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PPP-related expenses on their 2020 Cigar tax increases
federal income tax return were required Most changes made in S.B. 105 are
to add these expenses back as a sepa- favorable to taxpayers. However, the
rate state modification on their North state will begin subjecting remote sales
Carolina income tax return. A state of cigars to the current excise tax, which
modification will no longer be required is 12.8% of the cost of each cigar, with a
for the 2020, 2021, and 2022 tax years. cap of 30 cents per cigar (id. at Sections
As the 2020 tax returns have already 42.9.(a) and 42.9.(g)). This increase is
been filed, an amended return will likely likely to affect premium cigars only. The
be required (pending N.C. Department increase is effective July 1, 2022, and is
of Revenue guidance) to realize the projected to raise revenue in the fiscal
benefit for this period. Deduction of year 2022–2023 by $25 million (Joint
PPP-related expenses is estimated to re- Conference Committee Report at A1).
duce tax revenue by approximately $610
million and $50 million for fiscal years Large fiscal effects
2021–2022 and 2022–2023, respectively S.B. 105 includes significant state tax
(Joint Conference Committee Report law changes for both business entities
at A1). and individuals in North Carolina. The
Due to the prior conformity date, net changes are projected to result in
North Carolina conformed to the law tax cuts for both businesses and indi-
known as the Tax Cuts and Jobs Act of viduals in the state. Before the bill was
2017 (TCJA), P.L. 115-97, but not the enacted, North Carolina was projected
Coronavirus Aid, Relief, and Economic to add an additional $6.5 billion to the
Security (CARES) Act, P.L. 116-136. state’s general fund through fiscal year
Therefore, the state conformed to the 2022–2023 (Office of Gov. Roy Cooper,
30% excess business interest limitation news release, “New Revenue Forecast
of Sec. 163(j) mandated by the TCJA Projects Additional $6.5 Billion Sur-
but not the 50% limitation adopted by plus by 2023” (June 15, 2021)). New
the CARES Act. Because of the state’s revenue projections after Senate Bill
nonconformity to the CARES Act, a 105 was passed estimate that fiscal year
separate state addition modification was not one of the following are not eligible 2021–2022 revenue will decrease from
required in 2019 for C corporations and to make the election: an individual, an $29,705,400,000 to $28,379,700,000,
in 2020 for all entity types. S.B. 105 now estate, a trust described in Sec. 1361(c) and fiscal year 2022–2023 revenue
allows for any taxpayer who made a state (2), or an organization described in Sec. will decrease from $30,707,200,000 to
addition for CARES Act nonconformity 1361(c)(6) (id. at Sections 42.5.(a) and $28,716,900,000 (Joint Conference
to deduct 20% of the addition ratably 42.5.(h)). Committee Report at A1). North Caro-
for the first five tax years beginning with A resident of North Carolina histori- lina follows almost a dozen other states
the 2021 tax period (S.B. 105 at Section cally was allowed a credit for taxes paid that cut personal or corporate income
42.13A.(b)). to another state. If a passthrough entity tax rates throughout 2021 legislative
election is made, the North Carolina sessions on the heels of increased tax
Passthrough entity tax resident shareholder/partner will not revenue and federal support.
S.B. 105 creates a passthrough entity be entitled to a credit for taxes paid to From Breen Parry, J.D. (Breen.
election for S corporations, partnerships, another state on income that is taxed Parry@rsmus.com), Charlotte, N.C., and
and LLCs treated as partnerships for to the passthrough entity. However, the Charles Britt, CPA, J.D. (Charles.Britt@
federal income tax purposes to be taxed shareholder/partner will be allowed to rsmus.com), Raleigh, N.C. ■
deduct the pro rata share of distributive
at the entity level, becoming at least the
PHOTO BY PILAT666/ISTOCK 20th state to do so. Any S corporation income taxed to the passthrough entity Editor
is eligible to make this election in the
(id. at Section 42.5.(j)). The net effect of
Mo Bell-Jacobs, J.D., is a senior
these changes will depend on the states
state. However, publicly traded partner-
manager with RSM US LLP.
ships and partnerships that at any point
in which the passthrough entity election
during the tax year have a partner that is
has been made.
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