C. Computation of Net Income (G.S. 105-130.3 and G.S. 105-130.5)
- Preliminary Statement.
To compute State net income or net loss, a corporation simply
uses its Federal taxable income as defined in the Internal Revenue
Code in effect for the tax year for which the return is to be
filed as a beginning point and adds thereto or deducts therefrom
the items listed below.
To simplify the preparation and filing of its State income tax
return, a corporation may attach a copy of its Federal income
tax return and supporting schedules in lieu of completing the
corresponding schedules in its State return.
- Adjustments to Federal Taxable Income
The following additions to Federal taxable income must be made
in determining State net income:
The following deductions from Federal taxable income must be made
in determining State net income:
- Taxes based on or measured by net income by whatever name
called and excess profits taxes.
- Interest paid in connection with income exempt from State
income taxation. (See Subject: "Attribution of Expenses
to Nontaxable Income and to Nonbusiness Income and Property.")
- The contributions deduction allowed by the Internal Revenue
- Interest income earned on bonds and other obligations of
other states or their political subdivisions, less allowable
amortization on any bond acquired on or after January 1, 1963.
- The amount by which gains have been offset by the capital
loss carryover allowed under the Internal Revenue Code. All
gains recognized on the sale or other disposition of assets
must be included in determining State net income or loss in
the year of disposition.
- The net operating loss deduction allowed by the Internal
- Payments to or charges by a parent, subsidiary or affiliated
corporation in excess of fair compensation in all intercompany
transactions of any kind whatsoever.
- The amount of all income tax credits claimed against the
corporation's income tax liability during the income year.
In lieu of the addback of tax credits to federal taxable income,
taxpayers must now reduce the amount of credit available by
the current income tax rate. (See Form CD-425, Part 4, Line
- Percentage depletion in excess of cost depletion applicable
to mines, oil and gas wells and other natural deposits located
outside this State.
- The amount allowed under the Code for depreciation or as
an expense in lieu of depreciation for a utility plant acquired
by a natural gas local distribution company, to the extent
the plant is included in the company's rate base at zero cost
in accordance with G.S. 62-158.
- The amount of income the Code allowed the taxpayer to exclude
because the income was attributed under Section 925 of the
Code to a foreign sales corporation (FSC), to the extent the
Code required the amount to be included in the federal taxable
income of the foreign sales corporation to which it was attributed.
(Repealed effective January 1, 2002.)
- Royalty payments made and deducted as an expense by a payer
in arriving at federal taxable income if the election is made
under G.S. 105-130.7A for the recipient to exclude the royalty
income from its income. (Effective for taxable years beginning
on or after January 1, 2001.) No underpayment of estimated
income tax penalties will be applied to underpayments created
by this addition for a taxable year beginning on or after
January 1, 2001, and before January 1, 2002.)
- Interest (net of expenses) received from North Carolina
obligations included in federal taxable income.
- Interest upon the obligations of the United States or its
possessions, to the extent included in Federal taxable income.
Provided, interest upon the obligations of the United States
shall not be an allowable deduction unless interest upon obligations
of the State of North Carolina or any of its political subdivisions
is exempt from income tax imposed by the United States. (See
Subject: "Attribution of Expenses to Nontaxable Income
and to Nonbusiness Income and Property.")
- Payments received from a parent, subsidiary, or affiliated
corporation in excess of fair compensation in intercompany
transactions which in the determination of the net income
or net loss of such corporation were not allowed as a deduction
under this State's revenue laws.
- Net economic losses incurred by the corporation in any or
all of the fifteen (15) preceding years pursuant to the provision
of G.S. 105-130.8. For specific instructions with respect
to net economic loss determination and requirements applicable
to multistate corporations, see Subject: "Net Economic
- Contributions or gifts made by the corporation within the
income year to the extent provided under G.S. 105-130.9. (See
Subject: "Deduction of Contributions.")
- Amortization in excess of depreciation allowed for Federal
income tax purposes on the cost of sewage, waste or air pollution
facilities; recycling and resource recovering facilities;
or hazardous waste disposal facilities as provided in G.S.
105-130.10. (See Subject: "Rapid Amortization of Air
or Water Pollution Abatement, Recycling and Resource Recovering,
Sewage, and Hazardous Waste Facilities.")
- Depreciation of emergency facilities acquired prior to January
1, 1955. Any corporation shall be permitted to depreciate
any emergency facility, as such is defined in Section 168
of the Internal Revenue Code in effect prior to 1976 over
its useful life, provided such facility was acquired prior
to January 1, 1955, and no amortization has been claimed on
such facility for State income tax purposes.
- The amount of losses realized on the sale or other disposition
of assets not allowable under Section 1211(a) of the Internal
Revenue Code. All losses recognized on the sale or other disposition
of assets must be included in determining State net income
or loss in the year of disposition.
- The portion of undistributed capital gains of regulated
investment companies included in Federal taxable income and
on which the Federal tax paid by the regulated investment
company is allowed as a credit or refund to the shareholder
under Section 852 of the Internal Revenue Code.
- The amount by which a deduction for an ordinary and necessary
business expense on the corporation's federal income tax return
was reduced and not allowable as a deduction because the corporation
claimed in lieu of such amount a tax credit against its federal
income tax due for the income year.
- Reasonable expenses, in excess of deductions allowed for
federal income tax purposes, paid for reforestation and cultivation
of commercially grown trees, except that the deduction shall
be allowed only to those corporations whose real owners are
natural persons actively engaged in the commercial growing
of trees, or the spouse, siblings, or parents of such persons.
In no case shall a corporation be allowed a deduction for
the same cultivation or reforestation expenditure more than
- The amount by which the basis of a depreciable asset has
been reduced on account of a tax credit allowed for federal
- Market assessments paid by the corporation on tobacco grown
in North Carolina.
- The amount of natural gas expansion surcharges collected
by a natural gas local distribution company under G.S. 62-158.
- The amount of 911 service charges collected under G.S. 62A-5
and remitted to a local government under G.S. 62A-6, and the
amount of wireless Enhanced 911 service charges collected
under G.S. 62A-23 and remitted to the Wireless Fund under
- Any interest, investment earnings, and gains of a Trust
established by two or more manufacturers that signed a settlement
agreement with N.C. to settle claims for damages attributable
to a product of the manufacturers.
- Dividends treated as received from sources outside the United
States, as determined under section 862 of the Code, net of
related expenses, to the extent included in federal taxable
income. (Effective for taxable years beginning on or after
January 1, 2001. No underpayment penalties will be applied
to underpayments created by this deduction being limited to
"net of related expenses" for a taxable year beginning
on or after January 1, 2001, and before January 1, 2002.)
- Any amount included in federal taxable income under section
78 or section 951 of the Code, net of related expenses. (Effective
for taxable years beginning on or after January 1, 2001. No
underpayment penalties will be applied to underpayments created
by this deduction being limited to "net of related expenses"
for a taxable year beginning on or after January 1, 2001,
and before January 1, 2002.)
- Royalty payments received by a recipient from a payer, if
the election is made under G.S. 105-130.7A for the payer to
exclude the royalty payments from its expenses deduction.
(Effective for taxable years beginning on or after January
- Hurricane relief or assistance payments made to taxpayer
by the Office of State Budget, Planning, and Management from
the Hurricane Floyd Reserve Fund to the extent included in
federal taxable income. Compensation paid from the Fund to
the taxpayer for goods or services is not deductible.
Other adjustments to Federal taxable income that must be made
in determining State net income are listed below:
- In determining State net income, no deduction shall be allowed
for annual amortization of bond premiums applicable to any
bond acquired prior to January 1, 1963. The amount of premium
paid on any such bond shall be deductible only in the year
of sale or other disposition.
- Federal taxable income must be increased or decreased to
account for any difference in the amount of depreciation,
amortization, or gains or losses applicable to property that
has been depreciated or amortized by use of a different basis
or rate for State income tax purposes than used for Federal
income tax purposes.
- No deduction is allowed for any direct or indirect expenses
related to income not taxed, except no adjustment would be
made under this subsection for adjustments addressed previously
(See Subject: "Attribution of Expenses to Nontaxable
Income and to Nonbusiness Income and Property.")
- Federal taxable income must be adjusted in instances where
the taxable income change caused by the recovery of previously
deducted amounts may be different for state income tax purposes.
- A saving and loan association may deduct interest earned
on deposits at the Federal Home Loan Bank of Atlanta to the
extent included in federal taxable income.
- Depreciation Recapture.
Depreciation recapture under Federal provisions must also be
included in State net income. Since depreciation recapture is
included in the corporation's Federal taxable income, no adjustment
is necessary in computing its State net income.
- Unrealized Income from Installment Sales Taxable upon Termination
of Business. A corporation which withdraws from this State,
dissolves, merges, or consolidates its business, or terminates
its business in this State by any other means whatsoever is
required to file a final income tax return within 75 days after
the close of business. If the corporation uses the installment
method of reporting income, all unrealized or unreported income
from installment sales made while doing business in this State
must be included in State net income on the final return.
- International Banking Facility. Net income or loss
from an international banking facility included in the corporation's
federal taxable income shall be excluded in determining State