North Carolina Updates References to Internal Revenue Code and Decouples from Certain Provisions
July 29, 2020
Governor Roy Cooper signed Session Law 2020-58 on June 30, 2020. Part I of this legislation updates North Carolina’s reference to the Internal Revenue Code from January 1, 2019 to May 1, 2020, and includes provisions that provide economic and tax relief to taxpayers as a result of the coronavirus pandemic. Effective with Session Law 2020-58, changes made to the Code by the Further Consolidated Appropriations Act of 2020 (FCAA) and the Coronavirus Aid, Relief, and Economic Stimulus Act (CARES Act) are effective under North Carolina tax law to the extent North Carolina follows the Code and does not decouple from its provisions. Prior to the enactment of the FCAA and CARES Act, North Carolina did not apply certain provisions of federal tax law, including, but not limited to, the standard deduction amount and itemized deductions for individuals, and bonus depreciation and Section 179 limits for both individuals and corporations. The following discussion identifies and explains where North Carolina decouples from the FCAA and the CARES
Act.
Decoupling Provisions Impacting Individuals
- Deduction for Qualified Tuition and Related Expenses
- Federal treatment: Deduction is extended through tax year 2020.
- North Carolina requires an addition to federal adjusted gross income (AGI) for any tuition and related expenses deducted on the federal return.
- Mortgage Insurance Premiums
- Federal treatment: Mortgage insurance premiums may be treated as qualified residence interest through tax year 2020.
- North Carolina requires an addition to federal AGI for any mortgage insurance premiums deducted on the federal return.
- NOL Limit of Eighty Percent of Taxable Income for Tax Years 2018, 2019, and 2020
- Federal treatment: NOL carryforward limitation suspended until 2021 for NOLs incurred in these years.
- North Carolina requires an addition to federal AGI in tax years 2019 or 2020 that results from an NOL incurred and carried forward from tax years 2018, 2019, and 2020 to the extent that the federal deduction exceeds 80% of the NOL incurred in tax years 2018, 2019, and 2020. The addition may be deducted in five equal installments beginning in tax year 2021.
- Carryback of Net Operating Loss (NOL) Incurred in Tax Years 2018, 2019, and 2020
- Federal treatment: Five-year carryback for NOLs incurred in these years.
- North Carolina requires an addition to federal AGI for NOLs incurred in 2018, 2019, and 2020 which are carried back under the 5-year provision for federal purposes. Farming losses which are carried back are not subject to the add-back. The addition may be deducted in five equal installments beginning in tax year 2021.
- Excess Business Loss Limitation
- Federal treatment: The Code §461(l) excess business loss limitation is suspended for tax years 2018, 2019, and 2020.
- North Carolina requires an addition to federal adjusted gross income for excess business losses, as defined by Code §461(l) as enacted as of January 1, 2019, for tax years 2018, 2019, and 2020. If a taxpayer’s NOL addition includes excess business losses, this addition does not apply. The addition may be deducted in five equal installments beginning in tax year 2021.
- Cancellation of Qualified Principal Residence Indebtedness Income
- Federal treatment: Excluded from gross income through tax year 2020.
- North Carolina requires an addition to federal AGI for cancellation of qualified principal residence indebtedness income excluded from federal AGI.
- AGI Limitation on Charitable Contributions
- Federal treatment: The 60% of AGI limitation is suspended for tax year 2020.
- North Carolina limits the deduction to 60% of AGI.
- Above-the-Line Deduction for Qualified Charitable Contributions (QCCs)
- Federal treatment: Non-itemizers can deduct up to $300 of QCCs beginning with tax year 2020 as a deduction for AGI (above-the-line).
- North Carolina requires an addition to federal adjusted gross income for any for-AGI QCCs deducted on the federal return.
- Employer Payment of Student Loans
- Federal treatment: Employer payments of student loans under IRC §127(c), whether paid to the tax payer or to a lender, of principal or interest on any qualified education loan, incurred by the taxpayer for education of the taxpayer are excluded from gross income for tax year 2020.
- North Carolina requires an addition to federal adjusted gross income for employer payments of student loans as described above.
- Payroll Protection Program (PPP) Loan Forgiveness and Expense Deductions
- Federal treatment: Amount of forgiven PPP loan is excluded from gross income.
- North Carolina also excludes amount of forgiven PPP loan, however, any expenses paid with PPP proceeds that are deducted for federal tax purposes are not deductible when calculating North Carolina taxable income.
Decoupling Provisions Impacting Corporations
- Business Interest Expense Limitation
- Federal treatment: The limit on deductions for business interest expense is increased from 30% to 50% of adjusted taxable income for tax years 2019 and 2020.
- North Carolina’s limitation remains at 30% of federal adjusted taxable income and requires an addition to federal adjusted gross income for the excess of business interest deducted using the federal 50% limitation.
- Payroll Protection Program (PPP) Loan Forgiveness and Expense Deductions
- Federal treatment: Amount of forgiven PPP loan excluded from gross income.
- North Carolina also excludes amount of forgiven PPP loan, however, any expenses paid with PPP proceeds that are deducted for federal tax purposes are not deductible when calculating North Carolina taxable income.
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