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FRANCHISE TAX
(Subchapter 5b)
A. General Information (G.S. 105-114)
- Scope and Nature
North Carolina levies a series of franchise taxes upon corporations, both
domestic and foreign, and upon certain persons and partnerships. The taxes
levied in this subchapter are for the privilege of engaging in business or
doing the act named. Specific sections of the law under which the various
corporations and businesses are taxed are as follows:
- G.S. 105-122 General business corporations
- G.S. 105-116 Electric light, power, water, sewerage and other similar
businesses not otherwise taxed
- G.S. 105-119 Telegraph companies
- G.S. 105-120 Telephone companies
- G.S. 105-120.1 Street bus companies
- G.S. 105-121.1 Mutual burial associations
- G.S. 105-125 Exempt corporations
The taxes levied upon corporations organized under the laws of North Carolina
(domestic corporations) are for the corporate rights and privileges granted
by their charters, and the enjoyment of corporate powers, rights, privileges
and immunities under the laws of North Carolina.
The taxes levied upon corporations not organized under the laws of North
Carolina (foreign corporations) are for the privilege of doing business
in this State and for the benefit and protection they receive from the government
and laws of this State.
- Corporation Defined
For franchise tax purposes, the term "corporation"
includes not only corporations in the usual meaning of the term,
but also associations, joint stock companies, trusts and other
organizations formed or operating for pecuniary gain which have
capital stock represented by shares and privileges not possessed
by individuals or partnerships.
- S Corporations Liable for Franchise Tax
S corporations are liable for franchise tax levied under Article 3 of the
Revenue Laws. The enactment of the S corporation law for income tax purposes
does not affect the franchise tax liability of corporations doing business
and/or incorporated or domesticated in this State.
- Period Covered
Taxes levied under this Subchapter shall be for the fiscal year of the State
in which they become due, except for the general business franchise tax which
shall be for the income year of the corporation in which such taxes become
due.
- Inactive Corporations (Section .0104)
A corporation that is inactive and without assets is subject annually to a
minimum franchise tax of thirty-five dollars ($35). Failure to file this return
and pay the minimum tax will result in suspension of the Articles of Incorporation
or Certificate of Authority. Any corporation which intends to dissolve or
withdraw through suspension for nonpayment of franchise tax should indicate
its intention in writing to the Department.
- Dissolution or Withdrawal of Corporate Rights (Section.0105)
Corporations are not subject to franchise tax after the end of the income
year in which articles of dissolution or withdrawal are filed with the Secretary
of State unless they engage in business activities not reasonably incidental
to winding up their affairs. Therefore, no franchise tax is required with
the income return filed for the year in which the application is filed or
with any subsequent income returns that may be required in connection with
winding up the affairs of the corporation.
Notes: A calendar year corporation files articles of dissolution or withdrawal
during the calendar year 1998. Although its final income return will be
filed on a combined franchise and income form, the portion thereof constituting
the franchise return need not be completed since no franchise tax is due
after that applicable to the calendar year 1998. Tax applicable to that
year was due on March 15,1998 with the combined 1997 return.
A corporation using an income year ending April 30 files articles of
dissolution or withdrawal on May 19, 1998. Although its final income return
will be filed on a combined franchise and income form, the portion thereof
constituting the franchise return need not be completed since no franchise
tax is due after that applicable to the year ending April 30, 1999. Tax
applicable to that year will be due on July 15, 1998 with the combined
return for the year ended April 30,1998.
- Payment of Franchise Taxes
Franchise and income taxes are payable as of the filing due
date to the "N.C. Department of Revenue." The franchise
tax must be paid in full with the return.
The utility franchise tax liability, dependent on various law
requirements, may be monthly or quarterly as stated under the
paragraph of "Due Date of the Report and Tax" of each
utility tax type. All utility companies with an average franchise
utility tax of $20,000 or more per month are required to remit
the utility tax by Electronic Funds Transfer. For additional
information on EFT, refer to the subject of; "Payments
of Tax by EFT", under General Administration.
- Extension of Filing Date (Section .0107)
Prior to the regular due date, a corporation may apply for an extension of
time for filing its return.
For additional detailed information concerning the requirements
for obtaining an extension of time for filing a corporate franchise
and income tax return, see Subject, "Extension of Time
for Filing Return."
B. Subject: Electric Power, Natural Gas, Water and Sewerage
Companies (G.S. 105-116)
- Basis for Taxation
Every person, firm or corporation, domestic or foreign, and jointly owned
and operated municipal electric projects established under Chapter 159B, engaged
in the business of furnishing electricity, electric lights, current or power
are subject to a franchise or privilege tax at the rate of 3.22% of the total
gross receipts derived from such business within this state, less certain
statutory deductions. Private sewerage companies are subject to a 6% franchise
or privilege tax on total revenues derived from within this state. Water systems
are subject to a 4% franchise or privilege tax on total revenues derived from
within this state. Receipts received as contributions in aid of construction
are not subject to tax.
Companies subject to the 3.22% franchise tax and municipal corporations purchasing
power for resale are required to collect and remit to the state a sales tax
at the rate of 3% of total billings. Any excess sales tax collected by the
vendor is to be remitted to the state.
- Due Date of the Report and Tax
The reports are required quarterly and should contain in addition to the other
information the total gross receipts from such business in North Carolina
for the preceding calendar quarter. Payments by EFT are required if the average
amount of tax is at least $20,000 a month. Payments are required monthly or
quarterly as follows:
- Electric Power Companies
Companies pay tax monthly and are required to remit at least ninety-five
percent (95%) of the tax due in each of the first two months of a calendar
quarter with any underpayment includable in the quarterly report. Monthly
payments are due by the last day of the month that follows the month the
tax accrues, except the payment for tax that accrues in May is due by
June 25.
- Water & Sewerage Companies
Companies pay tax quarterly when filing the quarterly report which is
due by the last day of the month that follows the quarter covered by the
report.
- Forms to be Used for Filing
Form CD-310 is to be used by electric companies. Form CD-318 is to be used
by water and sewerage companies.
- Special Exemptions
Municipal corporations are not required to remit a franchise or privilege
tax directly to the State, but are required to file returns and remit the
utility sales tax of 3%. The total receipts of the vendor subject to franchise
tax includes sales made to a municipal corporation.
- Distribution to Municipalities
An amount equal to a tax of 3.09% of local service revenues subject to the
franchise tax levied by this Section (except water and sewerage services)
derived from within a legally incorporated municipality having either elected
officials or interim officials appointed by the Legislature and from within
Urban Service Districts as defined by the governing board in Chapter 160B,
Article 2 is distributed as soon as practicable to such municipality after
the end of the calendar quarter.
C. Telegraph Companies (G.S. 105-119)
- Basis for Taxation
Persons, firms, or corporations engaged in operating a telegraph system between
points within North Carolina are subject to an annual franchise or privilege
tax of 6% of the total gross receipts derived from business within North Carolina.
- Due Date of the Report and Tax
Reports are required annually on or before August 1 showing the total gross
receipts from business within and without North Carolina for the entire calendar
year next preceding the due date of the report and the total gross receipts
for the same period from business within North Carolina.
The tax is due on the date the report is due.
- Form to be Used for Filing
No specific form is provided by the Secretary for reporting this tax; therefore,
the corporation shall devise a form to be used for filing subject to acceptance
by the Secretary.
D. Telephone Companies (G.S. 105-120)
- Basis for Taxation
Every person, firm, or corporation, foreign or domestic, owning and/or operating
a business entity for the provision of Local Telecommunication Service in
this State, is subject to an annual franchise or privilege tax at the rate
of 3.22% on gross receipts derived from services that are obligated to be
furnished by such telephone company. Companies subject to the franchise tax
levied under this section are also required to collect and remit to the State
a sales tax at the rate of 3% of total billings.
Gross receipts derived from telecommunications service or private telecommunications
service as defined under G.S. 105-120 are subject to a six and one-half percent
(6˝%) sales tax rather than the combined 3.22% franchise tax and three percent
(3%) sales tax.
- Due Date of the Report and Tax
Reports are required quarterly and should contain in addition
to the other information the total gross receipts from such
business in North Carolina for the preceding calendar quarter.
Payments by EFT are required if the average amount of tax is
at least $20,000 a month. Payments are due monthly or quarterly
depending on the company's monthly franchise tax liability as
shown below:
- Monthly franchise tax average of less than $3000
Companies pay tax quarterly when filing the quarterly reports which are
due the last day of the month that follows the quarter covered by the
report.
- Monthly franchise tax average of $3000 or more
Companies pay tax monthly and are required to remit at least ninety-five
percent (95%) of the tax due in each of the first two months of a calendar
quarter with any underpayment includable in the quarterly report. Monthly
payments are due by the last day of the month that follows the month the
tax accrues, except the payment for tax that accrues in May is due by
June 25.
- Forms to be Used for Filing
Form CD-311 is to be used for filing the reports.
- Special Exemptions
Amounts derived from interstate commerce, advertising receipts, carrier access
or billing fees and pole rental receipts are not included in the franchise
tax base. The receipts received from sales for resale are considered charges
between telephone companies not subject to the tax.
Mutual or cooperative telephone associations or companies and municipal corporations
are not required to file Form CD-311.
- Distribution to Municipalities
An amount equal to a tax of 3.09% of the gross receipts generated from local
business conducted within a municipality subject to the franchise tax is returned
to the respective municipality. To be eligible for a distribution, a municipality
must first be legally incorporated and have either elected officials or interim
officials appointed by the Legislature.
The amount distributed will first be reduced by the credit afforded a telephone
company for the taxes paid to a municipality on gross revenue and credited
by the Secretary against the tax due on Form CD-311.
E. Street Transportation Companies (G.S. 105-120.1)
- Basis for Taxation
Persons, firms, or corporations owning and/or operating a street railway,
street bus or similar street transportation system for the transportation
of passengers for hire are subject to an annual franchise or privilege tax
of $35.
- Due Date of the Tax
The tax is due on or before June 1.
- Corporation Billed for the Tax (Section .0803)
There is no form to be completed by the corporation for the computation of
this tax; rather it is billed to the corporation by the corporate division.
F. Mutual Burial Associations (G.S. 105-121.1)
- Basis for Taxation
All domestic mutual burial associations are subject to an annual franchise
or privilege tax ranging from fifteen dollars ($15) to fifty dollars ($50)
and is based on the number of members.
- Due Date of the Tax
The tax is due on or before April 1 of each year.
- Association Billed For the Tax (Section .0903)
There is no form to be completed by the association for the computation of
this tax; rather it is billed to the association by the corporate division.
G. General Business Corporations (G.S. 105-122)
- Basis For the Tax
The basis of the tax is total or allocated capital stock, surplus and undivided
profits. The basis is the same for both domestic and foreign corporations.
Corporations doing business both within and without North Carolina are required
to allocate a part of their capital stock, surplus and undivided profits to
their business in North Carolina in accordance with a specified statutory
allocation formula. Regardless of the actual amount of capital stock, surplus
and undivided profits, the amount determined for purpose of this tax cannot
be less than fifty-five percent of appraised ad valorem tax value of all tangible
property plus value of intangible property in North Carolina nor less than
the actual investment in tangible property in North Carolina.
- Franchise Tax Bases
The taxable franchise tax base is the largest of these tax bases:
- Capital stock, surplus and undivided profits
- Fifty-five percent of appraised ad valorem tax value of all tangible
property plus value of intangible property in N. C.
- Actual investment in tangible property in North Carolina
- Corporations Required to File
Unless specifically exempt under G.S. 105-125, all active and inactive domestic
corporations, and all foreign corporations with a Certificate of Authority
to do business, or which are in fact doing business in this State, are subject
to the annual franchise tax levied under G.S. 105-122.
- Forms to be Used for Filing
The general business franchise tax is filed on form CD-405 for both domestic
and multistate corporations and CD-401S for S corporations. These forms, other
required corporate forms and instructions are available from the Department
of Revenue in Raleigh or from any of the branch offices located throughout
the State. The Department will accept only a facsimile of the form to be used
for filing.
- Report and Payment Due
General business corporations must file returns annually on or before the
fifteenth day of the third month following the end of the income year. The
return is filed as a part of a combined franchise and income tax return. Payment
of the entire amount of franchise tax is required with the return. The tax
paid represents an advance payment for the ensuing income year.
Note: A corporation files a franchise and income tax return on
December 15, 1999 for the fiscal year ended September 30, 1999. The franchise
tax due on the return would apply to the year October 1, 1999 through September
30, 2000.
- Tax Rate
The franchise tax rate is $1.50 per $1,000 and is applied to the greatest
base determined as set forth in the law. The minimum franchise tax is thirty-five
dollars ($35).
- Franchise Tax Payable in Advance (G.S. 105-114)
Franchise tax is payable in advance for the privilege of doing business in
North Carolina or for the privilege of existing as a corporation in North
Carolina.
Example: A corporation incorporates, domesticates or commences
business in North Carolina on October 15, 1999. The corporation has selected
the calendar year as its income year end. The first combined franchise and
income tax return due on March 15,2000 will be a short period return covering
the period from October 15,1999 to December 31, 1999. Franchise tax due
on this return covers the ensuing calendar year through December 31,2000
for the privilege of doing business in North Carolina or for the privilege
of existing as a corporation in North Carolina.
H. Capital Stock, Surplus and Undivided Profits Base (G.S.
105-122(b) & (c))
- Based on the Year End Balance Sheet
This base is determined from the corporation's books and records,
as reflected by its balance sheet, used for financial accounting
purposes, as of the close of the income year immediately preceding
the due date of the return.
- Surplus Defined
The term "surplus" for franchise tax purposes has
a broader and more inclusive meaning than the generally accepted
accounting definition. It includes, in addition to the balance
sheet surplus, all liabilities, reserves and deferred credits.
- Items Includable and Excludable
In addition to the items listed on the tax form, include stock
subscribed, deferred taxes and all other surplus, reserves,
deferred credits, inventory valuation reserves, amounts deferred
as result of a LIFO valuation method (LIFO "reserves")
and liabilities except reserve for depreciation permitted for
income tax purposes, accrued taxes, dividends declared, and
definite and accrued legal liabilities. Deferred income resulting
from customer advances for goods or services may be excluded
from this base provided there exists a definite legal liability
to render such service or deliver such goods, no part of such
advances has been reported or is reportable for income tax purposes,
and all related costs and expenses are reflected in the balance
sheet as assets. Deferred income arising from the usual installment
sale is not deductible since the corresponding liability would
have been discharged at the time of delivery.
The following items are excludable from capital stock, surplus
and undivided profits in arriving at the net base:
- Cost of treasury stock
- Definite and accrued legal liabilities
- Accrued taxes
- Reserve for depreciation permitted for income tax purposes
- Dividends declared
- Cost of any air-cleaning device or sewage or waste treatment plant,
including waste lagoons, and pollution abatement equipment certified by
the Department of Environment and Natural Resources or the Environ-mental
Management Commission. Cost should be net of any depreciation on the equipment
excluded from the base.
- Cost of purchasing and installing equipment or constructing facilities
for the purpose of recycling or resource recovering of or from solid waste
certified by the Department of Environment and Natural Resources. Cost
should be net of any depreciation on the equipment and facilities excluded
from the base.
- Cost of constructing facilities of any private or public utility built
for the purpose of providing sewer service to residential and outlying
areas. Cost should be net of any depreciation on the facility excluded
from the base.
- Cost of equipment and facilities acquired for the purpose of reducing
the volume of hazardous waste generated. Cost should be net of any depreciation
on the equipment and facilities excluded from the base.
- If a corporation is in the opinion of the Secretary of
Revenue qualified under the United States Code Annotated
Title 26, Section 851 as a "Regulated Investment Company"
or "Real Estate Investment Trust" and elects to
be treated as such for North Carolina tax purposes it shall
be allowed to exclude the aggregate market value of its
investments in stocks, bonds, debentures, or other securities
or evidences of debt of other corporations, partnerships,
individuals, municipalities, governmental agencies, or governments.
- All assets of an international banking facility which are employed outside
the United States less all liabilities owed to foreign persons by the
facility.
The following items are includable:
- Capital stock subscribed
- Appraisal surplus
- Reserve for bad debts
- Deferred income (except as explained above)
- Deferred taxes
- Contingent liabilities
- Inventory valuation reserves
- LIFO "reserves".
- All other reserves and allocations: also, credit items (not exempted
above) which do not represent definite and accrued legal liabilities.
- Exclusion of Retained Earnings by Parent Corporation (Section .1104)
A parent corporation may exclude any retained earnings of existing subsidiary
corporations filing in North Carolina which it has capitalized or otherwise
recorded on its books through an equity method of accounting.
- Investment in Subsidiary (Section .1105)
No reduction of the capital stock base is allowed for the investment in a
subsidiary.
- Borrowed Capital Treatment (Debtor Corporation)
Indebtedness owed to a parent, subsidiary or affiliated corporation
is considered a part of the debtor corporation's capital and
must be added to the debtor corporation's capital stock, surplus
and undivided profits tax base.
If the creditor corporation has borrowed a part of its capital
from outside sources (i.e., sources other than a parent, subsidiary
or affiliated corporation), the debtor corporation may exclude
a proportionate part of the debt in computing the amount to
be added determined on the basis of the ratio of the creditor
corporation's capital borrowed from outside sources to the creditor
corporation's total assets.
Note: ABC Corporation owes to its parent XYZ Corporation, $200,000.
XYZ's capital borrowed from outside sources is $75,000 and its
assets total $300,000.
| Indebtedness owed to XYZ Corporation |
$200,000 |
Less proportionate part:
XYZ's borrowed capital $75,000
--------------------------------------------------------x $200,000 = |
50,000 |
XYZ's total assets $300,000
Net amount to be added by ABC Corporation |
$150,000 |
XYZ Corporation is entitled to deduct from its
capital stock, surplus and undivided profits
the net amount added by ABC Corporation |
$150,000 |
- Borrowed Capital Treatment (Creditor Corporation)
The creditor corporation, if subject to the tax, can deduct the amount of
indebtedness owed to it by a parent, subsidiary or affiliated corporation
to the extent that such indebtedness has been added by the debtor organization.
If the corporations have different income years, the creditor corporation
shall deduct the amount of indebtedness added back by the parent, subsidiary,
or affiliate on the return immediately preceding that of the creditor.
- Exclusion Provision Limited to Indebtedness Owed (Section .1108)
The exclusion permitted the debtor corporation and the deduction permitted
the creditor corporation are applicable only to indebtedness owed to or due
from a parent, subsidiary or affiliated corporation.
- Equity Capital Not Deductible (Section .1109)
The equity capital of a wholly owned subsidiary does not represent
"indebtedness" owed to a parent corporation which
the parent is entitled to deduct from its franchise tax base.
- Reciprocal Indebtedness Between Affiliates (Section .1110)
A corporation which owes indebtedness to a parent, subsidiary or affiliated
corporation and at the same time is owed indebtedness by the same parent,
subsidiary or affiliated corporation may net the payable and receivable for
purposes of the indebtedness computation. If the indebtedness is owed to one
corporation and the receivable is due from another corporation, each amount
must be treated separately.
- Indebtedness Defined
The term "indebtedness" as used under G.S. 105-122(b)
includes all loans, credits, goods, supplies or other capital
of whatever nature furnished by a parent, subsidiary or affiliated
corporation. The terms "parent," "subsidiary"
and "affiliate" have the meanings specified in General
Statutes Section 105-130.6.
- Borrowed Capital Defined (Section .1112)
The term "borrowed capital" as used under G.S. 105-122(b)
includes all loans, credits, goods, supplies, or other capital
of whatsoever nature furnished by a source other than a parent,
subsidiary or affiliated corporation.
- Creditor Corporation Defined
The creditor corporation is considered to be the parent, subsidiary, or affiliated
corporation to which the indebtedness is directly owed.
- Holding Companies
Franchise tax payable by a qualified holding company on its capital stock
and surplus tax base shall be limited to an amount not exceeding $75,000.
There is no limitation on the amount of franchise tax payable where the alternative
tax bases of investment in tangible property, or appraised value of property
apply.
- Cash Basis Corporations (Section .1115)
Corporations using the cash basis method of accounting for income tax purposes
may not compute the capital stock, surplus and undivided profits base by this
method. Assets and liabilities must be accrued and reported for franchise
tax purposes.
I. Multistate Corporations. (G.S. 105-122(c))
- Apportionment Formula
Every corporation permitted to allocate its net income for income tax purposes
under the provisions of G.S. 105-130.4 must apportion its capital stock, surplus
and undivided profits for franchise tax purposes through use of the same fraction
computed for apportionment of its business income under G.S. 105-130.4. Adjustments
in the method of allocation authorized by the Tax Review Board for apportionment
of net income do not apply automatically to apportionment of capital stock,
surplus and undivided profits. Unless the Board specifically authorizes a
modified method of allocation for franchise tax purposes, the statutory formula
must be used.
- Alternate Apportionment Formula
If any corporation believes that the statutory allocation formula allocates
more of its capital stock, surplus and undivided profits to North Carolina
than is reasonably attributable to its business in this State, it may petition
the Tax Review Board for permission to use an adjusted allocation formula
which it believes would more properly allocate its capital stock, surplus
and undivided profits to North Carolina. The petition must be filed with the
Board not later than 90 days after the regular or extended due date of the
tax return. Taxpayers should address all correspondence in connection with
such petitions to the Secretary of the Tax Review Board, Revenue Building,
Raleigh, North Carolina 27604.
J. Investment in Tangible Properties in North Carolina Base.
(G.S. 105-122(d))
- Basis For the Investment Base
This base includes the original purchase price less reserve for depreciation
permitted for income tax purposes of all tangible property, including real
estate located in North Carolina at the end of the income year immediately
preceding the due date of the return.
- What is Includable in the Investment Base (Section .1302)
Include all tangible assets located in North Carolina at original purchase
price less reserve for depreciation permitted for income tax purposes. In
addition to the types of property listed in the schedule, include all other
tangible property owned such as supplies and tools. Typical items of tangible
property would include: inventory (valued at actual cost or by method consistent
with the actual flow of goods), consigned inventories to be included by consignor,
machinery and equipment, furniture and fixtures, containers, tools and supplies,
land, buildings, leasehold improvements, and all other tangible assets.
- Treatment of Construction in Progress (Section .1303)
Construction in progress is excluded from this base only if such property
is not owned by the corporation filing the return.
- Indebtedness Deduction
- A deduction from the tangible property base is allowed for existing
indebtedness incurred in the purchase or permanent improvement of real
estate. The deductible amount cannot exceed the book value (cost less
depreciation) of the real estate acquired or improvements made. Indebtedness
incurred in the purchase of personal property is not deductible even though
the funds borrowed may have been secured by a lien against real estate.
- Indebtedness owed to or endorsed or guaranteed by a parent,
subsidiary or affiliated corporation constitutes a part
of the debtor corporation's capital and therefore, cannot
be deducted from the tangible property tax base (except
to the extent explained below) even though such indebtedness
was incurred in the purchase or permanent improvement of
real estate. The extent to which such indebtedness can be
deducted is the amount of the total debt excluded by the
debtor corporation from its capital stock, surplus and undivided
profits tax base by application of the creditor corporation's
borrowed capital ratio.
Example: ABC Corporation owes its parent, XYZ Corporation
$300,000 which it borrowed for the purchase of real estate.
XYZ's borrowed capital from non-affiliated sources is $500,000
and its assets total $750,000. Assuming ABC Corporation
owns no other tangible property, its tangible property base
would be computed as follows:
| Investment in real estate |
$300,000 |
Deductible indebtedness:
XYZ's borrowed capital $500,000
--------------------------------------------------------x $ 300,000 |
$200,000 |
XYZ's total assets $750,000
Net tangible property base |
$100,000 |
- When real estate and personal property are acquired at a lump sum price
and the specific amount of indebtedness applicable to each type of property
cannot be determined, the deductible amount is the proportion of the total
amount that the cost assigned to the real estate bears to the total cost
of the properties.
Example: ABC Corporation, which operates on a calendar-year basis, purchased
an entire plant for $1,000,000, paying $100,000 down and giving a mortgage
for the balance. Costs were allocated to specific assets as follows:
-
| Land |
$ 50,000 |
| Building |
300,000 |
| Machinery and other personal property |
650,000 |
| Total purchase price |
$1,000,000 |
At December 31,1999 the balance owed on the mortgage was $850,000. The
amount of indebtedness deductible from total investment in tangible
properties on the return due on March 15, 2000 would be computed as
follows:
Total cost of land and
building $350,000
-----------------------------------------x $850,000 = |
$297,500 |
| Total cost of plant $1,000,000 |
|
No interest accrued on the mortgage would be deductible or used in the
computation.
- Refinancing of a Loan (Section .1306)
When an existing loan incurred in the purchase or improvement of real estate
is refinanced and additional funds are secured and spent for purposes other
than the purchase or improvement of real estate, the deductible portion of
the new loan is determined on the basis of the unpaid balance of the old loan
to the total of the new loan.
Example: A corporation operating on a March 31 fiscal year purchased land
and a building several years ago and incurred a mortgage of $50,000. The balance
of this mortgage at December 31,1999 was $30,000. At that time the mortgage
was refinanced and the new loan was $40,000. The additional $10,000 was used
to buy machinery and for working capital. At March 31,2000 (end of fiscal
year) the mortgage balance was $39,000.
Unpaid balance of
original loan $30,000
---------------------------------------------x $39,000 = |
$29,250 |
| Total balance of new loan $40,000 |
|
- Pollution Abatement Facilities
A deduction from the tangible property base is provided for the cost of any
air-cleaning device, or sewage or waste treatment plant, including waste lagoons,
and pollution abatement equipment certified by the Department of Environment
and Natural Resources or the Environmental Management Commission. Cost should
be net of any depreciation on the equipment excluded from the base.
- Qualifying Recycling, Sewer Service, and Hazardous Waste Facilities
A deduction from the tangible property base is provided for the cost of installing
equipment or constructing facilities for the purpose of recycling or resource
recovering of or from solid waste certified by the Department of Environment
and Natural Resources.
Deductions are also provided for the cost of constructing facilities of any
private or public utility built for the purpose of providing sewer service
to residential and outlying areas and the cost of equipment and facilities
acquired for the purpose of reducing the volume of hazardous waste generated.
For purposes of this section, 'cost' should be net of any depreciation
on the equipment or facilities excluded from the tangible property
base.
- Determination of Inclusion by Depreciation Deduction (Section .1309)
When two or more corporations are in doubt as to which should include property,
including leased property, in the investment in tangible property base, such
property shall be included by the corporation allowed depreciation under the
Federal Code.
- Holding Company
There is no limitation on the franchise tax payable by a holding company on
its investment in tangible property tax base.
K. Appraised Valuation of Tangible Property Base. (G.S. 105-122(d))
- Basis For Tangible Property
Tangible property values for this base are computed on fifty-five percent
of the appraised value of all property listed for county ad valorem tax in
North Carolina as of January 1 of the calendar year next preceding the due
date of the return.
Note: Also included in the appraised value of property for county
ad valorem tax is the appraised value of all vehicles for which the county
tax assessor has issued a billing during the income year.
- Holding Company
There is no limitation on the franchise tax payable by a holding company on
its appraised valuation of property tax base.
- Investment Base Property Included (Section .1406)
A corporation including property in the investment in tangible property base
shall also include the value of this property in the appraised valuation base.
L. Change of Income Year (G.S. 105-122(e))
- Computation of Tax (Section .1501)
A change in income year automatically establishes a new franchise year. A
combined franchise and income tax return is required for the short income
period. Credit is permitted on such return against the franchise tax to the
extent that the new franchise year overlaps the old year.
Examples: A corporation changes its income year from a calendar
year to one ending July 31. A combined franchise and income return is required
for the short period January 1, 1999 through July 31, 1999 (7 months). Franchise
tax paid on the 1998 return applicable to the calendar year 1999 was $242.88.
Franchise tax on the short period return would be applicable to the year
August 1, 1999 through July 31, 2000 and would be computed as follows:
-
| Total Tax Due per return |
|
$268.00 |
Less credit for portion of prior year's tax:
|
|
|
Total Tax Due on 1998 return
|
$242.88 |
|
Less amount applicable to short period (7/12) of $242.88
|
141.68 |
|
Amount applicable beyond
short period
|
|
101.20 |
Net franchise tax due on short
period return
|
|
$166.80 |
| |
|
===== |
- Computation of Tax When Merger is Involved (Section .1502)
Often when two corporations merge, a question arises concerning
which corporation is liable for the franchise tax. If the merger
is effective at any time after the close of the submerged corporation's
year end, then the submerged corporation is liable for the tax.
If the merger is effective at any time prior to the close of
the submerged corporation's year end, then the surviving corporation
is liable for the tax.
Since franchise tax is prepaid, a special computation is sometimes required
to prevent a duplication of tax when two or more corporations with different
income years merge or otherwise transfer the entire assets from one corporation
to the other. The following example illustrates the conditions under which
this occurs.
Example: ABC Corporation whose income year ends
July 31 merged into XYZ Corporation whose income year is the
calendar year. The merger occurred on October 31, 1999. ABC
filed a combination franchise and income tax return for the
year ended July 31, 1999 and paid franchise tax of $600 applicable
to the ensuing year ending July 31, 2000. XYZ filed a combination
return for the calendar year 1998 and paid franchise tax of
$700 applicable to the ensuing calendar year 2000. The assets
reflected in ABC's tax base were also reflected in XYZ's tax
base since they had been transferred to XYZ in the merger,
and therefore, were on its books as of the end of its income
year, December 31,1999. The year to which ABC's payment applied
overlapped the year to which XYZ's payment applied by seven
months (January 1, 2000 through July 31, 2000) and reflected
a duplication of tax to that extent.
Where the conditions illustrated in the above example exist,
namely; where the acquiring corporation acquired the entire
assets of the disposing corporation; the acquiring and disposing
corporations had different income years; the date of merger
or transfer was after the end of the disposing corporation's
income year next preceding such transfer but before the beginning
of the surviving corporation's income year next following such
transfers; and the disposing corporation had paid franchise
tax applicable to its income year in which the transfer occurred,
the acquiring corporation may compute its franchise tax on its
franchise and income tax return for the income year in which
the transfer occurred as shown in the following example:
-
Example:
Franchise tax per acquiring
corporation's return for income
year in which transfer occurred |
|
|
$700 |
Less:
Franchise tax paid by disposing
corporation per return for income
year immediately preceding
transfer |
|
$600 |
|
Less:
Number of months between the ending dates on the above returns |
5
|
|
|
| ----------------------------------------- |
--- x $600
|
250 |
350 |
| Number of months in year |
12
|
|
|
| Net franchise tax due |
|
|
$350 |
M. Corporations Conditionally or Partially Exempt (G.S. 105-122
& 125)
- Non-Profit Organizations
The following organizations and any other organization exempt from federal
income tax under the Code referred to under G.S. 105-130.3 are exempt from
franchise tax if they are not organized for profit and if no profit inures
to the benefit of any member, shareholder or other individual:
- Fraternal societies, orders or associations. To quality for income
tax exemption, the organization must operate under the lodge system or
for the exclusive benefit of members of a fraternity which is operating
under the lodge system; and provide life, sick, accident or other benefits
to the members or their dependents.
- Corporations organized or trusts created for religious, charitable,
scientific or educational purposes, including cemetery corporations and
organizations for the prevention of cruelty to children and animals.
- Business leagues, chambers of commerce, merchants associations and boards
of trade.
- Civic leagues or organizations operated exclusively for the promotion
of civic welfare.
- Clubs organized and operated exclusively for pleasure, recreation and
other non-profit purposes.
- Mutual hail, cyclone and fire insurance companies; mutual ditch, irrigation,
canning and breeding associations; mutual or cooperative telephone companies;
and like organizations of a purely local character which derive their
entire income from assessments, dues or fees collected from members for
the sole purpose of meeting expenses.
- Farmer's marketing associations operating as sales agents to market
the products of members or other farmers, and to return
to them the proceeds, less the necessary selling expenses,
on the basis of the quantity of product furnished by them.
- Pension, profit-sharing, stock bonus and annuity trusts established
by employers for the purpose of distributing both the principal and income
thereof exclusively to eligible employees or the beneficiaries of such
employees. There must be no discrimination in favor of any particular
employee. The interest of individual employees must be irrevocable and
nonforfeitable to the extent of contributions by such employees. Exemption
of a trust under the Federal income tax law is a prima facie basis for
granting exemption from North Carolina franchise and income taxation.
- Condominium associations, homeowner associations or cooperative housing
corporations not organized for profit.
- Cooperative or mutual associations formed under Section 54-124 of the
General Statutes to conduct agricultural business on the mutual plan,
and marketing associations formed under Section 54-129 of the General
Statutes, are exempt from franchise tax.
- Corporations Fully Exempt
Corporations which quality for the full franchise tax exemption are described
below.
- Insurance companies subject to the tax on gross premiums are exempt
from the general business franchise tax.
- Telephone membership corporations organized under Chapter 117 of the
General Statutes of North Carolina are exempt from the general business
franchise tax. Electric membership corporations are, however, subject
to franchise taxes.
- Regulated Investment Companies and Real Estate Investment Trusts
These are organizations or trusts which quality under the United
States Code as a "regulated investment company" or
"real estate investment trust" and file with the Revenue
Department an election to be treated as such a company or trust.
They are required to pay franchise tax; however, in determining their “capital
stock, surplus, and undivided profits base” they are allowed to deduct the
aggregate market value of investments in the stock, bonds, debentures, or
other securities or evidences of debt of other corporations, partnerships,
individuals, municipalities, governmental agencies or governments.
- Real Estate Mortgage Investment Conduits (REMIC)
Organizations which quality under the Code as Real Estate Mortgage Investments
Conduits (REMIC) are exempt from franchise tax, and are also exempt from income
tax to the extent the REMIC is exempt from income tax under the Code.
- Limited Liability Company (LLC)
The "North Carolina Limited Liability Company Act"
(Chapter 57C of the North Carolina General Statutes) permits
the organization and operation of limited liability companies
(LLC). A LLC is a business entity that combines the S corporation
characteristic of limited liability with the flow-through features
of a partnership.
- Exempt from Franchise Tax - The LLC is exempt from franchise
tax since the LLC is excluded from the definition of organizations subject
to franchise tax.
- Files as Corporation if Required for Federal - The LLC is subject
to State taxation according to its classification for federal income tax
purposes. If the corporation is classified as a corporation for federal
income tax purposes, then the LLC files as a corporation for North Carolina
income tax purposes.
- Subject to Suspension and Reinstatement Provisions - The LLC
is subject to the same provisions as apply to corporations relating to
suspension of charter, penalties for operating with a suspended charter
and reinstatement of rights after suspension of charter.
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