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North Carolina House Approves Decoupling From Federal Tax Relief

Posted on June 24, 2020

The North Carolina House has passed an omnibus bill that would decouple the state from most of the business tax relief in the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act.

H.B. 1080, sponsored by Rep. Julia Howard (R) and other Republicans, would address federal tax changes made between January 1, 2019, and May 1, 2020, including the CARES Act. The bill would also make changes to excise and sales and use taxes.

The House approved the bill June 22 by a vote of 98 to 21. It passed its first reading in the Senate the same day and was referred to the Senate Finance Committee, which on June 23 favorably reported a substitute version.

The bill would decouple from several provisions of the CARES Act designed to help improve liquidity for businesses that have been affected by the COVID-19 pandemic, including changes to IRC section 163(j) that allow taxpayers to deduct more business interest expense for tax years beginning in 2019 and 2020 and that increase from 30 percent to 50 percent the percentage of a taxpayer’s adjusted taxable income used to calculate the deductibility of business interest expense. 

H.B. 1080 would also decouple from changes to net operating losses under the CARES Act. The act allows NOLs incurred in 2018, 2019, or 2020 to be carried back for five years and allows losses to be carried forward to tax years after December 31, 2020, without being subject to the 80 percent income limitation.

The bill would conform the state's tax code to the lowered threshold amount for the medical expense deduction from 10 percent to 7.5 percent for the 2019 and 2020 tax years, which is expected to reduce state revenues by about $36 million in fiscal 2021, according to the House-passed version's fiscal note. However, the Senate committee substitute would decouple from the extension of the 7.5 percent threshold for that deduction for tax years 2019 and 2020, according to this summary.

Jared Walczak, director of state tax policy at the Tax Foundation, told Tax Notes June 23 that the North Carolina House is staking out a middle way on CARES Act conformity.

The bill would decouple from some of the key tax provisions of the CARES Act designed to improve business liquidity, but would allow businesses to recover some of the benefit of those provisions in subsequent years, Walczak said.

Walczak said states face a difficult choice in deciding whether to conform the NOL and business interest deduction provisions of the CARES Act at a time when state revenues are dropping.

“Because economic recovery is paramount, and is also the only long-term solution to state revenue recovery, states should prioritize conforming to these provisions wherever possible, but the North Carolina House's staggered approach is better than decoupling altogether,” Walczak said.

H.B. 1080 would also conform to the exclusion from gross income of any amount of indebtedness forgiven on a loan covered under the CARES Act's Paycheck Protection Program.

Originally, the bill would have decoupled from the loan forgiveness provision; however, the bill was replaced by a substitute May 19 that conforms to the exclusion.

Eugene Chianelli of Smith Debnam LLP in Raleigh told Tax Notes June 23 that the provision is "designed to prevent the taxpayer from getting a double benefit for North Carolina purposes." He said legislators "were pretty adamant that they wanted to decouple from anything that costs the state money."

H.B. 1080 would also add language to clarify that digital codes for digital property are taxed in the same manner as the "property for which the digital code relates" and that the state's economic nexus threshold applies only to marketplace facilitators. 

The bill would also require marketplace facilitators that facilitate sales of prepared food and beverages, such as Uber Eats, to collect and remit local meals taxes in the five localities that levy them — Cumberland County, Dare County, Mecklenburg County, Wake County, and the town of Hillsborough. This provision would be effective July 1 and would apply to sales occurring on or after that date. 

Howard could not be reached for comment by press time.

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