On September 18 the NC Budget funding out state operations for the next two years was finally adopted by the legislature and signed into law by our governor. This 429 page budget bill primarily focuses on the spending by our state over the next two years however there are 21 pages of Finance Provisions that will affect every business and person in North Carolina. In this summary we will examine the provisions that have the widest effect on our clients.
Individual Income Tax Provisions
1. Under the newly adopted budget individuals will receive a higher standard deduction for 2016.
2015 Deduction 2016 Deduction
Married Filing/Jointly/Surviving Spouse $15,000 $15,500
Head of Household $12,000 $12,400 Single $ 7,500 $ 7,750
Married Filing Separate $ 7,500 $ 7,750
2. NC taxpayers who itemize will also once again be allowed to take a deduction for medical expenses beginning with the current 2015 tax year. The medical deduction limits will follow the same rules in place for medical deductions medical deductions by the IRS.
3. For 2015 and 2016 the current individual income tax rate of 5.75% of NC Taxable Income will remain in effect. However, for starting in 2017 this rate drops to 5.499%.
4. Many NC taxpayers found themselves having to write a small check to the state when filing their 2014 income tax returns. This was a result of the income tax tables used to withhold taxes from their paychecks being based on just an employee’s W-2 wages. Starting in 2016 income tax tables will withhold an additional .1% in tax to account for income from other sources such as dividends and interest.
Sales Tax on Services
The 2015-2017 Biannual budgets expand sales tax to many services that are currently exempt from sales taxes. These include repair, maintenance and installation services for vehicles, appliances and other tangible personal property. The revenue from this expanded sells tax will be used to redistribute sales taxes collected from higher wealth counties and cities to lower wealth rural counties. 79 counties and municipalities will receive a share of these newly collected funds and may use it for economic development, public education or community colleges. The expanded sales tax begins on March 1, 2016
Corporate Income and Franchise Taxes
1. The corporate income tax rate was set to drop from 5% in 2015 to 4% in 2016 if state revenue projections were met. The decrease has now been made permanent without regard to state revenue collections. However if new revenue targets are met in future years the tax rate will decrease from 4% to 3%.
2. Corporations that work in multiple states will begin using only their sales by state as the apportionment factor beginning in 2018. Currently multistate corporations base the income allocated to each state they work in using three apportionment factors including sales, payroll and property in each state. The payroll and property factors will be phased out over the next three years.
3. Major changes have been made to the method franchise taxes are calculated for corporations doing business in North Carolina starting in 2017.
- The minimum Franchise Tax has been increased from $35 per year to $200 per year.
- In the past the amount of franchise tax was based on the highest of three factors. This included the Capital Surplus of the corporation calculated on the book method, the total actual investment in tangible property net of book depreciation or 55% of the appraised value of real and tangible property for property tax purposes. The following changes have been made to these methods:
- The Capital Surplus method has been replaced with the Net Worth method. Under the Net Worth method is calculated as Total Assets of the Corporation less Total Liabilities of the corporation without regard to any deduction for Accumulated Depreciation, Depletion or Amortization.
- The total actual investment in tangible property net of book deprecation method no longer allows a deduction for debt associated with real property.
As you can see there are a number of changes to the North Carolina Tax laws that will affect every business transacting business in the state and every individual who files a North Carolina tax return. Please call our office with questions or concerns about how these changes will affect you or your company’s particular situation. You can reach us in our Fayetteville office at 910-323-3600 or in our Dunn office at 910-891-1100.