I. Business and Nonbusiness Income (G.S. 105-130.4) (Section .0700)
- Division of Income-In General
When a taxpayer has income from sources within this State as well
as income from sources outside this State, the division of income
and the resulting determination of the portion of the taxpayer's
entire net income which is attributable to this State shall be
determined pursuant to the allocation and apportionment provisions
set forth in G.S. 105-130.4. In such cases, the first step is
to determine which portion of the taxpayer's entire net income
constitutes "business income" and which portion constitutes
"nonbusiness income". The various items of nonbusiness
income are then directly allocated to specific jurisdictions pursuant
to the provisions of subsections (d) through (h) of G.S. 105-130.4.
The business income of the taxpayer other than public utilities
and excluded corporations is divided between the jurisdictions
in which the business is conducted pursuant to the property, payroll
and sales apportionment factors set forth in subsections (i) though
(1) of G.S. 105-130.4. The sum of (1) the items of nonbusiness
income directly allocated to this State, plus (2) the amount of
business income attributable to this State by the apportionment
formula generally constitutes the amount of the taxpayer's entire
net income which is subject to tax under the income tax laws of
The taxpayer shall classify income as business or nonbusiness income on a
consistent basis. In the event the taxpayer is not consistent in its reporting,
it shall disclose in its return to this State the nature and extent of the
The word "apportionment" generally refers to the division
of net income between jurisdictions by the use of a formula containing
apportionment factors, and the word "allocation" generally
refers to the assignment of net income to a particular jurisdiction.
- Business and Nonbusiness Income Defined
The Revenue Act defines "business income" as income
arising from transactions and activities in the regular course
of the taxpayer's trade or business and includes income from tangible
and intangible property if the acquisition, management and/or
disposition of the property constitute integral parts of the taxpayer's
regular trade or business operations. In essence, the business
income of the taxpayer is that portion of the taxpayer's entire
net income which arises from the conduct of the taxpayer's trade
or business operations. For purposes of administration of G.S.
105-130.4, the income of the taxpayer is business income unless
clearly classifiable as nonbusiness income under the law and these
regulations. Nonbusiness income means all income other than business
- Business and Nonbusiness Income-Application of Definitions
The classification of income by the labels customarily given them,
such as interest, rents, royalties, capital gains, is of no aid
in determining whether that income is business or nonbusiness
income. The gain or loss recognized on the sale of property, for
example, may be business income or nonbusiness income depending
upon the relation to the taxpayer's trade or business. Examples
of business and nonbusiness income are shown below.
- Rents and Royalties from Real and Tangible Personal Property
Rental income from real and tangible personal property constitutes
business income when the rental of such property is a principal
business activity of the taxpayer or the rental of the property
is related to or incidental to the taxpayer's principal business
- Gains or Losses from Sale of Assets
A gain or loss from the sale, exchange or other disposition of real or
tangible property or intangible personal property constitutes business
income if the property while owned by the taxpayer was used to produce
business income. However, the gain or loss will constitute nonbusiness
income providing (1) such property was subsequently utilized principally
for the production of nonbusiness income for a period of at least three
(3) years prior to the disposition and (2) such property was reflected
as nonbusiness on the corporate income tax returns filed for those years.
Interest income is business income if the intangible with respect to which
the interest was received arises out of or was created by a business activity
of the taxpayer and in those situations where the purpose for acquiring
the intangible is directly related to the business activity of the taxpayer.
For taxable years ending before January 1, 1998, dividend income is considered
nonbusiness income with the exception of DISC dividends and dividends
received by a corporation whose principal business activity is dealing
Effective for taxable years beginning on or after January
1, 1998, (See North Carolina Department of Revenue "Technical
Advice Memorandum, Subsidiary Dividends and Other Dividend
Income, CTAM 97-14" dated September 15, 1997), dividend
income may be either business income or nonbusiness income
depending on its nature. Dividend income will be considered
business income if any of the following circumstances apply:
- The dividend arises out of or is acquired in the regular course
of the corporation's trade or business.
- The purpose of the corporation in acquiring or holding
the stock that gives rise to the dividend is related to
the corporation's trade or business.
- The dividend is paid by a unitary subsidiary.
If dividend income is not business income, it is nonbusiness income.
- Patent and Copyright Royalties
Patent and copyright royalties are business income if the patent or copyright
was created or used as an integral part of a principal business activity
of the taxpayer.
- Proration of Deductions Related to Business and Non-business Income
Any allowable deduction that is applicable both to business and
nonbusiness income or to more than one "trade or business"
of the taxpayer shall be prorated to those classes of income or
trades or businesses in determining income subject to tax. The
taxpayer shall be consistent in the proration of such deduction
or deductions in filing returns under these regulations. (Also
see Subject: "Attribution of Expenses to Nontaxable Income
and to Nonbusiness Income and Property").