FRANCHISE TAX
(Subchapter 5b)

A. General Information (G.S. 105-114)

  1. 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:
    1. G.S. 105-122 General business corporations
    2. G.S. 105-116 Electric light, power, water, sewerage and other similar businesses not otherwise taxed
    3. G.S. 105-119 Telegraph companies
    4. G.S. 105-120 Telephone companies
    5. G.S. 105-120.1 Street bus companies
    6. G.S. 105-121.1 Mutual burial associations
    7. 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.

  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

  7. 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.
  8. 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)

  1. 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.

  2. 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:
    1. 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.
    2. 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.
  3. 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.
  4. 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.
  5. 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)

  1. 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.
  2. 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.
  3. 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)

  1. 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 (6½%) sales tax rather than the combined 3.22% franchise tax and three percent (3%) sales tax.
  2. 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:
    1. 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.
    2. 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.
  3. Forms to be Used for Filing
    Form CD-311 is to be used for filing the reports.
  4. 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.
  5. 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)

  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.
  2. Due Date of the Tax
    The tax is due on or before June 1.
  3. 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)

  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.
  2. Due Date of the Tax
    The tax is due on or before April 1 of each year.
  3. 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)

  1. 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.
  2. Franchise Tax Bases
    The taxable franchise tax base is the largest of these tax bases:
    1. Capital stock, surplus and undivided profits
    2. Fifty-five percent of appraised ad valorem tax value of all tangible property plus value of intangible property in N. C.
    3. Actual investment in tangible property in North Carolina
  3. 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.
  4. 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.
  5. 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.
  6. 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).
  7. 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))

  1. 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.
  2. 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.
  3. 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.

  4. 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.
  5. Investment in Subsidiary (Section .1105)
    No reduction of the capital stock base is allowed for the investment in a subsidiary.
  6. 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

  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. Creditor Corporation Defined
    The creditor corporation is considered to be the parent, subsidiary, or affiliated corporation to which the indebtedness is directly owed.
  14. 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.
  15. 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))

  1. 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.
  2. 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))

  1. 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.
  2. 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.
  3. 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.
  4. Indebtedness Deduction
    1. 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.
    2. 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

    3. 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.

  5. 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  

  6. 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.
  7. 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.
  8. 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.
  9. 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))

  1. 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.
  2. Holding Company
    There is no limitation on the franchise tax payable by a holding company on its appraised valuation of property tax base.
  3. 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))

  1. 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
        =====
  2. 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)

  1. 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:
    1. 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.
    2. 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.
    3. Business leagues, chambers of commerce, merchants associations and boards of trade.
    4. Civic leagues or organizations operated exclusively for the promotion of civic welfare.
    5. Clubs organized and operated exclusively for pleasure, recreation and other non-profit purposes.
    6. 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.
    7. 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.
    8. 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.
    9. Condominium associations, homeowner associations or cooperative housing corporations not organized for profit.
    10. 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.
  2. Corporations Fully Exempt
    Corporations which quality for the full franchise tax exemption are described below.
    1. Insurance companies subject to the tax on gross premiums are exempt from the general business franchise tax.
    2. 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.
  3. 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.
  4. 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.
  5. 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.
    1. 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.
    2. 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.
    3. 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.