The annual bill to update North Carolina’s tax law with the Internal Revenue Code cleared its first legislative hurdle on April 28 when it received a favorable report from the Senate Finance Committee. The bill has two more committee stops in the Senate before it can be considered for a floor vote, then it will begin the process anew on the House side.
SB 322 passed with a 28-page amendment that rewrites the bill and includes two items on NCACPA’s 2021 public policy agenda:
- Converting the 10% late payment penalty into a graduated penalty that starts at 2%, then increases by an additional 2% for each additional month the tax is unpaid, up to a 10% maximum.
- Correcting an unintended consequence of decoupling from the CARES Act relative to the interest expense deduction under section 163(j) of the IRC. The bill eliminates the double add-back provision and provides that a taxpayer may deduct over a five-year period the amount of interest expense allowed under federal law that exceeds the state’s 30% limit. Without this change, taxpayers would be permanently disallowed the full amount of the deduction.
Chief among the bill’s numerous provisions is a change to the state’s IRC conformity date from May 1, 2020, to April 1, 2021. It also lays out a separate state net operating loss calculation for individual income tax purposes and a variety of technical changes. A full summary of the proposal is available here.
Other notable provisions:
- The bill decouples from several high-profile tax breaks in the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021, including the income exclusion for the first $10,200 of 2020 unemployment benefits.
- The bill also clarifies that the existing add-back requirement for federally deducted expenses associated with forgiven Paycheck Protection Program loans extends to similarly treated federal 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.
- These two changes send a clear signal that the Senate does not intend to go along with the House proposal to allow PPP deductibility or the unemployment exclusion at the state level.
- Another major provision of the bill is a workaround of the federal $10,000 cap on the state and local tax deduction for individual taxpayers. The bill would allow a pass-through entity to pay the state income taxes at the entity level, which is not subject to the cap.
- Both the Advocacy Advisory Council and the Taxation Committee of NCACPA are conducting a review of the proposal. NCACPA is preparing feedback to submit to lawmakers as the bill makes its way through the process.
If you have questions, comments, or suggestions about this legislation, please contact NCACPA Director of Advocacy Robert Broome, CAE.