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005; January 1, 1994;

Readopted Eff. May 1, 2018.

 

17 NCAC 05C .0802         PROPERTY USED FOR THE PRODUCTION OF APPORTIONABLE INCOME

Property shall be included in the property factor if it is actually used during the income year for the production of apportionable income. Property held as reserves or standby facilities or property held as a reserve source of materials shall be included in the factor. For example, a plant temporarily idle or raw material reserves not currently being processed are includible in the factor. Property or equipment under construction during the income year (except inventoriable goods in process) shall be excluded from the factor until such property is actually used for the production of apportionable income. If the property is partially used for the production of apportionable income while under construction, the value of the property to the extent used shall be included in the property factor.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0803         CONSISTENCY IN REPORTING

The taxpayer shall be consistent in the valuation of property and in excluding or including property in the property factor in filing returns with this state. In the event the taxpayer is not consistent in its reporting, it shall disclose in its return to this state the nature and extent of the inconsistency.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0804         NUMERATOR

(a)  Property in transit between locations of the taxpayer to which it belongs shall be considered to be at the destination for purposes of the property factor. Property in transit between a buyer and seller which is included by a taxpayer in the denominator of its property factor in accordance with its regular accounting practices shall be included in the numerator according to the state of destination.

(b)  The value of mobile or movable property such as construction equipment, trucks or leased electronic equipment which are located within and without this state during the income year shall be determined for purposes of the numerator of the factor on the basis of total time within the state during the income year. An automobile assigned to a traveling employee shall be included in the numerator of the factor of the state to which the employee's compensation is assigned under the payroll factor or in the numerator of the state in which the automobile is licensed.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0805         VALUATION OF OWNED PROPERTY

(a)  In determining the property factor in G.S. 105-130.4, property owned by the taxpayer shall be valued at its original cost:

(1)           "Original cost" of property which has a basis other than zero for federal income tax purposes equals the basis of the property for federal income tax purposes at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements thereto and partial disposition thereof, by reason of sale, exchange, abandonment, or any other type of disposition.

(2)           "Original cost" of property which has a zero basis for federal income tax purposes shall equal the taxpayer's actual cost of the property at the time of acquisition; provided, however, if the actual cost is unknown, the "original cost" shall equal the fair market value of the property, or, at the option of the taxpayer, eight times the net annual rental rate as described in G.S. 105-130.4(j)(2). The valuation method chosen by the taxpayer must be used consistently thereafter.

(b)  Inventory of stock of goods shall be included in the factor in accordance with the valuation method used for federal income tax purposes.

(c)  Property acquired by gift or inheritance shall be included in the factor at its basis for determining depreciation for federal income tax purposes.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. December 1, 1994; January 1, 1994; October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0806         RENTED PROPERTY

17 NCAC 05C .0807         AVERAGING PROPERTY VALUES

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .0900 ‑ PAYROLL FACTOR

 

17 NCAC 05C .0901         IN GENERAL

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Repealed Eff. November 1, 1993.

 

17 NCAC 05C .0902         PAYROLL ACCOUNTING METHOD

(a)  The total amount "paid" to employees is determined upon the basis of the taxpayer's accounting method. If the taxpayer has adopted the accrual method of accounting, all compensation properly accrued shall be deemed to have been paid. Not withstanding the taxpayer's method of accounting, at the election of the taxpayer, compensation paid to employees may be included in the payroll factor by use of the cash method if the taxpayer is required to report such compensation under such method for unemployment compensation purposes.

(b)  The taxpayer shall be consistent in the treatment of compensation paid in filing returns with this state. In the event the taxpayer is not consistent in its reporting it shall disclose in its return to this state the nature and extent of the inconsistency.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0903         COMPENSATION

Payments made to an independent contractor or any other person not classifiable as an employee are excluded from the term "compensation" for purposes of G.S. 105-130.4. Only amounts paid directly to employees are included in the payroll factor. Amounts considered paid directly include the value of board, rent, housing, lodging and other benefits or services furnished to employees by the taxpayer in return for personal services provided that such amounts constitute income to the recipient under the Federal Internal Revenue Code. In the case of employees not subject to the Federal Internal Revenue Code, e.g., those employed in foreign countries, the determination of whether such benefits or services constitute income to the employees shall be made as though such employees were subject to the Federal Internal Revenue Code.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0904         THE TERM EMPLOYEE

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Repealed Eff. November 1, 1993.

 

17 NCAC 05C .0905         INCLUDE IN PAYROLL FACTOR

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05C .0906         DENOMINATOR OF PAYROLL FACTOR

Except for compensation paid to general executive officers and compensation paid in connection with nonapportionable income the denominator of the payroll factor is the total compensation paid everywhere during the income year. Accordingly, compensation paid to employees whose services are performed entirely in a state where the taxpayer is exempt from taxation, for example, by Public Law 86‑272, is included in the denominator of the payroll factor.

Note: A taxpayer has employees in its state of legal domicile (State A) and is taxable in State B. In addition the taxpayer has other employees whose services are performed entirely in State C where the taxpayer is exempt from taxation by Public Law 86‑272. As to these latter employees, the compensation will be assigned to State C where their services are performed (i.e. included in the denominator only of the payroll factor) even though the taxpayer is not taxable in State C.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005; October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .0907         NUMERATOR OF PAYROLL FACTOR

Except for compensation paid to general executive officers and compensation paid in connection with nonapportionable income, for purposes of G.S. 105-130.4, the numerator of the payroll factor is the total amount paid in this State during the tax period by the taxpayer for compensation. In determining the payroll factor, information used to file federal forms 941 and the North Carolina Tax and Wage Reports may be used if the amounts can be reconciled to the amounts used for the payroll factor. If compensation paid to employees is included in the payroll factor by use of the cash method of accounting or if the taxpayer is required to report such compensation under such method for unemployment compensation purposes, it shall be presumed that the total wages reported by the taxpayer to this State for unemployment compensation purposes constitutes compensation paid in this State except for compensation excluded under G.S. 105-130.4(k). The presumption may be overcome by satisfactory evidence that an employee's compensation is not reportable to this State for unemployment compensation purposes.

 

History Note:        Authority G.S. 105-130.4; 105-262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005; January 1, 1994; October 31, 1981;

Readopted Eff. May 1, 2018.

 

17 NCAC 05C .0908         CORPORATIONS UTILIZING COMMON PAYMASTER

(a)  A parent corporation or any corporation serving as common paymaster for payroll purposes shall eliminate all payroll amounts paid on behalf of controlled members for which it has charged such member the exact cost and which does not meet the definition of compensation insofar as the common paymaster is concerned from the numerator and denominator of its payroll factor computation. The numerator and denominator of the payroll factor shall be determined in accordance with G.S. 105-130.4 after elimination of the described amounts.

(b)  A subsidiary or otherwise controlled corporation, which is a member of or participant in a common paymaster plan for payroll purposes, shall include in its numerator and denominator of the payroll factor computation amounts paid to its parent corporation or to another corporation of the controlled group as reimbursement in whatever form and by whatever label for employee's compensation as defined. The amounts paid by the subsidiary or controlled corporation includable in the numerator and the denominator of the payroll factor shall be determined in accordance with G.S. 105-130.4.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. November 1, 1991;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .1000 ‑ SALES FACTOR

 

17 NCAC 05C .1001         SALES MADE IN GENERAL BUSINESS OPERATIONS

For purposes of G.S. 105-130.4, `sales' by a taxpayer whose business activity consists of manufacturing and selling or purchasing and reselling goods or products includes all gross receipts from the sales of such goods or products (or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business. Gross receipts for this purpose means gross sales, less returns and allowances, and includes all interest income, service charges, carrying charges or time‑price differential charges incidental to such sales. Federal and state excise taxes (including sales taxes) shall be included as part of such receipts if such taxes are passed on to the buyer or included as part of the selling price of the product.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1002         SALES INCIDENTAL TO GENERAL BUSINESS OPERATIONS

(a)  The term "sales" also includes gross receipts derived by a taxpayer from business transactions or activities which are incidental to its principal business activity and which are includible in apportionable income. However, substantial amounts of gross receipts arising from an incidental or occasional sale of a fixed asset used in connection with the taxpayer's regular trade or business will be excluded from the sales factor since such sales constitute a "casual sale" of property and the inclusion of such gross receipts will not fairly apportion to this state the income derived by the taxpayer from its business activity in this state. Gross receipts from casual sales are considered substantial if they cause the sales factor to be distorted. For example, gross receipts from the sale of a factory or plant will be excluded from the sales factor.

(b)  In including or excluding gross receipts, the taxpayer shall be consistent in the treatment of such gross receipts in filing returns with this state. In the event the taxpayer is not consistent in its reporting, it shall disclose in its return to this state the nature and extent of the inconsistency.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1003         SALES MADE IN OTHER TYPE OF BUSINESS ACTIVITY

As applied to a taxpayer engaged in business activity other than the manufacturing and selling or purchasing and reselling of property, "sales" includes the gross receipts as defined in Rule .1001 of this Section (Sales Made In General Business Operations):

(1)           If the business activity consists of providing services; such as the operation of an advertising agency, or the performance of equipment service contracts or research and development contracts, "sales" includes the gross receipts from the performance of such services including fees, commissions, and similar items.

(2)           In the case of cost plus fixed fee contracts, such as the operation of a government‑owned plant for a fee, gross receipts includes the entire reimbursed cost, plus the fee.

(3)           If the business activity is the renting of real or tangible personal property, "sales" includes the gross receipts from the rental, lease, or licensing the use of the property.

(4)           If the business activity is the sale, assignment, or licensing of intangible personal property such as patents and copyrights, "sales" includes the gross receipts therefrom.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1004         NUMERATOR

The numerator of the sales factor will include the gross receipts from sales which are attributable to this state, and includes all interest income, service charges, carrying charges, or time‑price differential charges incidental to such sales regardless of the place where the accounting records are maintained or the location of the contract or other evidence of indebtedness.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1005         WHAT SALES OF TANGIBLE PERSONAL PROPERTY ARE IN THIS STATE

(a)  Gross receipts from the sales of tangible personal property are in this state if the property is delivered or shipped to a purchaser within this state regardless of the f.o.b. point or other conditions of sale.

(b)  Property shall be deemed to be delivered or shipped to a purchaser within this state if the recipient is located in this state, even though the property is ordered from outside this state.

(c)  Property is delivered or shipped to a purchaser within this state if the shipment terminates in this state, even though the property is subsequently transferred by the purchaser to another state.

(d)  The term "purchaser within this state" shall include the ultimate recipient of the property if the taxpayer in this state, at the designation of the purchaser, delivers to or has the property shipped to the ultimate recipient within this state.

(e)  When property being shipped by a seller from the state of origin to consignee in another state is diverted while enroute to a purchaser in this state the sales are in this state.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1006         SALES FACTOR: SALES TO UNITED STATES GOVERNMENT

(a)  For the purposes of G.S. 105-130.4, gross receipts from the sales of tangible personal property to the United States Government are in this state if the property is shipped to or received or accepted by the United States Government in this state. For the purpose of this Rule, only sales for which the United States Government makes direct payment to the seller pursuant to the terms of its contract constitute sales to the United States Government. Thus, sales by a subcontractor to the prime contractor, the party to the contract with the United States Government, do not constitute sales to the United States Government.

(b)  When the United States Government is the purchaser of property which remains in the possession of the taxpayer in this state for further processing under another contract, or for other reasons, "shipment" is deemed to be made at the time of acceptance by the United States Government.

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1007         NUMERATOR: OTHER RECEIPTS CONSTITUTING BUSINESS INCOME

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .1100 ‑ PUBLIC UTILITIES AND EXCLUDED CORPORATIONS APPORTIONMENT FACTORS

 

17 NCAC 05C .1101         RAILROAD COMPANIES

17 NCAC 05C .1102         TELEPHONE COMPANIES

17 NCAC 05C .1103         MOTOR CARRIERS OF PROPERTY AND/OR PASSENGERS

17 NCAC 05C .1104         TELEGRAPH COMPANIES

17 NCAC 05C .1105         EXCLUDED CORPORATIONS

 

History Note:        Authority G.S. 105‑130.4; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .1200 ‑ DEDUCTION OF CONTRIBUTIONS

 

17 NCAC 05C .1201         PRELIMINARY STATEMENT

17 NCAC 05C .1202         CHARITABLE CONTRIBUTIONS DEFINED AND QUALIFIED DONEES

17 NCAC 05C .1203         CONTRIBUTIONS LIMITED TO FIVE PERCENT OF NET INCOME

17 NCAC 05C .1204         CONTRIBUTIONS FULLY DEDUCTIBLE

17 NCAC 05C .1205         CONTRIBUTIONS BY CORPORATIONS ALLOCATING NET INCOME

17 NCAC 05C .1206         CONTRIBUTIONS CARRY‑OVER UNALLOWABLE

 

History Note:        Authority G.S. 105‑130.9; 105‑202; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .1300 ‑ RAPID AMORTIZATION OF AIR OR WATER POLLUTION ABATEMENT FACILITIES

 

17 NCAC 05C .1301         AMORTIZATION OVER 60 MONTH PERIOD

17 NCAC 05C .1302         CERTIFICATION OF FACILITIES REQUIRED

 

History Note:        Authority G.S. 105‑130.10; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .1400 ‑ AMORTIZATION OF BOND PREMIUMS

 

17 NCAC 05C .1401         PRELIMINARY STATEMENT

If a corporation purchases a bond at more than its face value, the amount of premium paid may be amortized over the life of the bond. However, the allowance of a deduction against net income for amortization of the premium paid depends upon the type of bond purchased by the corporation. For example:

(1)           Amortization of premiums on tax‑exempt bonds by a corporation is mandatory with no deduction allowed in computing state net income.

(2)           A corporation may at its option amortize the amount of premiums paid on taxable bonds over the life of the bonds. If the premium is not amortized by the corporation, it will constitute part of the basis of the bond in determining gain or loss at maturity of sale.

(3)           For state income tax purposes, obligations of the United States or its possessions and obligations of the State of North Carolina or any of its subdivisions are tax‑exempt. Interest income received by a corporation on such obligations is not taxable; however, a corporation must include in its computation of state net income any gain or loss realized on the disposal of such obligations.

(4)           Premiums paid on all bonds acquired prior to January 1, 1963 cannot be amortized but constitute a part of the cost basis of the bonds in determining gain or loss when the bonds are sold.

 

History Note:        Authority G.S. 105‑130.5; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1402         TAX‑EXEMPT BONDS

The amount of premium paid upon the purchase of a tax‑exempt bond is amortized over the life of the bond. Amortization for the taxable year is accomplished by reducing the original cost of the bond by a portion of the premium paid, with no deduction against net income for the year. Therefore, when the bond is sold or otherwise disposed of, the basis for determining gain or loss will always be original cost less the amount of premium amortized for book purposes through the year of disposal.

 

History Note:        Authority G.S. 105‑130.5; 105‑262;

Eff. February 1, 1976;

Amended Eff. October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1403         TAXABLE BONDS

A portion of the premium paid upon the purchase of a taxable bond may be deducted in the taxable year only if an adjustment is made to the basis of the bond. If a taxpayer elects to amortize the premium, the basis for determining gain or loss will always be original cost less the amount of premium amortized and deducted in its tax returns through the year of disposal. Otherwise, the basis of a taxable bond for determining gain or loss will always be the entire amount paid for the bond.

 

History Note:        Authority G.S. 105‑130.5; 105‑262;

Eff. February 1, 1976;

Amended Eff. October 31, 1981;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1404         DEFINITION OF BOND

The term "bond" means any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation and bearing interest and includes any like obligation issued by any government or political subdivision thereof.

 

History Note:        Authority G.S. 105‑130.5; 105‑262;

Eff. February 1, 1976;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .1500 ‑ NET ECONOMIC LOSS CARRY‑OVER

 

17 NCAC 05C .1501         PRELIMINARY STATEMENT

17 NCAC 05C .1502         DIFFERENCES BETWEEN NORTH CAROLINA AND FEDERAL PROVISIONS

17 NCAC 05C .1503         DEFINITION OF NET ECONOMIC LOSS

17 NCAC 05C .1504         INCOME NOT TAXABLE

17 NCAC 05C .1505         PROCEDURE FOR DEDUCTING A NET ECONOMIC LOSS

 

History Note:        Authority G.S. 105‑130.8; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

17 NCAC 05C .1506         CORPORATIONS APPORTIONING THEIR NET INCOME

A corporation required to apportion its net income or net loss under G.S. 105-130.4 may carry forward only a portion of its State net loss. For example, a corporation apportioning 50 percent of its net income or loss to North Carolina in a particular year in which it sustains a total State net loss of one thousand dollars ($1,000.00) may carry forward only five hundred dollars ($500.00) to a subsequent year.

 

History Note:        Authority G.S. 105-130.8; 105-130.8A; 105-262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005;

Readopted Eff. May 1, 2018.

 

17 NCAC 05C .1507         CORPORATION SUSTAINING LOSS ENTITLED TO DEDUCTION

 

History Note:        Authority G.S. 105‑130.8; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; October 31, 1981; April 1, 1979;

Expired Eff. September 1, 2017 pursuant to G.S. 150B-21.3A.

 

SECTION .1600 ‑ TRANSACTIONS BETWEEN AFFILIATED CORPORATIONS

 

17 NCAC 05C .1601         PRELIMINARY STATEMENT

17 NCAC 05C .1602         DEDUCTIONS FOR PAYMENTS TO AND CHARGES BY

17 NCAC 05C .1603         CONSOLIDATED RETURNS

17 NCAC 05C .1604         REQUIRED TO FURNISH INFORMATION REQUESTED BY SECRETARY

17 NCAC 05C .1605         DEFINITIONS

17 NCAC 05C .1606         TRANSACTIONS CLOSELY EXAMINED BY THE DEPARTMENT

 

History Note:        Authority G.S. 105‑130.6; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .1700 ‑ PARTNERSHIPS AND THE CORPORATE PARTNER

 

17 NCAC 05C .1701         REPORTING PARTNERSHIP NET INCOME

A corporation which is a member of a partnership or joint venture doing business in North Carolina is subject to North Carolina income tax and is required to include in the total net income subject to apportionment and allocation its share of the partnership's net income or net loss to the same extent required for federal income tax purposes.

 

History Note:        Authority G.S. 105‑130.3; 105‑262;

Eff. February 1, 1976;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .1702         APPORTIONABLE INCOME OR NONAPPORTIONABLE INCOME

Income shall be classified as nonapportionable income where the corporate partner limits its connection to the partnership to the investment of funds or property and does not regularly or materially participate in the day-to-day operation of the partnership. Where the business of the partnership is directly or integrally related to the business of the corporate partner, the corporate partner's share of the partnership net income is classified as apportionable income. When classified as apportionable income, the corporate partner's apportionment factors shall include its proportionate share of the partnership's property, payroll, and sales. If the income is classified as nonapportionable income, it shall be included in the corporate partner's net taxable income and allocated in accordance with the allocation provisions of G.S. 105-130.4.

 

History Note:        Authority G.S. 105-130.4; 105-262;

Eff. February 1, 1976;

Amended Eff. January 1, 2005; January 1, 1994; October 31, 1981;

Readopted Eff. May 1, 2018.

 

SECTION .1800 ‑ COMPUTING TAXABLE PERCENTAGES ON DIVIDENDS

 

17 NCAC 05C .1801         TAXABLE PERCENTAGES/DIVIDENDS

17 NCAC 05C .1802         NO RETURN FILED IN YEAR ENDED SEPTEMBER 30

17 NCAC 05C .1803         TWO RETURNS FILED BY A CORPORATION DURING TWELVE MONTH PERIOD

17 NCAC 05C .1804         CHANGE IN NAME OR IN STATE OF INCORPORATION

17 NCAC 05C .1805         AMENDED AND ADJUSTED RETURNS

17 NCAC 05C .1806         MERGERS

 

History Note:        Authority G.S. 105‑130.7; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; April 1, 1991;

Repealed Eff. December 1, 1997.

 

SECTION .1900 ‑ FILING OF RETURNS AND PAYMENT OF TAXES

 

17 NCAC 05C .1901         TIME AND PLACE FOR FILING

17 NCAC 05C .1902         EXTENSION OF FILING DATE

17 NCAC 05C .1903         PAYMENT OF TAXES

 

History Note:        Authority G.S. 105‑130.17; 105‑130.19; 105‑262; 105‑263;

Eff. February 1, 1976;

Amended Eff. January 1, 1978;

Repealed Eff. October 31, 1981.

 

17 NCAC 05C .1904         OVERPAYMENTS APPLIED TO NEXT YEAR

(a)  A corporation may elect to have an income tax refund applied to estimated income tax for the following tax year. A return reflecting an election to apply a refund to estimated tax for the following year must be filed by the last allowable date for making estimated tax payments for that year for the election to be valid.

(b)  If a corporation makes a valid election, that corporation may not revoke the election after the return has been filed in order to have the amount refunded or applied in any other manner, such as an offset against any subsequently determined tax liability.

 

History Note:        Authority G.S. 105-163.39; 105-163.40; 105-262;

Eff. March 1, 2006;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05c .1905         electronic filing of corporation income tax returns

The Department of Revenue participates in the Federal/State Electronic Filing Program and accepts corporation income tax returns filed under that program.

 

History Note:        Authority G.S. 105‑262;

Eff. March 1, 2006;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .2000 ‑ EXTENSION OF TIME FOR FILING RETURN

 

17 NCAC 05C .2001         AUTOMATIC EXTENSION

17 NCAC 05C .2002         APPLICATION FOR AN ADDITIONAL EXTENSION

 

History Note:        Authority G.S. 105‑263; 105‑262;

Eff. February 1, 1976;

Amended Eff. November 1, 1987; October 23, 1977;

Repealed Eff. April 1, 1991.

 

17 NCAC 05C .2003         INTEREST AND PENALTIES

 

History Note:        Authority G.S. 105‑236; 105‑262;

Eff. February 1, 1976;

Amended Eff. November 2, 1992; October 23, 1977;

Repealed Eff. July 1, 2000.

 

17 NCAC 05C .2004         EXTENSION OF FILING DATE

For tax years beginning before January 1, 2008, a corporation will receive a seven-month extension of time to file its corporate franchise and income tax return if the corporation timely files Form CD-419, Application for Extension of Time To File Corporate Franchise and Income Tax Return. For tax years beginning on or after January 1, 2008, the extension of time is six months. Payment of tax is not required to obtain an extension; however, interest accrues at the rate set under G.S. 105-241.21(a) on the amount not paid by the original due date of the corporate franchise and income tax return and the failure to pay penalty in G.S. 105-236(4) applies to the amount not paid by the original due date of the return.

 

History Note:        Authority G.S. 105‑262; 105‑263;

Eff. April 1, 1999;

Amended Eff. January 1, 2009; July 1, 1999; January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .2100 ‑ DISSOLUTIONS AND WITHDRAWALS

 

17 NCAC 05C .2101         REQUIREMENTS WHEN CORPORATION ENDS

A domestic corporation that is dissolved, whether voluntarily, administratively, or judicially, or a foreign corporation that withdraws from the State or has its certificate of authority revoked must file all tax reports and returns due and pay all taxes due. The final return of a corporation that has been dissolved, has withdrawn, or has had its certificate of authority revoked must include in income any unrealized or unreported profit from installment sales.

 

History Note:        Authority G.S. 55‑14‑01; 55-14-20; 55-14-30; 55-15-20; 55-15-30; 105-130.16; 105‑262.

Eff. February 1, 1976;

Amended Eff. July 1, 1999; April 1, 1997; January 1, 1995; January 1, 1994; November 1, 1991; April 1, 1991;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .2102         WITHDRAWALS/FILING REQUIREMENTS

 

History Note:        Authority G.S. 55‑15‑20; 105-130.15; 105‑262;

Eff. February 1, 1976;

Amended Eff. January 1, 1994; November 1, 1991; April 1, 1991;

Repealed Eff. July 1, 1999.

 

SECTION .2200 ‑ EXEMPT CORPORATIONS

 

17 NCAC 05C .2201         PRELIMINARY STATEMENT

17 NCAC 05C .2202         CORPORATIONS FULLY EXEMPT

17 NCAC 05C .2203         CORPORATIONS CONDITIONALLY OR PARTIALLY EXEMPT

17 NCAC 05C .2204         EXCEPTIONS TO EXEMPTION

17 NCAC 05C .2205         REGULATED INVESTMENT COMPANIES

17 NCAC 05C .2206         PROOF OF EXEMPTION

17 NCAC 05C .2207         NOTIFICATIONS OF CHANGE IN PURPOSES OR OPERATIONS

 

History Note:        Authority G.S. 105‑130.11; 105‑130.12; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .2300 ‑ REPORTING FEDERAL CHANGES

 

17 NCAC 05C .2301         REQUIREMENT FOR REPORTING CHANGES

17 NCAC 05C .2302         ASSESSMENTS OR REFUNDS

17 NCAC 05C .2303         EXTENT OF CHANGES WHICH MAY BE MADE

17 NCAC 05C .2304         FRAUD PROVISIONS ON FEDERAL CHANGES

 

History Note:        Authority G.S. 105‑130.20; 105‑262;

Eff. February 1, 1976;

Repealed Eff. October 31, 1981.

 

SECTION .2400 ‑ DOMESTIC INTERNATIONAL SALES CORPORATION

 

17 NCAC 05C .2401         DOING BUSINESS ACTIVITIES OF DISC

A domestic international sales corporation (DISC) is a domestic corporation whose income is derived from export sales. The DISC transacts business by exporting the products of its parent or related companies with the income earned by the DISC deferred for federal income tax purposes. The Tax Reform Act of 1984 left only the interest charge DISC remaining whose tax benefits are limited with an interest charge for tax deferred amounts imposed on DISC shareholders. Since G.S. 105-130.3 imposes an income tax on every corporation unless otherwise exempted, a DISC doing business in this state shall be subject to income tax in this state and subject to the rules in this Subchapter except as provided in this Section.

 

History Note:        Authority G.S. 105‑130.3; 105‑262;

Eff. December 5, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .2402         DETERMINATION OF DISC NET INCOME

 

History Note:        Authority G.S. 105‑130.3; 105‑262;

Eff. December 5, 1976;

Repealed Eff. January 1, 1994.

 

17 NCAC 05C .2403         APPORTIONMENT OF DISC NET INCOME

The net income of a DISC subject to a tax measured by net income both within and without this state shall be apportioned to this state by use of the applicable apportionment formula set out in G.S. 105‑130.4. The ratio determined thereunder for apportioning the net income of the DISC shall be computed by including the property, payrolls and sales of the parent corporation and related participants in the respective factors of the DISC.

 

History Note:        Authority G.S. 105‑130.4; 105‑130.6; 105-130.16; 105‑262;

Eff. December 5, 1976;

Amended Eff. January 1, 1994;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .2404         DIVIDENDS RECEIVED FROM DISC

Dividends received by a corporate shareholder from a DISC must be included in the corporate shareholder's taxable income. Dividends received from a DISC by a corporate shareholder taxable in another state must be included in the corporate shareholder's apportionable income and apportioned to North Carolina. The term "dividends" means all amounts currently taxable under the Internal Revenue Code to corporate shareholders of a DISC whether or not distributed.

 

History Note:        Authority G.S. 105-130.4; 105‑262;

Eff. December 5, 1976;

Amended Eff. January 1, 2005; August 1, 2002;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05C .2405         EARNINGS OF DISC NOT PREVIOUSLY TAXED

 

History Note:        Authority G.S. 105‑130.1; 105‑130.6; 105‑130.15; 105‑130.16; 105‑262;

Eff. November 1, 1984;

Repealed Eff. April 1, 1991.

 

SECTION .2500 ‑ FOREIGN SALES CORPORATION (FSC)

 

17 NCAC 05C .2501         DOING BUSINESS ACTIVITIES/FOREIGN SALES CORPORATION (FSC)

17 NCAC 05C .2502         DETERMINATION OF FSC NET INCOME

17 NCAC 05C .2503         CONSOLIDATED RETURN

17 NCAC 05C .2504         APPORTIONMENT ‑ CONSOLIDATED RETURN

 

History Note:        Authority G.S. 105‑130.3; 105‑130.4; 105‑130.6; 105‑130.7; 105‑130.15; 105‑130.16; 105‑262;

Eff. August 1, 1986;

Amended Eff. January 1, 1988;

Repealed Eff. October1, 1992.

 

SECTION .2600 ‑ REINSTATEMENT OF CORPORATE CHARTER

 

17 NCAC 05C .2601         REINSTATEMENT OF CORPORATE CHARTER

 

History Note:        Authority G.S. 105‑230; 105‑232;

Eff. November 1, 1991;

Repealed Eff. October 1, 1993.

 

 

 

SUBCHAPTER 05D ‑ Alternative Apportionment Method

 

17 NCAC 05D .0101         PRELIMINARY STATEMENT

17 NCAC 05D .0102         WHEN DUE

17 NCAC 05D .0103         PAYMENTS OF ESTIMATED TAX

17 NCAC 05D .0104         PENALTY FOR UNDERPAYMENT OF ESTIMATED TAX

17 NCAC 05D .0105         NO PENALTY TESTS

17 NCAC 05D .0106         OVERPAYMENT OF TAX

 

History Note:        Authority G.S. 105‑163.25; 105‑163.27; 105‑163.30; 105‑163.32; 105‑163.33; 105.262;

Eff. February 1, 1976;

Amended Eff. January 1, 1978;

Repealed Eff. October 31, 1981.

 

17 NCAC 05D .0107         PURPOSE

The Secretary of Revenue or his designee will consider requests from corporate taxpayers for use of an alternative apportionment formula in determining tax bases for franchise and income taxes.

 

History Note:        Authority G.S. 105‑122(c1)(2); 105-130.4(t1); 105-262;

Eff. February 1, 2008;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05D .0108         WHO MAY SUBMIT REQUEST

(a)  Any C-Corporation, S-Corporation, or Limited Liability Company electing to be treated as either a C-Corporation or S-Corporation for federal income tax purposes, which believes that the method of allocation or apportionment as administered by the Secretary of Revenue has operated or will so operate as to subject it to taxation on a greater portion of its income than is reasonably attributable to business or earnings may request an alternative apportionment method.

(b)  Any C-Corporation, S-Corporation, or Limited Liability Company electing to be treated as a C-Corporation for federal income tax purposes, which believes that the method of allocation or apportionment as administered by the Secretary of Revenue has operated or will so operate as to subject it to taxation on a greater portion of its capital stock, surplus and undivided profits than is reasonably attributed to business within the state may also request an alternative apportionment method.

 

History Note:        Authority G.S. 105‑122(c1)(2); 105-130.4(t1); 105-262;

Eff. February 1, 2008;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05D .0109         REQUEST FOR ALTERNATIVE APPORTIONMENT FORMULA

The corporation shall file a request with the Secretary setting forth the facts upon which the corporation's belief is based and its argument with respect to the application of the allocation formula as set forth under G.S. 105-130.4(t1) or G.S. 105-122(c1)(2). The request:

(1)           shall be in a form generally used in legal drafting, setting forth sections containing the relevant facts, applicable statutory basis, and analysis supporting the request;

(2)           shall be subscribed to by an officer of the corporation having knowledge of the facts;

(3)           shall summarize the business operation of the corporation both within and without North Carolina;

(4)           shall state whether the request is for income tax purposes, for franchise tax purposes, or for both;

(5)           shall include the corporation's argument and contentions respecting the application of the formula prescribed by statute and the method of allocation requested referring to any legal references and other grounds upon which the corporation is basing its positions(s);

(6)           shall disclose the alternative apportionment method of allocation and apportionment being requested and indicate the effect of its application on the corporation's tax liability together with any supporting and supplementing information that will enable the Secretary to fully understand and consider the method of allocation and apportionment requested;

(7)           shall state the taxable periods to be reviewed;

(8)           shall, for income tax purposes, include statements of income and expenses, showing the net income of the corporation subject to apportionment for each taxable period to be reviewed;

(9)           shall, for franchise tax purposes, include statements showing the total net worth subject to apportionment for each taxable period to be reviewed;

(10)         shall include schedules for each taxable period showing the computation of the property, payroll, and sales factors as prescribed by statute in the determination of the apportionment factor as required by G.S. 105-130.4 and rules published by the Department of Revenue;

(11)         shall, for a separate accounting method of reporting the corporation's business operations in this State, submit as support operating statements showing the results of the corporation's operations within North Carolina computed on the separate accounting basis together with similar statements showing the results of the corporation's operations outside North Carolina for each taxable period to be reviewed. A full explanation and description of the separate accounting method employed in the computation must accompany the statements. If there are items of expense or income that are indirectly attributed to the separated operations, the basis for apportioning such items must be disclosed. General overhead expenses must be separately stated in documentation and explained when any portion of this expense is allocated to the separate net income attributed to this State under the requested method;

(12)         shall, for a separate accounting method, submit as support schedules reflecting the apportionment factors applicable to the operations that are conducted in whole or part in this State and the apportionment factor applicable to the business conducted outside of this State. The computations shall be made without regard to nexus requirements that would be considered if the operations were legal separate entities; and

(13)         shall contain any other information relevant to the apportionment formula or the requested method of allocation that the corporation deems appropriate under the circumstances.

 

History Note:        Authority G.S. 105-122(c1)(2); 105-130.4(t1); 105-262;

Eff. February 1, 2008;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017;

Amended Eff. May 1, 2018.

 

17 NCAC 05D .0110         TIME FOR FILING

The request shall be filed with the Secretary not later than 90 days after the regular or extended due date of the tax return.

 

History Note:        Authority G.S. 105‑122(c1)(2); 105-130.4(t1); 105-262;

Eff. February 1, 2008;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05D .0111         NOTICE OF CONFERENCE

The Secretary shall schedule a conference to hear the corporation's request and will give notice of the time, date and place of the conference to the taxpayer at least 30 days prior thereto. Notice will be by United States Mail sent to the taxpayer's last known address. The date set for the conference must be within 90 days after the timely request of the conference or at a later date mutually agreed upon by the Taxpayer and the Secretary. The date set for the conference may be postponed once at the request of the Taxpayer and once at the request of the Secretary for up to 90 days or for a longer period mutually agreed upon by the Taxpayer and the Secretary.

 

History Note:        Authority G.S. 105‑122(c1)(2); 105-130.4(t1); 105-262;

Eff. February 1, 2008;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05D .0112         WHO SHALL ATTEND THE CONFERENCE

The Secretary or their designee and the Director of the Corporate Tax Division or their designee, along with any other Department personnel the Secretary or Director shall deem appropriate, shall attend any conference pursuant to a request for an alternative apportionment formula. The taxpayer is not required to personally appear or be represented at the conference. Legal counsel or other tax practitioner may appear with or without the taxpayer on the taxpayer's behalf.

 

History Note:        Authority G.S. 105-122(c1)(2); 105-130.4(t1); 105-262;

Eff. February 1, 2008;

Readopted Eff. May 1, 2018.

 

17 NCAC 05D .0113         CONDUCT OF THE CONFERENCE

(a)  If the corporation or its representative fails to appear after proper service of notice, the Secretary may proceed with the conference and make his decision in the absence of the party.

(b)  The taxpayer shall be given an opportunity to present arguments on issues of law and policy and an opportunity to present evidence on issues of fact.

(c)  The rules of evidence as applied in the trial division of the General Court of Justice do not apply.

(d)  An informal record containing in substance the evidence, contentions and arguments presented at the conference shall be made.

 

History Note:        Authority G.S. 105‑122(c1)(2); 105-130.4(t1); 105-262;

Eff. February 1, 2008;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05D .0114         REMEDY

(a)  If the Secretary finds that the statutory formula does not fairly represent the corporation's business activity in North Carolina, he may require:

(1)           separate accounting;

(2)           the exclusion of any one or more of the factors;

(3)           the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this State, or

(4)           the employment of any other method to effectuate and equitable allocation and apportionment of the taxpayer's income.

(b)  In the case of a request for relief from the statutory apportionment formula for both franchise tax and income tax, the Secretary shall make separate determinations as to whether an alternative apportionment method is warranted.

 

History Note:        Authority G.S. 105‑122(c1)(2); 105-130.4(t1); 105-262;

Eff. April 1, 2008;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05D .0115         FINAL DECISION

A final decision shall be furnished to the requesting corporation within 60 days from the date of the conference or within 60 days after the date any additional information requested by the Secretary during the conference is provided.

 

History Note:        Authority G.S. 105‑122(c1)(2); 105-130.4(t1); 105-262;

Eff. February 1, 2008;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

 

 

SUBCHAPTER 5E - INSURANCE PREMIUMS TAX AND REGULATORY SURCHARGE

 

SECTION .0100 - GENERAL PROVISIONS

 

17 NCAC 05E .0101          REDUCED INSTALLMENT PAYMENTS

The Secretary may reduce the installment payment requirements for the quarterly insurance gross premiums tax and the regulatory surcharge if an insurer submits a written statement to the Department indicating that the insurer reasonably believes that its total estimated payments made for the current year will exceed the anticipated tax liability for the year.

This written statement must contain the basis for the insurer's belief that its installment payments should be reduced and state the factors supporting that belief, such as changes in the law or a reduction in the insurer's writings. The statement must be submitted at least 45 days before the due date of an installment payment. An insurer that files a timely statement may reduce its next installment payment in accordance with the statement unless the insurer receives written notice from the Department that its request has been denied or adjusted.

 

History Note:        Authority G.S. 105‑228.5; 105-262;

Eff. January 1, 1989;

Transferred and Recodified from 11 NCAC 11E .0110 Eff. January 15, 1998;

Amended Eff. August 1, 1998;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

17 NCAC 05E .0102          ADDITIONAL FIRE AND LIGHTNING TAXES

 

History Note:        Authority G.S. 105-228.5; 105-262;

Eff. February 1, 1976;

Readopted Eff. February 28, 1978;

Transferred and Recodified from 11 NCAC 11E .0202 Eff. January 15, 1998;

Amended Eff. August 1, 1998;

Repealed Eff. February 1, 2008.

 

17 NCAC 05E .0103          PREMIUM FINANCE CHARGES AND OTHER CHARGES

Gross premiums from business in this State include premium finance charges and installment payment charges or other charges received as a result of the partial payment of premiums by a policyholder. These charges are therefore subject to tax.

 

History Note:        Authority G.S. 105‑228.5; 105-262;

Eff. April 1, 1993;

Transferred and Recodified from 11 NCAC 11E .0203 Eff. January 15, 1998;

Amended Eff. August 1, 1998;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05E .0104          DIVIDENDS APPLIED TO PURCHASE ADDITIONAL PAID‑UP LIFE

Dividends applied to purchase additional paid‑up life insurance are not taxable under G.S. 105‑228.5 since gross premiums are deemed to be the amounts specified in the life insurance policy contracts when issued.

 

History Note:        Authority G.S. 105‑228.5; 105-262;

Eff. February 1, 1976;

Readopted Eff. February 28, 1978;

Transferred & Recodified from 11 NCAC 11E .0302 Eff. January 15, 1998;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05E .0105          GROUP PREMIUMS

 

History Note:        Authority G.S. 105-228.5; 105-262;

Eff. February 1, 1976;

Readopted Eff. February 28, 1978;

Transferred and Recodified from 11 NCAC 11E .0304 Eff. January 15, 1998;

Amended Eff. August 1, 1998;

Repealed Eff. February 1, 2008.

 

17 NCAC 05E .0106          EMPLOYEE BENEFIT PLAN CONTRIBUTIONS

Insurance company contributions or subsidies in the self‑insurance of life and accident and health insurance coverage as an employee benefit plan are not taxable under G.S. 105‑228.5.

 

History Note:        Authority G.S. 105‑228.5; 105-262;

Eff. February 1, 1976;

Readopted Eff. February 28, 1978;

Transferred & Recodified from 11 NCAC 11E .0305 Eff. January 15, 1998;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

 

 

SUBCHAPTER 05F – SECRETARY'S AUTHORITY TO ADJUST NET INCOME OR TO REQUIRE A COMBINED RETURN

 

SECTION .0100 - GENERAL

 

17 NCAC 05F .0101          scope

The rules in this Subchapter apply to the Secretary's authority under G.S. 105-130.5A to adjust net income or to require a combined return for taxable years beginning on or after January 1, 2012.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

17 NCAC 05F .0102          DEFINITIONS

As used in G.S. 105-130.5A and this Subchapter, the following definitions shall apply:

(1)           "Centralized cash management" means a process by which an affiliated group of businesses makes all or most cash management decisions from one location, such as a headquarters or designated subsidiary, that results in individual affiliates having little autonomy in making decisions concerning how cash is managed.

(2)           "Economic position" means the status of a taxpayer's assets, liabilities, and equity (whether those items are actual, contingent, or potential) and their interrelationship to one another.

(3)           "Material benefit" means an improvement in the economic position of the taxpayer on a pre-tax basis.

(4)           "Material business activity" means an activity that is both:

(a)           An integral part of the unitary group's business; and

(b)           Performed on a regular and continuous basis.

(5)           "Principal member" means a member of the combined group that acts in the group's name in all matters relating to the income tax liability for the combined group, and is the entity responsible for preparing the corporate income tax return and making corporate income tax payments for the combined group.

(6)           "Unitary business" means one or more related business organizations where there is a unity of ownership, operation, and use. It can also exist where there is interdependence in their functions. A determination of whether a corporation is part of a unitary business with another corporation is determined based on the facts and circumstances of each case.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .0200 – ECONOMIC SUBSTANCE

 

17 NCAC 05F .0201          ECONOMIC SUBSTANCE TEST BURDEN OF PROOF

The taxpayer has the burden of proving that a transaction meets both prongs of the economic substance test as specified in G.S. 105-130.5A(g).

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05F .0202          REASONABLE BUSINESS PURPOSES

(a)  In proving that a transaction, or series of transactions of which the transaction is a part, has one or more reasonable business purposes other than the creation of State income tax benefits, the taxpayer must show:

(1)           The business purpose asserted was valid and realistic;

(2)           The transaction was a reasonable and realistic means to accomplish the asserted business purpose;

(3)           Evidence exists that shows the taxpayer took steps to achieve the asserted business purpose; and

(4)           The value of the non-State income tax benefits reasonably anticipated by the taxpayer from the transaction exceeds the additional cost associated with the transaction.

(b)  Generally, reasonable business purpose is supported by contemporaneous documentation. Though not conclusive, the absence of contemporaneous documentation weakens the contention that the asserted business purpose is valid.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05F .0203          ECONOMIC EFFECTS

(a)  In proving that a transaction, or series of transactions of which the transaction is a part, has economic effects beyond the creation of State income tax benefits, the taxpayer must show by objective evidence that a reasonable likelihood of material benefit, other than State income tax benefits, from the transaction existed at the time the transaction was initiated and there was a material benefit to the transaction apart from State income tax benefits.

(b)  In analyzing whether a transaction has an economic effect, the Secretary shall analyze the economic effect on the taxpayer and on the aggregate economic effect on the parties to the transaction.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05F .0204          ECONOMIC SUBSTANCE DOCTRINE

The Secretary shall rely on general principles of the common law economic substance doctrine as established under federal and state case law in applying each prong of the two pronged test under G.S. 105-130.5A(g), except where case law conflicts with the statute. General principles of the economic substance doctrine include the following:

(1)           Economic substance is a prerequisite to any provision allowing deductions;

(2)           A taxpayer has the burden of proving that a transaction has both purpose and substance;

(3)           A taxpayer has the burden of showing that the form of the transaction accurately reflects its substance and that deductions claimed are permissible;

(4)           The economic substance of a transaction shall be determined based on documentation and data rather than the subjective opinions of the taxpayer; and

(5)           The transactions, not the entities, shall be examined for economic substance.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05F .0205          ECONOMIC SUBSTANCE FACTORS

Determining whether or not a transaction has economic substance is a fact-intensive inquiry that is dependent upon the facts and circumstances of each transaction made by a taxpayer. The Secretary shall consider or analyze all the facts and circumstances including the following:

(1)           The reasons for the transaction;

(2)           Whether the transaction was a reasonable means to accomplish the asserted purposes;

(3)           Expectations of benefits obtained from the transactions;

(4)           The effects the transaction had on the taxpayer's profits;

(5)           The existence of a reasonable or realistic potential for profit from making the transaction;

(6)           The objective economic impact of the transaction other than State income tax savings;

(7)           The transaction's effect on the taxpayer's State income tax liability;

(8)           The transaction's effect on the taxpayer's tax liability in other states;

(9)           The transaction's effect on the taxpayer's federal tax liability;

(10)         Whether the method of determining the amount of payment is an industry practice;

(11)         The change in the business operations of the parties, if any, after the transaction;

(12)         Whether assets were transferred between or among related parties;

(13)         Whether the business operations related to specific assets changed after any transfer of those assets;

(14)         Whether the entity transferring assets retained control over the assets;

(15)         The tax consequences of the transfer of assets;

(16)         The party or parties who created or developed the ideas which led to the transaction;

(17)         The party or parties who presented the ideas concerning the transaction to the taxpayer;

(18)         Whether the contemporaneous documentation explaining the transaction to the taxpayer discussed profit potential in addition to tax benefits;

(19)         The party or parties that drafted the agreements relating to the transaction;

(20)         The party or parties that negotiated the agreements relating to the transaction;

(21)         The party or parties that dictated the terms of the agreements relating to the transaction;

(22)         Cost-benefit analyses or other studies conducted related to the transaction;

(23)         Non-tax benefits obtained by the taxpayer as a result of the transaction; and

(24)         Whether the intercompany transaction resulted in a circular cash flow.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05F .0206          WHEN STATE INCOME TAX Benefits ARE CONSIDERED

(a)  State income tax benefits resulting from a transaction are considered by the Secretary in determining whether a transaction has reasonable business purposes and economic substance when the State income tax benefits are consistent with legislative intent, such as when the transaction is made in accordance with laws enacted by the General Assembly to encourage engagement in certain types of activities through tax deductions or tax credits.

(b)  When a transaction that generates targeted tax incentives is, in form and substance, consistent with the State income tax benefits designed by the General Assembly, the State income tax benefits shall be considered by the Secretary in determining whether the transaction has reasonable business purposes and economic substance.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05F .0207          Centralized Cash Management

Although the existence of a centralized cash management system among members of an affiliated group is not conclusive evidence that a transaction lacks economic substance, the Secretary shall analyze the transactions for reasonable business purposes and economic effects. If the cash management transaction, or series of transactions of which the transaction is a part, results in the creation of unreasonably excessive interest expense when compared to industry practice, shifting of assets, or the reclassification of income as nonapportionable or nonallocable, the transaction may be deemed to lack economic substance.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .0300 – FAIR MARKET VALUE

 

17 NCAC 05F .0301          DETERMINATION OF FAIR MARKET VALUE

(a)  For purposes of determining whether or not transactions between members of an affiliated group were made at fair market value under the standards contained in the regulations adopted under section 482 of the Internal Revenue Code pursuant to G.S. 105-130.5A(h), the Secretary shall consider all facts and circumstances relative to the transactions, including any transfer pricing studies provided by the taxpayer.

(b)  In determining whether or not transactions were made at fair market value, the Secretary will also apply any federal or state case law developed under section 482 of the Internal Revenue Code and its regulations.

(c)  The fact that a taxpayer has a transfer pricing study will not in and of itself be sufficient to establish that a transaction was made at fair market value.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .0400 - ADJUSTMENTS

 

17 NCAC 05F .0401          ADJUSTMENTS TO STATE NET INCOME

Adjustments the Secretary may make to intercompany transactions that are found to lack economic substance or not to be at fair market value include the following:

(1)           Disallowing deductions in whole or in part;

(2)           Attributing income to related corporations;

(3)           Disregarding transactions; and

(4)           Reclassifying income as apportionable or allocable.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .0500 – COMBINED RETURNS

 

17 NCAC 05F .0501          METHODOLOGY WHEN COMBINed ReTURN REQUIRED OR PERMITTED

When the Secretary requires or allows a corporate taxpayer to submit a combined return, the following methodology applies:

(1)           The starting point is the federal taxable income of the pro forma 1120 for each corporation. The 1120s shall represent federal taxable income "as if" each corporation were not part of a consolidated federal 1120;

(2)           The taxpayer shall combine the pro forma 1120s of the corporations to be included in the combined group; this results in a combination of each corporation's line items in determining combined income.

(3)           The taxpayer shall eliminate the intercompany transactions between members of the combined group in arriving at combined federal taxable income.

(4)           The taxpayer shall make North Carolina modifications (additions and subtractions) as provided in G.S. 105-130.5 to determine combined income subject to apportionment.

(5)           The taxpayer shall include in the apportionment factors the property, payroll, and sales of all corporations included in the combined group as provided in G.S. 105-130.4. All sales into North Carolina by entities within the combined group shall be included in the sales factor numerator. Where an intercompany transaction has occurred and been eliminated in the calculation of combined income, this amount shall also be eliminated from the numerator and denominator of the applicable factor.

(6)           Only one apportionment factor is to be calculated by the taxpayer for the combined group. Unless otherwise provided in this section, the standard three factor formula, which uses the apportionment factors of property, payroll, and sales, shall be used. If more than 50 percent of the group's combined income subject to apportionment is generated from a business activity subject to special apportionment under subsections (m) through (s1) of G.S. 105-130.4, then that apportionment formula shall be used for the entire group. If the taxpayer believes the statutory apportionment method that otherwise applies to the combined group subjects a greater portion of the group's income to tax than is attributable to its business in this State, the taxpayer may propose, and the Secretary shall consider, an alternative method of apportionment. The taxpayer shall apply the combined apportionment factor to the combined apportionable income to determine income apportioned to this State.

(7)           The taxpayer shall add any nonapportionable income allocated to North Carolina to the income apportioned to this State to determine total income subject to North Carolina tax.

(8)           The combined group's income subject to tax may be reduced by net economic losses sustained by a corporation that becomes a member of the group, but not fully used by that corporation prior to becoming a member of the combined group, subject to the provisions of G.S. 105-130.8. Net economic losses brought by a corporation into the group remain with that corporation and, to the extent not used by the group during the years the corporation is part of the group, may be claimed by the corporation in the tax years after the corporation ceases to be a part of the group. The tax years that the corporation is part of the combined group count toward the 15-year carryforward period authorized in G.S. 105-130.8. A net economic loss sustained by the group in a combined return year shall be allocated among the members of the group that reported losses on their pro forma 1120s, after elimination of intercompany transactions between members of the combined group. The amount allocated to each member shall be determined by dividing that member's loss (after elimination of intercompany transactions) by the total losses (after elimination of intercompany transactions) of all members of the combined group in that tax year. To the extent not used by the group during the years the corporation is part of the group, the group's net economic losses allocated to a corporation that is a member of the group may be claimed by the corporation in the tax years after the corporation ceases to be a part of the group. Net economic losses shall be considered used in order beginning with earliest tax year. If more than one corporation brought net economic losses from the same tax year into the combined group and a portion of the losses from that year is used, the amount of used net economic losses shall be prorated among the members bringing losses from that year based on the percentage of each member's losses to the total losses carried forward from that year.

(9)           The combined group's income tax may be reduced by tax credits earned by a member of the combined group, but not fully used by that entity prior to becoming a member of the combined group, subject to the provisions of the specific credits. Because the eligibility for a tax credit is determined at the separate entity level, any unused installment or carryforward of a tax credit earned by a member of the combined group remains with that entity if that entity is no longer a member of the combined group or the group is no longer required to file a combined return. This is applicable whether the credit was earned by the entity before becoming a member of the combined group or while a member of the combined group. For franchise tax purposes, the tax credits may only be used by the entity generating the credit unless the group also files a combined return for franchise tax purposes.

 

History Note:        Authority G.S. 105-130.4; 105-130.5; 105-130.5A; 105-130.8; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05F .0502          PROCEDURES FOR FILING A COMBINED INCOME TAX RETURN

(a)  The principal member shall file Form CD-405, The North Carolina C Corporation Tax Return, and all required schedules. The combined tax return replaces the separate entity corporate income tax returns filed by the members of the group that are doing business in this State.

(b)  The principal member shall include the following schedules:

(1)           A computation of the North Carolina taxable income of each corporation in the combined return that would have been reported if the member had filed a North Carolina income tax return on a separate company basis;

(2)           A schedule detailing all intercompany eliminations made by and between the members of the unitary group;

(3)           A schedule of all North Carolina income tax estimated payments made by each member of the group;

(4)           A schedule reflecting the computation of the combined apportionment factor as required in 17 NCAC 05F .0501(6). Taxpayers shall not use Schedule O of the CD-405;

(5)           A schedule of eligible net economic losses and the use of same by member entities and the combined group; and

(6)           A schedule of eligible tax credits and the use of same by member entities and the combined group.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

17 NCAC 05F .0503          COMBINED RETURN TAX CREDITS

(a)  Any member of the combined group that has activities that qualify for a North Carolina income tax credit shall provide all required information to determine and support the amount of the credit on a separate company basis. This information shall be included with the combined return in each year the qualifying member becomes eligible to claim a credit or an installment of a credit, even if the group's income tax liability for that tax year is not sufficient for the combined group to benefit from the income tax credit.

(b)  Combined groups eligible to claim income tax credits shall complete Form CD-425, Corporate Tax Credit Summary, on a combined basis and file it with the group's income tax return. If a member of the combined group is eligible to claim an income tax credit limited by statute to 50 percent of tax, the combined group shall also complete Form NC-478, Summary of Tax Credits Limited to 50 Percent of Tax.

 

History Note:        Authority G.S. 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.

 

SECTION .0600 – FRANCHISE TAX RETURN

 

17 NCAC 05F .0601          PROCEDURES FOR FILING A FRANCHISE TAX RETURN

(a)  The provisions of this Rule apply unless the Secretary authorizes a combined group to file a combined franchise tax return under G.S. 105-122. Each corporation that is doing business in this State pursuant to G.S. 105-114(b)(3) shall file a separate North Carolina franchise tax return and pay any franchise tax due. Any corporation that is included in a combined income tax return but that is not doing business in this State pursuant to G.S. 105-114(b)(3) is not subject to North Carolina franchise tax.

(b)  The principal member shall file its franchise tax return on the combined group's CD-405.

(c)  All other members' separate returns shall include zero dollars ($0) on the "Net Taxable Income" and "NC Net Income Tax" lines on the CD-405 and include a statement with the return that:

(1)           Indicates its income is included in the combined income tax return filed by the principal member; and

(2)           Identifies the name and Federal Employer Identification Number of the principal member.

(d)  If the corporation filing a franchise tax return is a multistate taxpayer, then it shall calculate an apportionment factor to be used in calculating its capital stock base using its separate entity property, payroll, and sales before intercompany eliminations. Schedule O of the CD-405 must reflect the entity's apportionment factor for franchise tax purposes.

 

History Note:        Authority G.S. 105-114(b)(3); 105-122; 105-130.5A; 105-262.1;

Eff. January 31, 2013;

Pursuant to G.S. 150B-21.3A, rule is necessary without substantive public interest Eff. August 19, 2017.