House leaders unveiled proposed tax changes on August 9 as part of the final touches to their version of the state budget, SB 105.
The House proposal is smaller in scope than the $13 billion in tax cuts approved by the Senate in June. The total projected revenue reduction to the state over the next five fiscal years is $8.6 billion.
PPP Expense Deductibility
The House is sticking with its plan to allow businesses to deduct expenses associated with forgiven Paycheck Protection Program loans. The House twice passed PPP expense deductibility language in other bills this session.
The House would further allow expense deductibility for other federal pandemic relief programs, such as emergency EIDL grants and targeted EIDL advances, loans under the Debt Relief Program, grants for Shuttered Venue Operators, and Restaurant Revitalization grants.
The Senate’s version of SB 105 does not allow expense deductibility for PPP loans and similar programs. Instead, it would create a program to distribute grants to businesses that received state and federal pandemic assistance (read more).
IRC Conformity Provisions
The bill would change the state’s Internal Revenue Code conformity date from May 1, 2020, to April 1, 2021. The House wants to conform to the federal income exclusion for the first $10,200 of 2020 unemployment benefits, which is another key difference from the Senate version.
This IRC conformity section includes two NCACPA policy priorities: (1) Creating a graduated late tax payment penalty; and (2) correcting an unintended consequence of decoupling from the CARES Act by allowing a taxpayer to fully deduct over five years the applicable amount of business interest expense under Section 163(j).
Tax Policy Changes
Major tax provisions of the House budget would:
- Reduce the personal income tax rate from 5.25% to 4.99% in TY 2022.
- Increase the personal income tax standard deduction for all filers to match the 2022 federal standard deduction.
- Eliminate the income tax on military pensions.
- Reduce the corporate income tax to 2.25% in 2024 and 1.99% in 2025.
- Simplify the franchise tax by eliminating the two property tax calculations and basing the tax solely on the net income calculation.
- Create a SALT cap workaround for pass-through entities.
- Provide a separate net operating loss calculation for individual taxpayers.
What’s Next
SB 105 received a favorable recommendation from the House Finance Committee and will be heard in the Appropriations Committee on August 10. Floor votes will take place before the week is out.
The Senate is expected to reject the House budget, after which a conference committee of House and Senate members will be appointed and tasked with forging a compromise that both chambers can support.
Legislative leaders have said they hope to approve a conference report and send it to the governor’s desk by the end of August.
If you have questions about this issue or other policy matters, please contact NCACPA Director of Advocacy Robert Broome, CAE.