North Carolina’s tax landscape encompasses a diverse range of levies, including corporate income tax, franchise tax, and sales tax. Understanding the intricacies of the state’s tax system is crucial for businesses and individuals alike. The corporate income tax rate, currently at 2.5%, is set to undergo phased reductions, ultimately reaching 0% by 2030. Alongside this, corporations operating in the state are subject to a minimum Franchise Tax of $200. Compliance with tax return deadlines, nexus considerations for income tax, and the availability of various tax credits are essential aspects for businesses navigating North Carolina’s tax environment.

In addition to income-related taxes, North Carolina imposes a sales tax with a standard rate of 4.75%, potentially reaching 7.5% in specific local municipalities. Sales tax nexus, particularly for remote sellers, adds another layer of complexity. Knowing which transactions are subject to sales tax and the exemptions in place is vital. Furthermore, North Carolina’s treatment of Software-as-a-Service (SaaS) and the availability of certain exemptions contribute to the nuanced understanding required for tax compliance in the state. This blog post delves into the key facets of North Carolina’s tax regulations, providing valuable insights for businesses and individuals navigating the state’s fiscal landscape.

What is the North Carolina Corporate Income Tax Rate?

North Carolina’s current corporate income tax rate is set at 2.5%, but this rate is slated to reduce to 0% corporate income tax by 2030, starting with reductions in the 2025 tax year to 2.25%, then to 2% for 2026 and 2027, and 1% for 2028 and 2029. 

Is There a Corporate Minimum Tax in North Carolina?

There is a minimum Franchise Tax of $200 that applies to all corporations, including C-Corporations and S-Corporations operating in North Carolina 

When is the NC State Corporate Income Tax Return Due?

North Carolina follows the Federal filing schedule, meaning most corporation tax returns will be due by April 15th. Franchise and income tax returns must be submitted by the 15th day of the fourth month following the conclusion of the income year. If an income year concludes on a day other than the last day of the month, it is considered to end on the last day of the calendar month nearest to the actual income year’s end. 

Cooperative or mutual associations must file income tax returns by the 15th day of the ninth month after the income year’s close. However, if these corporations are liable for franchise tax, they must also file a franchise tax return by the 15th day of the fourth month after the income year concludes.

For non-U.S./foreign corporations, excluding those with a U.S. office, place of business, or FSC/former FSC status, federal income tax returns are due by the 15th day of the seventh month rather than the 15th day of the fourth month. North Carolina law allows these corporations to submit Form CD-405 by the 15th day of the seventh month instead of the 15th day of the fourth month.

How is State Income Tax Nexus Triggered?

All active and inactive domestic corporations, as well as foreign corporations holding a Certificate of Authority to operate or “doing business” within the state, are obligated to pay the annual franchise tax, unless specifically exempt under G.S. 105-125.

For income tax purposes, the term “doing business” encompasses engaging in any business enterprise or activity in North Carolina for economic gain. This includes, but is not limited to:

• Maintaining an office or another business location in North Carolina;
• Keeping an inventory of merchandise or materials for sale, distribution, or manufacturing within the state, whether stored on the taxpayer’s premises or in a public or rented warehouse;
• Selling or distributing merchandise directly to customers in North Carolina from a company-owned or operated vehicle, where title to the merchandise is transferred to the customer at the time of the sale or distribution;
• Providing services to clients or customers in North Carolina by agents or employees of a foreign corporation; or
• Owning, renting, or operating business or income-producing property in North Carolina, including realty, tangible personal property, trademarks, trade names, franchise rights, computer programs, copyrights, patented processes, and licenses.

Corporations acting as partners in a partnership or joint venture operating in North Carolina are deemed to be “doing business” in the state.

For interstate motor carriers, “doing business” is defined as engaging in any of the following activities in North Carolina:

• Maintaining an office in the state;
• Operating a terminal or another business location in the state;
• Employing personnel working from the office or terminal of another company;
• Dropping off or picking up shipments in the state.

In the event that an LLC is classified as a C Corporation for federal tax purposes, and a corporate member’s sole connection to North Carolina is its ownership stake in the LLC, there is no obligation for the corporate member(s) to file a North Carolina corporate income and franchise tax return. This exemption arises because the LLC reports its North Carolina income at the entity level, and the apportionment attributes of the LLC do not pass through to the corporate member(s), as is the case when the LLC is disregarded or treated as a partnership.

However, if an LLC is categorized as a C Corporation for federal tax purposes and a corporate member engages in activities within the state, beyond its ownership interest in the LLC, the corporate member(s) is mandated to file a corporate income and franchise tax return.

Does Having an Employee or Contractor Trigger Nexus?

In North Carolina, having employees or contractors in the state may create nexus for income tax purposes. The state considers various activities, including having employees or contractors performing services, as constituting the “doing business” standard that establishes nexus. If a business has a significant presence in North Carolina, it may be required to file income tax returns and comply with the state’s tax laws.

Are There North Carolina Income Tax Credits Available?

North Carolina offers various corporate income tax credits to encourage economic development, investment, and certain activities that align with the state’s priorities. Some of the notable corporate income tax credits in North Carolina include:

Job Development Investment Grant (JDIG): 

This program provides discretionary, performance-based grants to new and expanding businesses to help offset the cost of locating or expanding in North Carolina. The grant is based on a percentage of the withholding taxes generated by the new jobs created by the project.

Article 3J Tax Credits: 

These credits are available for activities that promote economic development, such as investing in machinery and equipment, rehabilitating historic structures, and investing in renewable energy projects.

Research and Development Tax Credit: 

North Carolina offers a tax credit for qualified research expenses, providing an incentive for businesses engaged in research and development activities.

Mill Rehabilitation Tax Credit: 

This credit encourages the rehabilitation of historic mills in the state. It provides a percentage credit for qualified expenses related to the rehabilitation of eligible historic mills.

Film and Entertainment Grant Fund: 

North Carolina provides tax credits for qualified expenses related to film and television productions, including a base incentive and additional incentives for in-state spending.

Investment Tax Credit: 

This credit is available for businesses making eligible investments in machinery and equipment for use in North Carolina. The credit is based on a percentage of the cost of qualifying property.

What is the North Carolina Sales Tax Rate?

The existing sales tax rate in North Carolina (NC) is 4.75%. In certain local municipalities, the combined tax rate has the potential to reach 7.5%.

How is Sales Tax Nexus Triggered?

All remote vendors with gross sales surpassing $100,000 attributed to North Carolina or engaging in 200 or more distinct transactions attributed to North Carolina in the prior or ongoing calendar year are obligated to enroll for the collection and remittance of sales and use tax in North Carolina. 

It’s important to note that the exemption for small sellers does not extend to vendors with a physical presence in North Carolina or those subject to any other legal obligation to collect and remit sales and use tax in the state.

What Transactions are Included or Excluded from NC Sales Tax?

In North Carolina, sales tax is imposed on various transactions, and there are specific guidelines outlining what is included or excluded from the tax. Here’s a breakdown:

Included in NC Sales Tax:

• Retail Sales: Sales of tangible personal property to consumers for their use or consumption.
• Leases and Rentals: The lease or rental of tangible personal property.
• Digital Property and Services: Sales of digital property or services, including digital audio works, digital audio-visual works, and digital books.
• Admissions: Charges for admission to places of entertainment, amusement, or recreation.
• Repair, Maintenance, and Installation Services: Charges for repair, maintenance, and installation services on tangible personal property.
• Certain Services: Charges for certain services, including storage services and fabrication services.

Excluded from NC Sales Tax:

• Sales to Exempt Entities: Sales to entities that are exempt from sales tax, such as government agencies and certain nonprofit organizations.
• Certain Food Sales: Sales of food that qualifies for the federal food stamp program.
• Prescription Drugs and Medical Supplies: Sales of prescription drugs, insulin, and medical supplies.
• Agricultural Products: Sales of certain agricultural products for use in farming operations.
• Sales for Resale: Sales of tangible personal property for resale.
• Educational Materials: Sales of educational materials, including textbooks and instructional materials.
• Sales of Motor Vehicles: Sales of motor vehicles, airplanes, and certain other transportation equipment.

Are Services Taxed for Sales Tax?

Most services are not taxed in North Carolina for sales tax purposes. However, general state and applicable local and transit rates of sales and use tax apply to the sales price or gross receipts derived from retail sales of repair, maintenance, and installation services.

Is SaaS Taxable for Sales Tax?

In general, North Carolina does not impose sales tax on Software-as-a-Service (SaaS). According to North Carolina Sales and Use Tax Bulletin 19-3, software as a service is a distribution model where a service provider uses computer hardware and software to provide electronic access to consumers. The software is not downloaded to the consumer’s computer but is accessed electronically over a computer network, typically the Internet. Charges for such services are not subject to sales or use tax in North Carolina.

Frequently Asked Questions (FAQs) – North Carolina Business Taxes

What is the current corporate income tax rate in North Carolina, and are there upcoming changes?

The current corporate income tax rate in North Carolina is 2.5%, with a planned reduction to 0% by 2030. The phased reduction involves incremental decreases starting in the 2025 tax year.

Is there a minimum tax requirement for corporations operating in North Carolina?

Yes, there is a minimum Franchise Tax of $200 applicable to all corporations, including both C-Corporations and S-Corporations, conducting business in North Carolina.

When are state corporate income tax returns due, and how does the filing schedule align with federal deadlines?

North Carolina follows the federal filing schedule, with most corporate tax returns due by April 15th. Additionally, franchise and income tax returns must be submitted by the 15th day of the fourth month following the close of the income year.

What activities constitute “doing business” in North Carolina, triggering income tax nexus?

Engaging in various business activities, such as maintaining an office or place of business, selling merchandise, providing services, or owning/renting property in the state, establishes income tax nexus. This includes having employees or contractors working within North Carolina.

Are there tax credits available for businesses in North Carolina?

Yes, North Carolina offers various corporate income tax credits to encourage economic development, research and development, rehabilitation projects, and investments in machinery and equipment.

What is the sales tax rate in North Carolina, and what transactions are subject to sales tax?

The current state sales tax rate is 4.75%, potentially reaching 7.5% in certain local municipalities. Sales tax is imposed on retail sales, leases and rentals, digital property and services, admissions, and certain services. However, specific transactions, such as sales to exempt entities and certain food sales, are excluded from sales tax.

Can you help with state taxes?

If you have questions about North Carolina or any state taxes, book a consultation today. View our services page for more information on the various types of consultations and tax optimization services available at Optic Tax.