Corporate Tax Rates

Incorporation Fee A fee of $125 is payable to the Office of the Secretary of State upon filing articles of incorporation; a fee of $250 for application for certificate of authority. Various other fees are assessed when documents are filed with the Office of the Secretary of State. In addition, an annual report with a $20 filing fee must be filed with the North Carolina Department of Revenue by the due date of the corporation's income and franchise tax return. Franchise Tax A franchise fee is levied on business corporations (including federal S Corporation status) at the rate of $1.50 per $1,000 of the largest of three alternate bases. a) The amount of capital stock, surplus and undivided profits apportionable to the State. b) 55% of appraised value of property in the State subject to local taxation c) Book value of real and tangible personal property in the State less any debt outstanding which was created to acquire or improve real property in the State. Book value may be computed by use of the same depreciation methods as are permitted for federal income tax purposes. Only corporations operating in one or more states are permitted to apportion "capital" as described in (a) above. The formula used by manufacturing and/or merchandising corporations to determine the amount of "capital" apportionable to North Carolina is the total of the following ratios divided by 4: a) The ratio of payrolls in the State to total payrolls b) The ratio of the value of tangible property used in the State to the value of all tangible property used, wherever located (Property ratio is computed by the fact that owned property is valued at original cost and leased property is valued at eight times the annual rental rate.) c) Two times the ratio of sales of merchandise shipped to North Carolina customers to total sales Franchise tax and income tax are reported on the same return. Holding companies (80% of gross income is from subsidiaries) are separately taxed and the tax may not exceed $75,000 when it is computed on the capital stock, surplus, and undivided profits base. Income Tax An income tax is levied at the rate of 6.9% on the portion of net income allocable to the State. Corporations "doing business" in at least one additional state apportion business income to North Carolina through use of the apportionment formula described above for franchise tax purposes. Non-business income is directly allocated in accordance with applicable revenue statutes. Corporations not "doing business" in at least one state other than North Carolina are not permitted to apportion income. Year: 1996 1997 1998 1999 2000 2001 Effective Rate: 7.75% 7.5% 7.25% 7.0% 6.9% 6.9% In determining net income, North Carolina allows in addition to operating expenses, depreciation, etc. a deduction for all taxes paid or accrued in the year, except taxes on income; contributions not to exceed 5% of net income; income from tax exempt securities; payments to employee pensions or profit-sharing trusts; current year losses; and net economic losses (as defined in the law) of any or all of the 15 proceeding years. North Carolina accepts the same depreciation as is permitted on federal tax returns. Corporations are not taxed on divided income from a subsidiary corporation in which the parent owns more than 50% of the voting stocks. A corporation may also deduct certain dividends received from a regulated investment company or a real estate investment trust and dividends treated as received from sources outside the United States to the extent included in federal taxable income, net of related expenses. Income Tax Credits Quarterly estimated income tax payments are required if a corporation expects to have an income tax liability of $500 or more. Tax credits against the income tax are allowed to corporations for certain qualifying energy-saving equipment and conservation tillage equipment, real property donations for public access and land conservation purposes, gleaned crops, and rehabilitation of historic structures. An income tax credit is also permitted for a portion of the increase in wharfage, handling, and throughput charges paid by a cargo owner on exported or imported processed cargo, including forest products, loaded onto or unloaded from an ocean carrier at North Carolina ports at Wilmington or Morehead City. This credit is in effect for taxable years ending on or before February 28, 2001. Tax Incentives for New and Expanding Businesses N.C. legislation enacted during 1996 provided four new tax credits and expanded the previous credit for new job creation to include all 100 counties. In succeeding years, two new tax credits have been added and all of the credits have been expanded. The credits may be taken against corporate income tax, individual income tax, franchise tax, or gross premiums tax. For each credit, taxpayers must specify to which tax the credit will be applied, and that election is binding until the credit is exhausted or expires. The sum of the credits cannot exceed 50% of the tax against which they are claimed, reduced by any other credits applied against that tax, in any tax year. Any unused portion of a credit can be carried forward for periods of 5 to 20 years, depending on type of credit. A summary of the tax credits are below: Business Property Tax Credit provides a credit equal to 4.5% of tangible personal property capitalized under the tax code, including leased personal property, up to a maximum single-year credit of $4,500. The credit cannot be based on property for which the taxpayer is claiming an investment tax credit. The credit is taken in equal installments over 5 years beginning in the taxable year the property is placed into service. To claim any of the tax credits listed below, a taxpayer must file an application with the Department of Commerce and pay a $500 filing fee that applies only to credits claimed in a Tier 3, 4, or 5 area (no fees applies to an application for a credit in a Tier 1 or 2 area or in a development zone). A separate application and fee is required for each credit for each county, with a maximum fee of $1,500 per taxpayer per year. Beginning January 1, 2002, the application will no longer be required and the fees will be paid to the Department of Revenue. Applicants must be engaged in one of the following types of business, with definitions tied to the North American Industry Classification Systems (NAICS) published by the federal Office of Management and Budget. Manufacturing Warehousing Wholesale trade Data processing, including computer systems design and related services Software publishers, software reproducing, and on-line information services Central administrative office or aircraft facility that creates at least 40 new jobs Customer service center in Tier 1 or 2 (or 3 beginning January 1, 2002) Electronic mail order house that creates at least 250 new jobs in Tier 1 or 2 (or 3 beginning January 1, 2002) s Air courier services s Computer services (January 1, 2002) Applicants must also pay at least 100% of the average county wage in enterprise Tier 1 areas, and at least 110% of the average county wage in all other enterprise tier areas. The following three conditions for eligibility took effect January 1, 2000: 1) health insurance for employees; 2) a good environmental record; and 3) a good occupational safety and health (OSHA) record. Except for the credit for research and development, the amount of the credit depends on the enterprise factor tier in which the new or expanded business is located. The North Carolina Department of Commerce ranks the 100 counties annually, and assigns an enterprise factor to each county based on a statutory formula using the unemployment rate, population growth, and per capita personal income. An enterprise Tier 1 area is a county whose enterprise factor is one of the 10 highest in the State; a Tier 2 county has one of the next 15 highest enterprise factors in the State; a Tier 3 county has one of the next 25 highest in the State; a Tier 4 county has one of the next 25 highest in the State; and Tier 5 county is any county that is not in a lower-numbered enterprise tier. Beginning January 1, 2000, counties which meet the requirements for low population or percentage of population under the federal poverty level are given a lower tier number. 2002 Research Triangle Region's Tier Designations Tier 1 equals Vance and Warren County. Tier 3 equals Person County. Tier 4 equals Granville, Harnett and Lee Counties. Tier 5 equals Chatham, Durham, Franklin, Johnston, Moore, Orange and Wake Counties. Other Tax Incentives for New and Expanded Companies Investment Tax Credit provides a credit of 7% of the excess value of the cost, of qualifying machinery and equipment placed in service in North Carolina by new and expanding businesses, including leased machinery and equipment. The credit is taken in equal installments over seven years after the year the machinery or equipment is first placed in service. The enterprise factor of the county in which the machinery or equipment are placed in service determines the threshold to be used in computing the excess value. Thresholds are as follows: Tier 1: $0, Tier 2: $100,000, Tier 3: $200,000, Tier 4: $500,000, Tier 5: $1,000,000. Job Creation Tax Credit provides a credit for each new job created by an eligible employer with at least five full-time employees. The credit is taken in equal installments over the four years following the year in which the position is filled. The enterprise factor of the area in which the job is created determines the amount of tax credit per job, as follows: Tier 1: $12,500, Tier 2: $4,000, Tier 3: $3,000, Tier 4: $1,000, Tier 5: $500. Worker Training Tax Credits provides a credit for wages paid during training up to $500 ($1,000 for taxpayers located in Tier 1) for each employee trained (but not classified as exempt under the Fair Labor Standards Act) to taxpayers eligible for the job creation or investment tax credit, and which provide training for five or more employees. Wage paid for on-the-job training are excluded. Research and Development Tax Credit provides a state tax credit equal to 5% of the state's apportioned share of the expenditures for R&D to taxpayers that qualify for the Federal Research and Experimental Tax Credit. An alternative credit is equal to 25% of the state's apportioned share of the federal alternative credit. If the federal credit expires, the State credits are calculated as if the federal credits had not expired. Central Office or Aircraft Facility Property Tax Credit provides a credit of 7% of the eligible investment in real property (including leased real property) for use as a central office or aircraft facility, up to a maximum of $500,000. The credit is taken in equal installments over seven years following the taxable year in which the property is first used as a central office or aircraft facility. Credit for Substantial Investment in Other Property provides a credit of 30% of the eligible investment amount of an investment in real property in a Tier 1 or 2 area. To be eligible for this credit, the investment amount must be at least $10 million in real property and result in the creation of at least 200 new jobs. Enhanced tax credits exist for large investments and job created in development zones. A new technology commercialization tax credit is available for tax years beginning on or after January 1, 2000. The credit is for investment in new machinery and equipment that are directly related to production based on technology developed by and licensed for a research university. This credit can be divided between the taxes against which it is allowed and has a carry forward period of 20 years. Information about applying for tax credits can be obtained at the North Carolina Department of Commerce Finance Center. S Corporations S Corporations are not subject to the corporate income tax. Each shareholder's pro rata share of S Corporation income attributable to North Carolina is taxed under the individual income tax. A shareholder who is a resident of the State also takes into account his share of S Corporation income not attributable to North Carolina when computing his individual income tax. An S Corporation incorporated or doing business in this State is required to file an information return with the North Carolina Department of Revenue. The return should show the name, address, social security or federal identification number of each shareholder, and for each shareholder, income attributable and the amount of income not attributable to the State. An S Corporation is required to file an agreement with the North Carolina Department of Revenue for each nonresident shareholder whereby each nonresident shareholder agrees to file an income tax return, pay tax imposed by the State, and be subject to personal jurisdiction in the State for purposes of collecting unpaid taxes, penalties, interest, etc. However, an S Corporation may file a composite return and make composite payment of tax to the North Carolina Department of Revenue on behalf of some or all of its nonresident shareholders. Sales and Use Tax The General Assembly enacted legislation to temporarily increase the State rate of sales and use tax by ½%. The increase will be in effective October 16, 2001, and will expire June 30, 2003, at which counties will have the option of levying an additional ½% local tax. The local sales and use tax, currently 2%, applies to transactions subject to the state general rate and to food. The State exempts food from sales and use tax except for certain classifications. Dietary supplements, food sold from vending machines, and alcoholic beverages are always taxable. Candy, soft drinks, and prepared foods are exempt from State sales and use tax provided that they are eligible for purchase with food stamps under the Federal Food Stamp Program and sold for home consumption. Sales of electricity to manufacturers, farmers, and commercial laundries and dry cleaners for non-residential use are taxed at 2.83%; sales of electricity for all other purposes are taxed at a 3% state rate. Aircraft, boats, mobile classrooms, mobile offices, and railway cars are taxed at 3% with a $1,500 maximum tax on each aircraft, boat, mobile classroom, mobile office, or railway car. Beginning January 1, 2002, all sales and franchise taxes on telecommunications services will be replaced with a single 6% state sales tax. Prepaid telephone calling arrangements will be subject to the general state and local sales tax rates. A new 6% State sales and use tax on sales of spirituous liquor other then mixed beverages takes effect December 1, 2001. A new 5% State sales and use tax will be imposed on direct-to-home satellite service effective January 1, 2002. Purchases of the following items by manufacturers are taxable at a rate of 1%: coal, coke, and fuel oil used in manufacturing; manufacturing machinery and equipment; and parts and accessories to manufacturing machinery. "Accessories" include most supplies used in manufacturing process but not becoming a part of the manufactured product and also include pollution abatement equipment. Purchases of manufacturing machinery by contractors or subcontractors for use in performance of contracts to construct manufacturing facilities are also taxed at 1%. Raw materials, containers, labels, packaging and shipping materials and motor vehicles are exempt from sales and use tax. Special Provisions Pollution abatement and recycling equipment, OSHA-mandated equipment and equipment to reduce hazardous waste receives special treatment under the state's tax laws. Piped Natural Gas Tax Effective July 1, 1999, both the sales tax and franchise tax on piped natural gas were repealed and replaced with a piped natural gas tax. The tax rate is a declining block rate based on the number of therms of gas consumed in a month. The rate starts at 4.7¢ for the first 200 therms received and declines to 0.3¢ for the number of therms received in excess of 500,000. Highway Use Tax North Carolina levies a tax on the privilege of using its highways at the rate of 3% of the retail value of a motor vehicle. The tax cannot exceed $1,000 for Class A and Class B commercial motor vehicles (as defined by law). The $1,500 limit for other motor vehicles was repealed effective October 1, 2001. Tax is paid when the vehicle is purchased or titled in North Carolina. If the motor vehicle is purchased from an automobile dealer, "retail value" is sales price less any trade-in allowance. For casual sales, "retail value" is the value set in a schedule of values adopted by the Commissioner of Motor Vehicles, less any trade allowance. A retailer who is engaged in the business of leasing or renting motor vehicles, and who purchases a motor vehicle for business, can elect either to pay the use tax whenever he/she purchases the vehicle, or collect a tax on the gross receipts from the lease or rental of the vehicle. The rate to be applied on the gross receipts from long-term leases or rentals of the vehicle (at least 365 continuous days to the same person) is 3%. Gross receipts from short-term lease or rentals are taxed at a rate of 8%. Taxable gross receipts don't include the allowance for a motor vehicle taken in trade on the transaction. The tax can't exceed $1,000 if the vehicle is a Class A or Class B commercial vehicle continuously to the same person. Employment Security Tax Business entities are subject to a payroll tax under the North Carolina Employment Security Law if they have one or more employees for twenty different weeks during a calendar year or pay $1,500 in wages in any calendar quarter during a calendar year in this State. The tax is payable quarterly and applies to wage payments up to $14,700 per employee per year in 2001. Entities commencing business in North Carolina are subject to a tax rate of 1.2% during the first two years. The rate may be changed after the entity comes under experience rating. The minimum tax rate allowed in 2001, under the experience rating tables is 0% of taxable payrolls and the maximum tax rate, 5.7%. Local Taxes Some municipalities and counties levy a small annual license tax on manufacturing concerns and a reasonable license tax on certain retail and service businesses. The principal source of local revenue is a property tax on real estate and tangible personal property, including all machinery and equipment. The State does not levy a tax on such property. Sales & Use Tax All counties levy local sales and use tax at the rate of 2% on food and on transactions subject to the State 4.5% general rate, such as sales of building materials, office equipment, etc. General Property Tax Property Tax Assessment There is only one assessment in each county. The value as determined by the county assessor constitutes the base for all levies, including those of cities and towns on property located within the municipality. Property is to be assessed at 100% of appraised value. Although appraised value is to be "full value," this is a standard not always achieved for real property. This is largely because real property is required to be revalued every eight years, although counties may revalue earlier. Property appraised at full value at the time of appraisal may appreciate until appraised value is only 50-60% of true value by the end of the eight-year period. Actual ratios vary from county to county. New manufacturing machinery is generally appraised at cost and is depreciated annually until it reaches a minimum value, frequently 25% of cost. The annual depreciation varies but a common figure is 10% per year. Most counties have adopted the "trending" procedure to value machinery and equipment. Under this procedure the machinery is valued at replacement cost each year and then depreciated according to its age and expected life. Property taxes are based on assessment as of January 1, are due September 1, but may be paid at par as late as January 5 of the following year. Tax Rates The tax rates vary from county to county and from town to town. Since many manufacturing plants are outside the corporate limits of any town, such plants would pay only the county property tax. Merchandising concerns within municipalities are subject to both the city and the county levies. The weighted average county-wide tax rate for all 100 counties for 2000 - 2001 was 65.3¢ per $100 of appraised valuation. County-wide rates range as low as 43¢ per $100 of appraised valuation. There are few special district taxes apart from school levies and rural fire district levies. The latter are usually very low, 20¢ or less per $100. School district levies range from a few cents to 22¢ per $100. In much of the State, only county-wide rates apply outside of cities and towns. Property Tax Exemptions and Exclusions There are only a few exemptions and exclusions of interest to manufacturers and retail/wholesale establishments. They are described in the following paragraphs. Excluded from property taxation are manufacturers' inventories (raw materials, goods in process, finished goods, materials or supplies consumed in processing, crops, and other agricultural or horticultural products held for sale), contractors' inventories (goods held by contractors to be furnished in the course of building, installing, repairing, or improving real property), livestock, poultry, and feed used in production of livestock and poultry, and inventories of retail and wholesale merchants (tangible personal property held for sale and not manufactured, processed, or produced by the merchant). Computer software is exempt from taxation. This exemption does not apply to embedded software and capitalized software purchased or licensed from an unrelated entity. Property which has been imported from a foreign country and is stored at the terminal while awaiting further shipment is exempt for the first year of storage. "Bill and hold" goods manufactured in North Carolina and held by the manufacturer for shipment to a nonresident customer are exempt. Motor vehicle chassis belonging to nonresidents which enter the State temporarily for the purpose of having a body mounted theron are exempt from taxation. Nuclear materials held for the purpose of, or in the process of, manufacture or processing, or held by the manufacturer for delivery are exempt from taxation. Improvements on brownfields properties are partially excluded from property taxation. The exclusion is for a five-year period beginning when the improvements are made and declines during the period of 90% of the appraised value for the first year to 10% for the fifth year. The improvements are fully taxable in the sixth and subsequent years after the improvements are made. Special Provisions Pollution Abatement Equipment Property used (or, if under construction, will be used) to reduce air or water pollution receives special treatment under the tax laws of North Carolina if the Board of Environmental Management or local air pollution control program certifies that the property complies with the requirements of the Board. Such real and tangible personal property is exempt from taxation under the property tax laws and is subject to the preferential 1% state sales tax rate as "accessory" to manufacturing machinery. Further, the cost may be excluded from the three alternate bases in computing the franchise tax and may be amortized over 60 months for corporation income tax purposes. Personal property used exclusively for the prevention or reduction of dust in textile plants is also exempt from local property taxes. Recycling Equipment Equipment or facilities installed for the purpose of recycling solid waste or resource recovery from solid waste receives the same treatment under the tax laws as that given to pollution abatement equipment described above. OSHA Equipment The cost of equipment and facilities mandated by the Occupational Safety and Health Act may be amortized over 60 months for income tax purposes. Equipment to Reduce Hazardous Waste Equipment and facilities acquired for the purpose of reducing the volume of hazardous waste generated may be amortized over a period of 60 months for income tax purposes. The cost of such equipment and facilities is excluded from the capital stock base in computing the franchise tax. Limited Liability Companies Limited liability companies (LLCs) are a hybrid combining characteristics of both S Corporation and partnerships, and are owned by members instead of shareholders or partners. Limited liability companies and their members are subject to income tax in the same manner and to the same extent as for federal income tax purposes. A LLC is subject to taxation as a partnership if it is classified as a partnership for federal income tax purposes or as a corporation if it is classified as a corporation for federal income tax purposes. However, a LLC classified as a corporation is not subject to franchise tax. In addition, LLCs must file with the Office of the Secretary of State. A fee of $125 is due when filing articles of organization; a fee of $250 for application for certificate of authority. An annual report with a $200 filing fee is also required. Source: North Carolina Department of Revenue, Tax Research Division 2002