North Carolina Lowers Corporate Income Tax Rate, Now The Lowest Top Corporate Rate In The United States - Corporate Tax

On July 28, 2015, North Carolina Governor Pat McCrory announced the state had met the necessary revenue target for the fiscal year ended June 30, 2015 to lower the corporate income tax rate from 5 percent to 4 percent effective for tax years beginning on or after January 1, 2016.¹ The rate reduction tied to the revenue goal was part of legislation passed in the 2013 legislative session.² In May 2015, North Carolina announced a significant forecasted surplus for the fiscal year after April collections, making this announcement somewhat anticlimactic.³

History

North Carolina undertook significant tax reform in 2013, lowering individual and corporate income tax rates, broadening the sales tax base, and limiting the ability of local jurisdictions to institute and apply local business privilege taxes/fees.⁴ Specifically, North Carolina lowered the corporate income tax rate from 6.9 percent to 6 percent effective for tax years beginning on or after January 1, 2014, and to 5 percent for tax years beginning on or after January 1, 2015.⁵ Additional reductions to 4 percent for 2016 tax years and 3 percent for 2017 tax years were provided in the legislation, but were tied to specific revenue goals for the fiscal years ending June 30, 2015 and 2016, respectively, reported by the North Carolina Comptroller.⁶ The law actually specifies that the rate "may" be reduced, rather than "shall" be reduced per the revenue goals set by the North Carolina legislature. In addition, the law specifies that the Secretary of the North Carolina Department of Revenue shall notify taxpayers of the rate decrease.⁷

Rate Reduction Implications and Commentary

Corporate taxpayers should consider the rate change when evaluating their North Carolina tax positions, including how they value deferred tax balances in their financial statements. The application date of the rate change has created some debate within the taxpayer community, particularly for public companies reporting the change for quarterly filings with the Securities and Exchange Commission. Accounting guidance instructs taxpayers to value their deferred balances at the rate at which they expect the deferred items to be taxed in the future.⁸ Further, taxpayers should develop a policy for contingent tax rate adjustments and apply it consistently.⁹ The May 2015 announcement may have led taxpayers to deem that announcement and 2013 law to be sufficient to change the rate given the relatively high likelihood that the tax rate ultimately would be lowered for 2016 tax years from 5 percent to 4 percent. However, based on the nuances in the law and the lack of final revenue results or notification until July 28, 2015, many taxpayers may not have deemed the rate change to have occurred until the Governor's announcement. Taxpayers with material North Carolina deferred tax balances should evaluate this change carefully and seek necessary input from their tax advisors.

Further North Carolina tax reforms are currently being considered in the General Assembly. The Senate and House have proposed various changes included removing the revenue goal for the rate reduction to 3 percent, changes to apportionment factor weighting, receipts sourcing for services, and re-establishing many repealed income tax credits. The combination of the 2016 rate change and anticipated legislation should cause taxpayers to monitor their North Carolina tax positions within their financial statements carefully.

Footnotes

1. Press Release, Office of North Carolina Governor Pat McCrory, July 28, 2015.

2. Ch. 316 (H.B. 998), Laws 2013.

3. Memorandum, North Carolina General Assembly Legislative Services Office, May 6, 2015.

4. Ch. 316 (H.B. 998), Laws 2013. For a discussion of this legislation, see GT SALT Alert: North Carolina Enacts Legislation Reducing Income Tax Rates, Expanding Sales Tax to Service Contracts.

5. N. C. GEN. STAT. § 105-130.3.

6. N. C. GEN. STAT. § 105-130.3A. For the corporation income tax rate to be reduced from 5 percent to 4 percent for the 2016 tax year, net general fund collections for the 2014-2015 fiscal year had to exceed $20.2 billion. For the corporation income tax rate to be reduced from 4 percent to 3 percent for the 2017 tax year, net general fund collections for the 2015-2016 fiscal year must exceed $20.975 billion. The "permanent" tax rate for tax years beginning on and after January 1, 2017 is the tax rate ultimately determined by the section (either 3 percent if the 2015-2016 fiscal year revenue goal is met, or 4 percent if such goal is not met).

7. Id.

8. ASC 740-10-55.

9. Id.

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