North Carolina Senate Bill 174 (the “Act”) was signed into law by Gov. Roy Cooper on April 3, 2023. The Act includes changes related to corporate and individual income tax (including pass-through entity tax [“PTE"]), sales tax, excise tax, property tax, and tax administration and collections. Summaries of the significant changes related to income tax and sales tax are provided below.1
Income Tax
I.R.C. Conformity
Effective April 3, 2023, North Carolina’s I.R.C. conformity date has been updated from April 1, 2021 to January 1, 2023.2
Pass-Through Entity Tax
The Act makes several changes to the recently enacted North Carolina tax. In response to the PTE tax changes in the Act, the North Carolina Department of Revenue has provided updates related to the 2022 North Carolina Partnership Return (Form D-403) instructions in North Carolina Department of Revenue.
Taxed Partnership Eligibility
Perhaps the most significant change was to allow partnerships with a partner that is either a partnership or S corporation to make the PTE tax election.3 The distributive share of the pass-through partner cannot be included in the partnership’s calculation of North Carolina taxable income for PTE tax purposes.4 Instead, the partnership must pass the distributive share through to the pass-through partner pursuant to N.C. Gen. Stat. § 105-154(d).5 This change is effective for taxable years beginning on or after January 1, 2022.6
Individual Credit
The Act amends N.C. Gen. Stat. § 105-153.9 to allow North Carolina resident partners and S corporation shareholders that don’t pay the entity-level PTE tax in North Carolina a credit for PTE tax payments made in other states.7 This change is effective for taxable years beginning on or after January 1, 2022.8
Making or Revoking the PTE Tax Election
The PTE tax election cannot be made or revoked after the return is filed.9 Formerly, the election could not be revoked following the due date of the return (including the extension).10 This change is effective for taxable years beginning on or after January 1, 2023.11
Changes for Resident Partners and Shareholders
Under the Act, the resident partner or shareholder’s pro rata share of the PTE’s income or loss which is not attributable to North Carolina is no longer included in the taxed PTE calculation of North Carolina taxable income.12 Resident partners and shareholders may deduct their pro rata share of the taxed PTE’s income which is included in their adjusted gross income and subject to a PTE tax in another state.13 Resident partners or shareholders that are eligible to make such a deduction will not be allowed a tax credit for taxes paid to other states.14 In addition, the credit which was available to resident shareholders of taxed S corporations for taxes paid to other states is repealed.15 These changes are effective for taxable years beginning on or after January 1, 2023.16
Multistate Sole Proprietorships
The Act provides that multistate sole proprietorships determine allocation and apportionment in the same manner as partnerships and S corporations, codifying the North Carolina Department of Revenue’s current treatment of multistate sole proprietorships.17
Sales Tax
Utensils Provided by the Retailer
Prepared food is subject to sales tax in North Carolina. There are multiple conditions which can cause food to be considered “prepared food,” one of which is when utensils are provided by the retailer. The Act codifies the administrative definition of when utensils are “provided by the retailer.”18 The determination of whether utensils are “provided by the retailer” depends on what percentage of the retailer’s food is prepared food.19 For retailers with more than 75% of their sale of food constituting prepared food, “provided by the retailer” means the utensil is made available to the purchaser.20 Additional rules apply depending on the number of servings packaged together.21 For retailers with 75% or less of their sale of food constituting prepared food, “provided by the retailer” means the utensil is physically given to the purchaser.22 However, if the utensil is a plate, bowl, glass, or cup, then it is “provided by the retailer” if it is made available to a purchaser.23 This provision is effective as of April 3, 2023.24
Marketplace Facilitator Changes
The Act authorizes the Secretary to regard certain persons as “marketplace facilitators” when the Secretary determines that it is necessary for the efficient administration of the North Carolina sales tax.25 In addition, marketplace facilitators are now allowed to take a credit on their sales and use tax return for items which they paid sales and use tax on when sales and use tax was also collected by a marketplace seller.26 Both provisions are effective as of April 3, 2023.27
Nonprofit Sales Tax Exemption
The Act codifies the Department of Revenue’s treatment of certain sales by nonprofits, allowing as many as six annual sales periods in a year so long as they do not overlap, each period is for a different program, and the products sold for each period are different.28 The provision is effective as of April 3, 2023.29
Streamlined Sales & Use Tax Agreement
The reference for “Streamlined Agreement” is updated to “the Streamlined Sales and Use Tax Agreement amended as of December 22, 2022.”30
For more information on sales and other tax changes to the North Carolina PTE Election, reach out to a professional at FORVIS or fill out the Contact Us form below.
- 1The changes under the Act related to excise tax, property tax, and tax administration and collection are outside of the scope of this FORsight™. The excise tax, property tax, and tax administration and collection changes can be found in Parts III, IV, and V of N.C. SB 174, S.L. 2023-12, respectively.
- 2N.C. SB 174, s. 1.1., S.L. 2023-12 (amending N.C. Gen. Stat. § 105-228.90(b)(7)).
- 3N.C. SB 174, s. 1.5.(b), S.L. 2023-12 (codified at N.C. Gen. Stat. § 105-154.1(a)(5)).
- 4N.C. SB 174, s. 1.5.(c), S.L. 2023-12 (amending N.C. Gen. Stat. § 105-154.1(b)(1)).
- 5N.C. SB 174, s. 1.5.(a), S.L. 2023-12 (amending N.C. Gen. Stat. § 105-154(d)).
- 6N.C. SB 174, s. 1.5.(e), S.L. 2023-12.
- 7 N.C. SB 174, s. 1.5.(d), S.L. 2023-12 (codified at N.C. Gen. Stat. § 105-153.9(d) and (e)).
- 8 N.C. SB 174, s. 1.5.(e), S.L. 2023-12.
- 9N.C. SB 174, s. 1.6.(b,e), S.L. 2023-12 (amending N.C. Gen. Stat. §§ 105-131.1A(a) and 105-154.1(a)).
- 10 Id.
- 11 N.C. SB 174, s. 1.6.(f), S.L. 2023-12.
- 12 N.C. SB 174, s. 1.6.(a), S.L. 2023-12 (repealing N.C. Gen. Stat. §§ 105-131.1A(b)(1)b and 105-154.1(b)(1)b.).
- 13 N.C. SB 174, s. 1.6.(c), S.L. 2023-12 (amending N.C. Gen. Stat. §§ 105-153.5(c3)(1a) and (3a).
- 14 N.C. SB 174, s. 1.6.(d), S.L. 2023-12 (codified at N.C. Gen. Stat. §§ 105-153.9(f)).
- 15 N.C. SB 174, s. 1.6.(a), S.L. 2023-12 (repealing N.C. Gen. Stat. §§ 105-131.1A(d).
- 16 N.C. SB 174, s. 1.6.(f), S.L. 2023-12.
- 17 N.C. SB 174, s. 1.3., S.L. 2023-12 (codified at N.C. Gen. Stat. § 105-153.4(d1)).
- 18 N.C. SB 174, s. 2.1.(b), S.L. 2023-12 (codified at N.C. Gen. Stat. § 105-164.4L(b)).
- 19 Id.
- 20 Id.
- 21 Id. (providing that four or more servings contained in the same package are “prepared food” if utensils are physically given to the purchaser).
- 22 Id.
- 23 Id.
- 24 N.C. SB 174, s. 2.6., S.L. 2023-12.
- 25 N.C. SB 174, s. 2.2., S.L. 2023-12 (codified at N.C. Gen. Stat. § 105-164.4J).
- 26 N.C. SB 174, s. 2.2., S.L. 2023-12 (codified at N.C. Gen. Stat. § 105-164.11B.(b)).
- 27 N.C. SB 174, s. 2.6., S.L. 2023-12.
- 28 N.C. SB 174, s. 2.4.(b), S.L. 2023-12 (codified at N.C. Gen. Stat. § 105-164.13(35)(d)-(f)).
- 29 N.C. SB 174, s. 2.6., S.L. 2023-12.
- 30 N.C. SB 174, s. 2.5., S.L. 2023-12 (amending N.C. Gen. Stat. § 105-164.3(259)).