U. Exempt Corporations (G.S. 105-125, G.S. 105-130.11, and G.S. 105-130.12)
- Preliminary Statement
Some types of corporations are fully exempt from income and franchise taxes,
whereas others are conditionally or partially exempt, subject to the conditions
set out in number 2 of this section.
- Corporations Fully Exempt
Corporations which have qualified for the full income tax exemption are described
in the following subsections.
- Insurance companies subject to the tax on gross premiums are exempt
from income tax.
- Telephone membership corporations organized under Chapter 117 of the
General Statutes of North Carolina are exempt from income tax. Electric
membership corporations are also exempt from income taxes.
- Corporations Conditionally or Partially Exempt
The following organizations and any organization exempt from Federal Income
Tax under the Code are exempt from both franchise tax and corporation income
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 qualify for income tax
exemption, the organization must (a) operate under the lodge system or
for the exclusive benefit of members of a fraternity which is operating
under the lodge system; and (b) 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
- 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.
- Farmers' 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 required to file an annual income tax return on form CD-418
and to pay tax on any net income not refunded on a patronage basis on
or before the 15th day of the ninth month after close of the income year.
They are also required to furnish with this return the names and addresses
of all persons paid a patronage refund of $10.00 or more, and the amount
of the refund paid to each.
- Organizations exempt from Federal income tax but not covered by a specific
section of the N. C. statutes
The Non-Profit Organizations and Cooperative and Mutual Associations
listed above are not exempt from tax on income received in excess of $1,000
annually from business activities not substantially related to the functions
for which the organizations or associations were formed. However, they are
fully exempt from tax on the following income unless such income is classified
as unrelated business taxable income under the Code: Interest, royalties,
dividends and rentals; income from a business operated without cost to the
organization; income from the sale of merchandise donated to the organization;
income from a business conducted by a religious, charitable, scientific, or
educational organization for the convenience of its members; income derived
from research performed by a college, university or hospital, or performed
for a governmental unit or agency, or performed by a research organization
primarily for the benefit of the public, unless such income is deemed to be
related income by the IRS.
Homeowners associations are taxed on gross income (excluding membership income),
less allowable deductions. The $1,000.00 specific deduction does not apply
to homeowners associations.
- Regulated Investment Companies and Real Estate Investment Trusts
These are organizations or trusts which qualify under the United
States Code as a "regulated investment company" or a
"real estate investment trust" and file with the Revenue
Department an election to be treated as such a company or trust.
They are exempt from income tax only on that part of their net income which
is distributed or declared for distribution to shareholders during the income
year or by the time required by law for the filing of the return for the income
year including the period of any extension of time granted for filing such
- Real Estate Mortgage Investment Conduits (REMIC)
Organizations which qualify 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.
- Proof of Exemption
A corporation is not exempt from tax merely because it is not
organized and operated for profit. Nor does the fact that it is
formed under Chapter 55A of the General Statutes (the "Non-Profit
Corporation Act") automatically entitle a corporation to
Every corporation claiming exemption as a non-profit organization or as cooperative
or mutual association must furnish the Secretary of Revenue a copy of its
Articles of Incorporation and bylaws, and any other document or information,
such as a trust agreement, which may be requested. After reviewing the evidence
submitted, the Secretary will notify the corporation whether or not it qualifies
The principal factors which are considered in determining taxable
status are the corporation's character; its purposes, the activities
in which it will engage; the sources and disposition of its income;
whether any of its net income may inure to any private individual;
and what disposition will be made of its assets in event of dissolution.
It is the policy of the Revenue Department, except when the nonprofit nature
and intent of the corporation is otherwise clearly indicated, to require that
the Articles of Incorporation or bylaws of the corporation contain a specific
stipulation that no part of its net income shall inure to the benefit of any
private member, shareholder or other individual, either during the existence
of the corporation or in the event of its dissolution.
- Notification of Change In Purposes or Operations
If any change is made in its purposes or method of operation which affects
its taxable status, an exempt corporation should promptly notify the Revenue
Department of such change.