Form Cd-401s - S Corporation Tax Return - 2014

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January 15, 2015
IMPACT OF THE FEDERAL TAX INCREASE PREVENTION ACT OF 2014 ON NORTH
CAROLINA’S CORPORATE AND INDIVDUAL INCOME TAX RETURNS
North Carolina’s corporate income tax law uses federal taxable income as the starting point in determining
North Carolina taxable income. North Carolina’s individual income tax law uses federal adjusted gross
income as the starting point in determining North Carolina taxable income. In both cases, the reference to
federal law is to the Internal Revenue Code (“Code”) as of a certain date. Currently, that reference is to the
Code as of December 31, 2013. Each year the General Assembly determines whether to update its reference
to the Code. Doing so would make recent amendments to the Code applicable for North Carolina income tax
purposes. In some cases, the General Assembly chooses not to follow (“decouple” from) certain
amendments to federal law.
On December 19, 2014, President Obama signed into law the Tax Increase Prevention Act of 2014
(“TIPA”). The Act extended several provisions in federal law that had sunset at the end of 2013. If the
General Assembly does not update the reference to the Code to December 19, 2014 or later, the extension of
those provisions will not apply for North Carolina income tax purposes.
The Revenue Laws Study Committee is charged with studying North Carolina’s revenue laws and making
recommendations with respect to those laws to the General Assembly. On January 13, 2015, the Revenue
Laws Study Committee adopted a recommendation to update the reference to the Code to January 1, 2015
but to decouple from specific provisions in TIPA. The recommended bill may be viewed here.
If the General Assembly enacts legislation to update the Code reference as recommended, North Carolina
will require additions on the corporate and individual income tax returns for (a) 85% of the amount deducted
as bonus depreciation on the federal return and (b) 85% of the difference between the amount deducted on
the federal return for Code section 179 expenses, using the federal dollar and federal investment limitations,
and the amount that would be deductible for Code section 179 expenses using the North Carolina dollar and
North Carolina investment limitations set out for 2014. For individual income tax returns, additions would
also be required for (a) the amount excluded from gross income for the discharge of qualified principal
residence indebtedness, (b) the amount deducted in arriving at adjusted gross income for qualified tuition and
related expenses, and (c) the amount excluded from gross income for a qualified charitable distribution from
an individual retirement plan by a person who has attained age 70 ½. In addition, an individual would also
be required to exclude amounts paid for mortgage insurance premiums from the deduction for qualified
residence interest if the taxpayer claims itemized deductions on the North Carolina return.
Any person filing a North Carolina income tax return whose 2014 federal taxable income or federal adjusted
gross income is impacted by the amendments to federal law included in TIPA should consider waiting to file
the 2014 North Carolina income tax return until the General Assembly takes action. A taxpayer who files
the 2014 income tax return before the General Assembly takes action may have to amend the return to reflect
the General Assembly’s action. The General Assembly is scheduled to convene on January 28, 2015. If the
General Assembly enacts legislation to update the Code reference, the Department will provide additional
guidance, including how to report any required additions on the 2014 returns.
Income Tax Division
January 15, 2015

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