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North Carolina Legislators Introduce Tax Relief Bills

Posted on May 29, 2020

North Carolina legislators have introduced bills designed to provide tax relief to businesses amid the COVID-19 pandemic, including one that would create a temporary franchise tax credit for some corporations.

Under S.B. 848, filed May 26 by Senate Finance Committee co-chairs Paul Newton (R), Ralph Hise (R), and Jerry W. Tillman (R), corporations would be eligible for the tax credit for tax years beginning on or after January 1, 2020, if they increase their total actual investment in tangible personal property in North Carolina from the prior year. The credit would be repealed for tax years beginning on or after January 1, 2022, and could not be carried forward.

Corporations would also be eligible if they retain employment for the tax year at a level at least equal to 90 percent of the number of full-time employees employed as of March 31, 2020, and the average wage paid is at least 90 percent of the average wages paid to full-time employees as of that date, based on the unemployment tax filing for the quarter. Salaries over $200,000 and part-time employee wages would be excluded.

Total tax credits for tax years 2020 and 2021 would be limited to $50 million per year. Revenue from the state’s Coronavirus Relief Fund would be used for the franchise tax relief. 

The North Carolina Chamber of Commerce supports S.B. 848. “This bill provides much-needed and much-deserved tax relief for businesses that continue to make investments in our state and its economy during this challenging time,” chamber spokeswoman Jennifer Dart told Tax Notes May 28.

However, Alexandra Sirota, director of the North Carolina Budget and Tax Center at North Carolina Justice Center, told Tax Notes May 28 that the bill “is a terrible idea for North Carolina to consider.”

Sirota said there are already projected revenue shortfalls and “reducing revenues further in the face of real needs . . . will do more harm to our efforts to secure a strong economic recovery.”

“Businesses hurt by COVID-19 need direct grants, loans, and support to reopen, not a poorly targeted tax cut,” Sirota said. “The vast majority of franchise tax collections come from businesses with net worth in the multimillion-dollar range.”

Conformity

Meanwhile, a conformity bill introduced in the House would exempt loans forgiven under the Paycheck Protection Program (PPP) established by the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), and partially decouple from the net operating loss provisions of the act. 

H.B. 1211 was filed May 26 by Republican Reps. Jason Saine, Stephen M. Ross, John Sauls, and Jake Johnson, with bipartisan support. The bill passed its first reading in the House May 27 and was referred to the House Committee on Finance.

The CARES Act expanded the Small Business Administration section 7(a) loan program to include $349 billion for a new PPP. The program provides small business loans that can be forgiven in whole or in part if a company avoids layoffs.

Jared Walczak of the Tax Foundation told Tax Notes May 28 that the bill's proposed decoupling from the NOL provisions would require businesses to claim additional losses over a period of five years.

"Both of these federal policies are designed to keep people employed where possible and to facilitate faster rehiring after the health crisis abates, and states should seek to conform to them wherever possible," Walczak said. 

Republicans also filed omnibus revenue bill H.B. 1080/S.B. 727 to address federal tax changes made between January 1, 2019, and May 1, 2020, including the CARES Act, which was enacted March 27.

Originally, H.B. 1080 would have decoupled from the loan forgiveness under section 1106 of the CARES Act. However, the bill was replaced by a substitute May 19 that would conform to the provision and decouple from everything else, according to Eugene Chianelli of Smith Debnam LLP in Raleigh. 

"That is the provision that has gotten the most attention with the decoupling bills. My understanding is that that's going to be a big budget number if they conform to it," Chianelli said.

Sponsors of the bills did not respond to requests for comment by press time. 

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