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State and local tax advisor: December 2021

December 29, 2021 Article 29 min read
Authors:
Curtis Ruppal Mike Merkel Ron Cook Jeanette Tolar Julie Corrigan
Are you looking for the latest changes in state and local taxes? Find the December 2021 roundup here.
Empty conference room with a view of the sun rising through the glass windows.The states covered in this issue of our monthly tax advisor include:

Arkansas

Corporate, personal income taxes: Tax rate reductions, other changes enacted

Arkansas has enacted tax rate reductions for both corporate and personal income taxes, effective for tax years beginning on or after Jan. 1, 2022. The law reduces the top rates over a period of several years, and for personal income taxes, restructures and consolidates the lower- and middle-income tax tables. Additionally, the existing personal income bracket adjustments are divided into smaller income ranges and are adjusted annually to reflect changes to the consumer price index.

The law makes additional income tax changes, including:

  • Annually increasing the standard deduction amount by the cost-of-living adjustment.
  • Providing a nonrefundable income tax credit for certain individuals who timely file their income tax return.
  • Excluding payments received from the Coronavirus Food Assistance Program 2 and any successor programs, from the definition of gross income.

Personal income tax rates

For personal income taxes, the rates and brackets are amended for each year for tax years 2022 through 2025. However, the adjustments for tax years 2024 and 2025 will not take effect if a transfer from the Catastrophic Reserve Fund occurs during certain time periods.

Tax year 2022: For tax year 2022, the income tax brackets for taxpayers with a net income less than or equal to $84,500 are:

  • 0% on the first $4,999.
  • 2% on income from $5,000 to $9,999.
  • 3% on income from $10,000 to $14,299.
  • 3.4% on income from $14,300 to $23,599.
  • 5% on income from $23,600 to $39,699.
  • 5.5% on income over $39,700.

The brackets for taxpayers with a net income greater than $84,500 are:

  • 2% on the first $4,300 of income.
  • 4% on income from $4,301 to $8,500.
  • 5.5% on income over $8,500.

For tax year 2022, individuals with net taxable income of more than $84,501 but less than $90,600 will reduce their income tax due by the specified bracket adjustment amount.

Tax year 2023: For tax year 2023, the brackets for taxpayers with a net income less than or equal to $84,500 are:

  • 0% on the first $4,999.
  • 2% on income from $5,000 to $9,999.
  • 3% on income from $10,000 to $14,299.
  • 3.4% on income from $14,300 to $23,599.
  • 5% on income from $23,600 to $39,699.
  • 5.3% on income over $39,700.

The brackets for taxpayers with a net income greater than $84,500 are:

  • 2% on the first $4,300 of income.
  • 4% on income from $4,301 to $8,500.
  • 5.3% on income over $8,500.

For tax year 2023, individuals with net taxable income of more than $84,501 but less than $90,000 will reduce their income tax due by the specified bracket adjustment amount.

Tax year 2024: If funds are transferred from the Catastrophic Reserve Fund for any reason between July 1, 2022, and Jan. 1, 2024, the income tax tables for tax year 2023 will continue to apply. If such a transfer does not occur, the brackets for the 2024 tax year will remain the same, but the top rate will be reduced from 5.3 to 5.1%. Additionally, individuals with net taxable income of more than $84,501 but less than $89,400 will reduce their income tax due by the specified bracket adjustment amount.

Tax year 2025: If funds are transferred from the Catastrophic Reserve Fund for any reason between Jan. 1 and Dec. 31, 2024, the income tax tables for tax year 2024 will continue to apply. If such a transfer does not occur, the brackets for the 2025 tax year for taxpayers with a net income less than or equal to $84,500 are:

  • 0% on the first $4,999.
  • 2% on income from $5,000 to $9,999.
  • 3% on income from $10,000 to $14,299.
  • 3.4% on income from $14,300 to $23,599.
  • 4.9% on income over $23,600.

The brackets for taxpayers with a net income greater than $84,500 are:

  • 2% on the first $4,300 of income.
  • 4% on income from $4,301 to $8,500.
  • 4.9% on income over $8,500.

Further, for tax year 2025, individuals with net taxable income of more than $84,501 but less than $88,900 will reduce their income tax due by the specified bracket adjustment amount.

Pass-through entity-level tax: The enacted law also amends the pass-through entity level tax so the rate reflects the income tax rate reductions. The pass-through entity-level tax rate will be equal to the top marginal personal income tax rate.

Corporate income tax rates

Tax year 2023: For tax year 2023, the law reduces the top corporate income tax rate from 5.9 to 5.7%.

Tax year 2024: If funds are transferred from the Catastrophic Reserve Fund for any reason between July 1, 2022, and Jan. 1, 2024, the income tax rates for tax year 2023 will continue to apply. If such a transfer does not occur, the top rate for tax year 2024 will be reduced from 5.7 to 5.5%.

Tax year 2025: If funds are transferred from the Catastrophic Reserve Fund for any reason between Jan. 1 and Dec. 31, 2024, the planned reduction for 2025 will not take effect. If such a transfer does not occur, the top rate for tax year 2025 and beyond will be reduced from 5.5 to 5.3%.

Annual standard deduction increases

Effective for tax years beginning on or after Jan. 1, 2022, the standard deduction amount is required to be increased annually by the cost-of-living adjustment for the current calendar year, rounded to the nearest $10. The cost-of-living adjustment for a calendar year is the percentage, if any, by which the consumer price index for the current calendar year exceeds the consumer price index for the preceding calendar year, not to exceed 3%.

Credit for timely filed returns

Also effective for tax years beginning on or after Jan. 1, 2022, a nonrefundable personal income tax credit is available for taxpayers below the income threshold who timely file a tax return. Taxpayers with net income up to $23,600 will receive a $60 credit against their income tax due, with the credit reduced by $5 for every $100 of additional net income up to $24,700.

Exclusion for Coronavirus Food Assistance Program 2 payments

Effective Dec. 9, 2021, the law adds the Coronavirus Food Assistance Program 2, and any successor programs, to the list of COVID-19 relief programs that are excluded from gross income.

Act 1 (H.B. 1001) and Act 2 (S.B. 1), Laws 2021, Second Extraordinary Session, effective as noted.

Colorado

Corporate income tax: Guidance issued on Sec. 303(8)(b) entities

The Colorado Department of Revenue has issued guidance on the requirement for certain business entities incorporated in a foreign jurisdiction for the purposes of tax avoidance (Sec. 303(8)(b) entities) to be included in a combined state income tax return.

Requirement to include certain foreign corporations in combined report

For tax years beginning on or after Jan. 1, 2022, a taxpayer must include in the combined group any member of an affiliated group of C corporations that is incorporated in a foreign jurisdiction for the purpose of tax avoidance. A C corporation is presumptively incorporated in a foreign jurisdiction for the purpose of tax avoidance if it’s incorporated in a listed jurisdiction.

A taxpayer may rebut the presumption if it proves to the department that its incorporation in a listed jurisdiction has economic substance pursuant to IRC Sec. 7701(o).

Determining income of foreign corporations

The guidance also provides information on determining the net income of C corporations incorporated outside of the United States, including profit and loss statement requirements, in addition to discussing subtractions from federal taxable income for Subpart F income and global intangible low-taxed income (GILTI).

Income Tax Topics: Section 303(8)(b) Entities, Colorado Department of Revenue, December 2021.

Corporate, personal income taxes: Enterprise Zone Contribution Credit guidance updated

The Colorado Department of Revenue has updated its guidance on the Enterprise Zone Contribution Credit against corporate and personal income taxes. The credit is available to taxpayers for contributions made during the tax year either to an enterprise zone administrator or to a certified program, project, or organization for the purpose of implementing the economic development plan for the enterprise zone. The credit is generally equal to 25% of the qualifying contribution, subject to limitations. The guidelines provide general information about qualifying and nonqualifying contributions, credit calculations and limitations, carryforward, and effect of the credit on federal tax.

Income Tax Topics: Enterprise Zone Contribution Credit, Colorado Department of Revenue, December 2021.

Illinois

Corporate NOL carryforward period extended

Illinois extended the carryforward period for corporate income tax net operating loss (NOL) deductions from 12 to 20 years.

When does the new carryforward period apply?

The new carryforward period applies to:

  • NOLs for tax years ending on or after Dec. 31, 2021.
  • Unused NOLs from tax years ending before 2021 if the statute of limitations period is open.

Are there limits on NOL carryforwards?

Illinois limits the NOL carryforward deduction to $100,000 tax years ending on or after Dec. 31, 2021, and before Dec. 31, 2024. P.A. 102-669 (H.B. 1769), Laws 2021, effective Nov. 16, 2021, and as noted.

Sales and use tax: Property transferred incident to service subject to tax

For sales and use tax purposes, the Illinois Department of Revenue (department) issued a letter ruling discussing the taxability of tangible personal property transferred incident to service but price was not separately stated. In this matter, the taxpayer sold hardware and corresponding software subscriptions. Hardware products included internet connected sensors, cameras, GPS fleet trackers, temperature monitors, driver ID tokens, cables, etc.

Upon review, the department determined that the taxpayer was acting as a serviceman when it provided its cloud-based services and sold the subscriptions in a bundled offering inclusive of the necessary hardware, cables, and accessories. The department also concluded that:

  • The computer software and firmware transferred to the customer incident to the service were tangible personal property and subject to tax because they did not meet the license requirements, were not custom to any particular customer, and were not separately stated.
  • The charges for the warranty were part of the gross receipts and were subject to tax since the charges were included in the subscription price.
  • As the taxpayer did not wish to separately state the selling price of the property transferred incident to the service, it must use 50% of the entire bill as the tax base or, if the taxpayer is a de minimis serviceman, pay service occupation tax based upon the cost price of the property transferred.
  • The taxpayer would not be required to determine whether it is a de minimis serviceman as he can still opt to pay service occupation tax on the selling price of the tangible personal property transferred to service customers.
  • The taxpayer would be liable for retailers’ occupation tax and any customers liable for use tax on sales of replacement hardware, cables, and accessories that are sold separately as needed at list price.

Private Letter Ruling, ST 21-0006-PLR, Illinois Department of Revenue, Sept. 9, 2021, released November 2021.

Indiana

Corporate income tax practice and procedure: Partnership audit guidance released

Indiana provides guidance to income taxpayers regarding the new regime governing partnership audits and amended returns. The new regime is effective for partnership audits and amended returns occurring on or after June 30, 2021, and federal partnership audits conducted for 2018 and later.

Indiana-initiated changes

If Indiana initiates a change to a partnership attribute (income, deduction, credit, and so forth), Indiana will provide the partnership with a report of proposed partnership adjustments (ROPPA). A partnership has 60 days from the issuance of the ROPPA to protest the ROPPA. If the outcome of an appeal or settlement from a ROPPA modifies the original ROPPA, the department has 180 days to issue a report of final partnership adjustments (ROFPA) incorporating such modifications.

When a partnership receives a ROFPA or when a ROPPA becomes final, the partnership has 90 days to issue a partner-level adjustments report (PLAR) to each of its direct partners and to Indiana. When a partner receives a PLAR, the next steps depend on whether or not the partner is a pass-through entity. If the partner is a pass-through entity, the partner has 30 days to issue amended K-1s to each owner or beneficiary. This 30-day period is repeated for each level of pass-through entity.

Amended returns

If a partnership determines that it did not report an attribute correctly for one or more partners, the partnership must file an amended IT-65 return to report the corrected adjustments. Further, the partnership must supply its partners with amended K-1s reporting the adjustments along with any additional information necessary for the partners to process their adjustments.

For purposes of direct and indirect partners, the same general timetables apply. However, instead of the date being 90 days from the date of the ROFPA, the timetable for direct and indirect partners begins immediately with the partnership’s filing of an amended return. Thus, pass-through entities have 30 days from the receipt of an amended K-1 from an upstream partnership to file their own amended returns, provide amended K-1s reporting the adjustments, and remit any composite tax that may be due from them, while a partner has 90 days from receipt of the last K-1 to file an amended return and remit any tax that is due from them.

Adjustments from federal changes

For Indiana purposes, a partnership is generally required to report changes resulting from a federal partnership-level audit by filing an amended partnership return, filing an amended composite schedule, remitting any composite tax due, and providing partners with amended K-1s in the discussed above. The amended partnership return resulting from federal changes must be filed with the department within 180 days of the partnership’s receipt of federal audit changes.

Election to be taxed at the partnership level

A partnership may elect to be taxed on partnership adjustments at the partnership level as opposed to having its direct or indirect partners. A partnership must file an election on or before:

  • 60 days after a ROPPA, if the election arises from an Indiana adjustment.
  • At the time of filing, if the filing is the result of an amended return other than the result of federal adjustments.
  • Within 180 days of the final federal determination date, if the election is the result of final federal adjustments.
  • If a partnership receives adjustments as a result of adjustments from another partnership, the date by which the partnership is otherwise required to file an amended return reporting those adjustments.

The election is required to be made on a year-by-year basis and can’t be made on an originally filed return.

Partnership representatives

For any partnership that is the subject of a federal or state audit, the partnership must designate a partnership representative to act on behalf of the partnership. If the partnership has designated a federal partnership representative, that entity and any designated individual(s) are presumed to be the state partnership representative(s) unless the partnership designates otherwise.

For a state partnership representative, the partnership representative must meet each of the following:

  • The partnership representative has a U.S. taxpayer identification number.
  • The partnership representative has a U.S. mailing address and telephone number with a U.S.  area code.
  • The partnership representative must be available to meet in person with Indiana at any reasonable time and place, including administrative hearings, and must provide or make available any books or records of the partnership upon request.
  • If the partnership representative is an entity, the partnership must designate one or more individuals from the entity to act on behalf of the partnership.

Failure to provide timely reports or statements

If any entity required to provide amended statements or PLARs does not provide the amended statements or PLARs in a timely manner, the entity is subject to tax at the entity level.

Other information

The bulletin also provides information on:

  • The tax rate applied for particular periods
  • Extensions
  • Refunds
  • Statutes of limitations

Information Bulletin #72A, Indiana Department of Revenue, Dec. 14, 2021.

Massachusetts

Multiple taxes: New electronic filing requirements discussed

Massachusetts issued a notice stating that all sales and use tax, meals tax, and sales on service tax filers will be required to submit returns and make payments through MassTaxConnect for tax periods beginning on or after Jan. 1, 2022, including any past-due returns and payments for prior periods. Therefore, current paper filers are advised to register to use MassTaxConnect at the earliest.

Additionally, taxpayers filing partnership income tax, corporation excise, financial institution excise and urban redevelopment excise, regardless of income or number of partners in a partnership, will be required to file returns electronically for periods ending on or after Dec. 31, 2021. Payments must also be submitted electronically.

For fiduciary taxpayers, all payments of $2,500 or more must be made electronically after Dec. 31, 2021. In addition, tax preparers preparing more than 10 fiduciary returns annually must submit them electronically beginning with tax periods ending on or after Dec. 31, 2021.

Release, Massachusetts Department of Revenue, Nov. 18, 2021.

Corporate, personal income taxes: Elective pass-through entity tax guidance issued

Massachusetts issued guidance on the new elective pass-through entity excise tax that applies to:

  • S corporations.
  • Partnerships, excluding publicly traded partnerships.
  • Limited liability companies (LLCs), excluding single-member LLCs.
  • Certain trusts.

The Massachusetts legislature adopted the elective tax in response to the $10,000 cap on the federal state and local tax (SALT) deduction.

The guidance includes frequently asked questions that discuss:

  • Election Form 63D-ELT and the election deadline.
  • Electronic filing and payment requirements.
  • Determining and reporting tax liability.
  • Estimated tax payment requirements and deadlines.
  • Limitations on the use of capital losses.
  • Tax credits for pass-through entity members.

Elective Pass-Through Entity Tax Guidance and FAQs, Massachusetts Department of Revenue, Nov. 19, 2021.

Michigan

Corporate income tax: Disallowance of credit did not amount to tax deficiency

The Michigan Court of Appeals found the Department of Treasury’s (department’s) disallowance of an overpayment credit did not result in a corporate income tax deficiency.

In this matter, the department audited the tax returns of a corporation (taxpayer), for tax years 2008 through 2010 and eventually finished the audit in 2017. Subsequently, the department issued a final audit determination that reflected a total net credit to the taxpayer along with a check. Later, the taxpayer cashed the check; however, that check reflected and included a prior-year overpayment credit of $711,415 that the company had claimed in its 2011 return. The department recognized that the taxpayer received the benefit of the credit in its 2011 return, and also received the benefit of the same credit in the final audit determination check that it had received and cashed in 2017, and formally adjusted the taxpayer’s 2011 return.

The department sent the taxpayer a formal notice in February 2018 that the department was disallowing the overpayment credit on the 2011 return. However, the disallowance did not result in the taxpayer having to pay additional monies related to the 2011 return; rather, the disallowance resulted in a much lower overpayment credit that could be carried forward. Subsequently, the taxpayer challenged the department’s adjustment of the 2011 return arguing that the department’s actions violated the four-year statute of limitations involving an assessed “deficiency” under the applicable statute. The referee disagreed, as did the department, and the taxpayer filed an appeal.

Upon review, it was noted that the reduction of a credit that does not result in a tax deficit owed by the taxpayer can’t be a “deficiency” under the applicable law. Moreover, it was noted that if a credit reduction results in a lower credit to carry forward to the next year, there is no deficiency to be paid by the taxpayer. Since the disallowance did not result in additional tax being owed, the taxpayer did not have to cut a check to pay a tax deficit. Thus, the taxpayer erroneously characterized the deduction at issue as an assessment of a “deficiency,” as whether or not there is a tax deficit to pay is merely a potential secondary effect of the disallowance of the credit.

Accordingly, the taxpayer’s appeal was denied.

Mclane Company, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 354973, Oct. 14, 2021.

Sales and use tax: Remote seller guidance updated

The Michigan Department of Treasury has updated its guidance on the sales and use tax nexus standards for remote sellers. Once a remote seller has met one of the economic nexus thresholds (i.e., 200 sales transactions or more than $100,000 in sales), it must remit tax until an entire calendar year has passed in which it does not meet either threshold. Furthermore, the economic nexus standard applies to marketplace facilitators and marketplace seller.

Revenue Administrative Bulletin 2021-21, Michigan Department of Treasury, Dec. 21, 2021.

North Carolina

Corporate, personal income taxes: Elective pass-through entity tax enacted

North Carolina enacted an elective pass-through entity tax to reduce the impact of the federal state and local tax deduction cap (SALT cap). S corporations and partnerships can elect to pay tax on North Carolina income, effective for tax years beginning after 2021.

The elective tax does not apply to publicly traded partnerships. It also does not apply to partnerships that have at any time during the tax year a partner who is not:

  • An individual
  • An estate
  • A trust described under IRC Sec. 1361(c)(2)
  • An exempt organization that can qualify as an S corporation shareholder

Election

A partnership or S corporation can make the election on its annual North Carolina return. It can’t change the election once it is made.

Tax rate and taxable income

S corporations and partnerships pay the tax at the same rate as North Carolina personal income taxpayers. Taxable income equals:

  • Each shareholder’s pro rata share of the S corporation’s income or loss subject to North Carolina income tax adjustments.
  • Each partner’s distributive share of the partnership’s income subject to North Carolina income tax adjustments.

The tax calculation can’t include:

  • The S corporation’s separately stated items described under IRC Sec. 1366.
  • The partnership’s separately stated items described under IRC Sec. 702.

For nonresident shareholders or partners, the tax applies to income or loss from North Carolina sources.

Credits

An electing partnership or S corporation that qualifies for North Carolina credits can apply the credits against each shareholder’s or partner’s tax liability. It can’t pass through any credits to its partners or shareholders, including unused credits, after it makes an election to pay the tax.

North Carolina provides a taxed S corporation or partnership a credit for taxes paid on its income to another state or country. The credit can’t be claimed by:

  • Shareholders of the taxed S corporation.
  • Partners of the taxed partnership.
  • Fiduciaries and beneficiaries of estates and trusts who are shareholders or partners of the taxed S corporation or partnership.

Shareholder or partner adjustments

A North Carolina taxpayer who is a shareholder or partner can deduct the taxpayer’s share of income included in the electing S corporation’s or partnership’s taxable income. There is a corresponding addback requirement for a North Carolina taxpayer’s share of loss from a taxed S corporation or partnership.

The tax paid by a partnership or S corporation does not change the basis of the ownership interests of its partners or shareholders.

Payments and refunds

Tax payments are due at the same time as the S corporation’s or partnership’s North Carolina return. If there is an overpayment of tax, only the S corporation or partnership can request a refund.

Collection proceedings

North Carolina can begin collection proceedings against the electing S corporation or partnership if it fails to pay the tax. It must issue a collection notice to the S corporation or partnership for the amount of the unpaid tax.

If the tax is not paid within 60 days after the mailing date of the notice, the shareholders or partners can’t claim a deduction for their share of the S corporation’s or partnership’s taxable income. North Carolina can then send a notice of proposed assessment for the unpaid tax to the shareholders or partners.

Ch. 180 (S.B. 105), Laws 2021, effective July 1, 2021, and as noted.

Corporate, personal income taxes: Corporate income tax phaseout, other major tax changes

North Carolina enacted budget legislation with major income tax changes that include:

  • Phasing out the corporate income tax.
  • Reducing the personal income tax rate.
  • Updating the IRC conformity tie-in date for computing income tax liability from May 1, 2020 to April 1, 2021.
  • Increasing the standard and child deduction for personal income taxpayers.
  • Simplifying the corporation franchise tax.
  • Creating, extending, and clarifying several income tax adjustments.

Corporate income tax phaseout

North Carolina is reducing the corporate income tax rate from 2.5% to:

  • 2.25% for the 2025 tax year.
  • 2% for the 2026 and 2027 tax years.
  • 1% for the 2028 and 2029 tax years.
  • 0% for tax years after 2029.

Personal income tax rate and standard deduction

North Carolina personal income tax rates decrease from 5.25% to:

  • 4.99% for the 2022 tax year.
  • 4.75% for the 2023 tax year.
  • 4.6% for the 2024 tax year.
  • 4.5% for the 2025 tax year.
  • 4.25% for the 2026 tax year.
  • 3.99% for tax years after 2026.

Effective for the tax years beginning after 2021, the standard deduction increases from:

  • $21,500 to $25,500 for taxpayers with a filing status of married filing jointly or surviving spouse.
  • $16,125 to $19,125 for taxpayers with a filing status of head of household.
  • $10,750 to $12,750 for taxpayers with a filing status of single or married filing separately.

Child deduction

Individuals who can claim a federal child tax credit can claim a North Carolina deduction from federal adjusted gross income (AGI) for each dependent child. The child deduction ranges from $500 to $2,500 based on a taxpayer’s North Carolina AGI and filing status.

Effective for tax years beginning after 2021, the deduction range is $500 to $3,000. Taxpayers are not eligible for the deduction if the taxpayer’s North Carolina AGI is more than:

  • $140,000 for taxpayers with a filing status of married filing jointly or surviving spouse.
  • $105,000 for taxpayers with a filing status of head of household.
  • $70,000 for taxpayers with a filing status of single or married filing separately.

Franchise tax

Taxpayers currently compute the North Carolina corporation franchise tax based on the larger of:

  • Net worth.
  • Actual investment in tangible property in North Carolina.
  • 55% of the appraised value of North Carolina tangible property.

Effective for tax years beginning after 2022, North Carolina eliminates the alternate property tax bases for computing the tax.

Federal expense deduction addback

Effective for tax years beginning after 2022, North Carolina corporate and personal income taxpayers must addback federal expense deductions related to income entirely excluded or exempted from state tax.

Military pension income deduction

Effective for tax years beginning on or after Jan. 1, 2021, North Carolina personal income taxpayers can deduct retirement pay from the U.S. military if the taxpayer:

  • Served 20 or more years.
  • Retired due to a physical disability.

Beneficiaries of a retired member are eligible for the deduction. The deduction does not apply to military severance pay.

Home loan debt forgiveness addback

North Carolina requires a personal income tax addback through the 2025 tax year if a taxpayer claims a federal exclusion under IRC Sec. 108(h) for income from the forgiveness of home loan debt.

Student loan debt addback

Effective for tax years through 2025, North Carolina personal income taxpayers must addback amounts excluded from federal gross income for:

  • Student loan payments by an employer.
  • Student loan debt forgiveness.

Business meal expense addback

IRC Sec. 274 limits the federal deduction for most business meal expenses to 50% of those expenses for tax years after 2017. There is an exception for business meals provided by restaurants in 2021 and 2022. Taxpayers can deduct 100% of those expenses.

Effective for the 2021 and 2022 tax years, North Carolina personal income taxpayers must addback the amount that exceeds the 50% limit.

Unemployment compensation addback

Federal legislation added an exclusion from federal gross income for 2020 unemployment compensation. Effective for the 2020 tax year, North Carolina personal income taxpayers must addback the amount excluded from the taxpayer’s federal gross income.

NOL addback and deduction

Taxpayers computing North Carolina personal income tax liability currently must addback any federal NOL carryforward if:

  • The taxpayer does not absorb the federal NOL deduction for the current tax year.
  • The taxpayer will carry forward the federal NOL to a later tax year.

Effective for tax years beginning after 2021, the addback applies to any federal NOL deduction.

North Carolina also allows a state NOL deduction for personal income taxpayers beginning after the 2021 tax year. The carryforward period for NOLs is 15 tax years.

A taxpayer determines the NOL deduction based on the IRC with certain modifications. The amount of the NOL can’t:

  • Include excess capital or nonbusiness losses.
  • Exclude capital gains under IRC Sec. 1202.

A taxpayer claiming the NOL deduction can’t claim:

  • The North Carolina child deduction.
  • A qualified pass-through deduction under IRC Sec. 199A.

The deduction can include unabsorbed federal NOL carryforward from tax years before 2022 if:

  • IRC Sec. 172 as enacted on April 1, 2021, would allow the NOLs for that tax year.
  • North Carolina addback requirements do not apply to the NOLs.
  • The NOL is from the previous 15 tax years.

Charitable contribution and mortgage interest deductions

North Carolina allows an itemized deduction for IRC Sec. 170 charitable contributions. Federal legislation temporarily suspended the 60% federal limit on cash contributions for the 2020 and 2021 tax years.

The 60% deduction limit continues to apply to personal income taxpayers who claim North Carolina itemized deductions for the 2021 tax year. Taxpayers who itemize can carryforward charitable contributions that exceed the limit for tax years beginning on or after Jan. 1, 2021.

North Carolina also allows an itemized deduction for home mortgage interest under IRC Sec. 163(h). But it does not allow the deduction to include mortgage insurance premiums.

Business interest expense addback and deduction

IRC Sec. 163(j) limits the federal deduction for business interest expenses. Federal legislation increased the limit from 30 to 50% of a taxpayer’s adjusted taxable income (ATI) for tax years 2019 and 2020.

North Carolina required an addback by corporate and personal income taxpayers for amounts that exceeded the 30% limit. The budget legislation clarifies that the addback did not apply to amounts subject to another addback requirement. Effective beginning with the 2021 tax year, taxpayers who made the addition adjustment can deduct 20% of the addback amount over five years.

Related member interest expense deduction

Taxpayers computing North Carolina corporate income tax liability can deduct interest payments to related members from federal taxable income. North Carolina limits the deduction to the taxpayer’s proportionate share of interest paid to unrelated parties. The limitation does not apply to interest payments to related members disallowed under IRC Sec. 163(j). The exception is effective beginning Nov. 18, 2021, and applies retroactively to tax years beginning after 2017.

Income tax withholding changes

Effective beginning Nov. 18, 2021, North Carolina will no longer require a withholding reconciliation return within 30 days from employers that:

  • Terminate a business.
  • Permanently cease to pay wages.

Instead, the withholding reconciliation return is due by:

  • The last day of the month after end of the calendar quarter in which the employer terminates its business.
  • January 31 of the following year.

North Carolina will also require the assessment of estimated withholding tax against withholding agents that:

  • Fail to file a return and pay the withholding tax.
  • File a grossly inaccurate, false, or fraudulent return.

Intercompany transaction information requests

North Carolina can redetermine the net income of a corporation if intercompany transactions between affiliated group members lack economic substance or are not at fair market value. Effective beginning Nov. 18, 2021, it can:

  • Request financial or tax documentation to determine appropriate adjustments.
  • Make any allowable adjustments if the taxpayer does not timely provide the information.

Extra grant program deduction

North Carolina allows a personal income tax deduction for amounts received under the Extra Credit Grant Program. The budget extends the sunset date for the deduction to Jan. 1, 2022.

Other changes

Effective for tax years beginning after 2021, North Carolina limits insurance premiums tax on bail bonds to the amounts paid to the bond insurer.

Ch. 180 (S.B. 105), Laws 2021, effective July 1, 2021 and as noted.

Ohio

Corporate income, sales and use taxes: Tax amnesty bill passes house

The Ohio House has passed a tax amnesty bill that would allow taxpayers to pay qualifying delinquent taxes, including sales and use tax, corporate income tax, among others, and receive a waiver for interest and penalties. Qualifying delinquent taxes would be those due as of the effective date of the legislation. The program would begin July 1, 2022, and conclude on Aug. 31, 2022.

H.B. 45, as passed by the Ohio House of Representatives on Dec. 8, 2021.

Sales and use tax: Owner personally liable for LLC’s unremitted sales tax

The co-owner of a limited liability company (LLC) was personally responsible for the LLC’s Ohio sales and use tax liability. Although the taxpayer asserted that he was not the proper responsible party, it was noted that under the Ohio law, if any corporation fails to file or pay taxes, its employees who are responsible for the execution of fiscal responsibilities are personally liable for the failure.

In this matter, the documentary evidence established that the taxpayer was responsible for executing the LLC’s overall fiscal responsibilities and that the taxpayer's partner’s liability did not absolve taxpayer from his liability. Lastly, it was noted that, under the applicable law, the holder of a liquor license, for excise tax purposes, is responsible for the collection of tax, and the bar’s vendor’s license application and liquor permit listed the taxpayer as the owner and CEO.

Accordingly, the taxpayer’s appeal was denied.

Dunn v. Tax Commissioner of Ohio, Ohio Board of Tax Appeals, No. 2019-2999, Dec. 7, 2021.

Texas

Corporate income tax: No tax due threshold and compensation deduction limit adjusted

The no tax due threshold for Texas franchise tax is $1,230,000 for 2022 and 2023. The threshold was $1,180,000 for 2020 and 2021.

The compensation deduction limit is $400,000 for 2022 and 2023. The prior limit was $390,000 for 2020 and 2021.

Tax Rates, Thresholds and Deduction Limits, Texas Comptroller of Public Accounts, December 2021.

Wisconsin

Income tax: End of COVID-19 nexus relief for telecommuting employees announced

Wisconsin issued a withholding tax update discussing how the state previously relaxed its enforcement of nexus provisions on an out-of-state business whose only Wisconsin activity was having an employee working temporarily from home during the COVID-19 national emergency.

The update notes that this nexus relief no applies beginning Jan. 1, 2022. The update also addresses a number of other topics, including: Wisconsin and federal differences for 2021 under the dependent care assistance program; an electronic filing mandate for Form PW-2; employers using a payroll service provider; the combined federal/state filing program; and Form 1099-NEC.

Withholding Tax Update 2021-1, Wisconsin Department of Revenue, November 2021.

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