C. Business & Energy Tax Credits (Article 3B of Chapter 105)

  1. General Information (Applies to all credits under this article unless otherwise noted.)

    1. Franchise, Income, or Gross Premium Tax Election (G.S. 105-129.17(a))
      The credits allowed under this article can be taken against franchise or income tax, but not against insurance gross premium tax unless otherwise noted. The taxpayer must elect the tax against which a credit will be claimed when filing the return on which the first installment of the credit is claimed. This election is binding. All future installments and carryforwards of a credit must be claimed against the same tax.

    2. Cap on Credit (G.S. 105-129.17(b))
      Total credits claimed under this article may not exceed fifty percent (50%) of the tax against which they are claimed for the taxable year, reduced by the sum of all other credits, including carryforwards, against that tax, except tax payments made by or on behalf of the taxpayer.

    3. Credit Carryforward (G.S. 105-129.17(b))
      Unused portions of the credits may be carried forward for the succeeding five years unless otherwise noted, but must be taken against the same tax as on the return on which the credit was first taken.

    4. Substantiation (G.S. 105-129.18)
      The burden of proving eligibility for any credit under this article rests upon the taxpayer. Every taxpayer claiming a credit under this article must maintain and make available for inspection by the Secretary of Revenue any records the Secretary considers necessary to determine and verify the amount of the credit to which the taxpayer is entitled. No credit may be allowed to any taxpayer that fails to maintain adequate records or to make them available for inspection.

    5. Forms
      The Form NC-478 series is used to calculate and report tax credits, including the tax credits allowed under Article 3B, that are limited to fifty percent (50%) of the taxpayer's tax less the sum of all other credits that the taxpayer claims. Forms NC-478A through NC-478H are used to calculate the specific credits without regard to the fifty percent (50%) limitation. Form NC-478 is used to total the specific credits, to determine if the fifty percent (50%) limitation applies, and, if so, to allocate the limited total credit among the specific credits.

      Both Form NC-478 and the applicable Form NC-478 series form must be filed for any taxable year in which the taxpayer is eligible to claim a credit or an installment of a credit against the taxpayer's tax liability for that year. This requirement applies even if the taxpayer's tax liability for that year is not large enough for the taxpayer to benefit from the credit.

  2. Credit for Investing in Business Property (G.S. 105-129.16)
    (Effective for taxable years beginning January 1, 1966 or later, and applicable to property placed in service on or after August 1, 1996, unless otherwise noted. The credit expires effective for taxable years beginning on or after January 1, 2002.)

    1. Credit
      A tax credit is allowed for four and one half percent (4.5%) of the cost, determined pursuant to Section 1012 of the Internal Revenue Code, of business property purchased or leased and placed in service in North Carolina during the taxable year. The maximum credit is $4,500. The credit is taken in five equal installments beginning with the taxable year in which the property is placed in service. (G.S. 105-129.16) A taxpayer may not claim a tax credit under Article 3A and 3B for the same property. The credit is not allowed for property expensed under Section 179 of the Internal Revenue Code.

    2. Business Property Defined
      Business property is tangible personal property that is used by the taxpayer in connection with a business or for the production of income and is capitalized by the taxpayer for tax purposes under the Internal Revenue Code. Business property excludes luxury passenger automobiles (Code Section 4001) and watercraft used primarily for entertainment at no admission charge. (G.S. 105-129.15)

    3. Leased Property
      Whether or not leased business property qualifies for the credit will depend on the type of lease. For example, business property leased under a capitalized lease would generally qualify for the credit, but business property leased under an operating lease generally would not qualify.

      A taxpayer that takes a tax credit under Article 3B for leased property must obtain written certification from the lessor that said lessor will not capitalize the property for federal tax purposes, nor claim an Article 3B tax credit for the subject property. (G.S. 105-129.16(c))

    4. Expiration of Credit
      If business property is disposed of, taken out of service, or moved out of North Carolina prior to the end of the five year period in which the credit is claimed, the credit expires and a taxpayer may not take any remaining installment of the credit except for the portion of an installment that accrued in a previous year and had been carried forward. (G.S. 105-129.16(b))

  3. Credit for Investing in Renewable Energy Property (G.S. 105-129.16A) (Effective for taxable years beginning on or after January 1, 2000)

    1. Credit
      If a taxpayer that has constructed, purchased, or leased renewable energy property places it in service during the taxable year, the taxpayer is allowed a credit equal to thirty-five (35%) of the cost of the property. No credit is allowed to the extent the cost of the renewable energy property was provided by public funds.

      If the taxpayer owns the property, the cost is determined in accordance with Section 1012 of the Code and is subject to the limitation on cost provided in section 179 of the Code. If the property is leased, the cost is eight times the net annual rental rate. The net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from sub-rentals. The sub-rentals are not deducted if they are business income for the taxpayer.

      If the property serves a single-family dwelling, the credit is taken for the taxable year in which the property is placed in service. For all other property, the credit is taken in five equal installments beginning with the year the property is placed in service.

    2. Cap on Credit (G.S. 105-129.16A(c))
      The maximum credit allowed for nonresidential property is $250,000 per installation. The credit ceilings for residential property are:

      1. $1,400 per dwelling unit for solar energy equipment for domestic water heating

      2. $3,500 per dwelling unit for solar energy equipment for active space heating, combined active space and domestic hot water systems, and passive space heating; and

      3. $10,500 per installation for any other renewable energy property for residential purposes.


    3. Eligible Renewal Energy Property (G.S. 105-129.15)
      Any of the following machinery and equipment or real property is considered to be eligible renewable energy property:

      1. Biomass equipment that uses renewable biomass resources for biofuel production of ethanol, methanol, and biodiesel; methane production using agricultural and animal waste or garbage; commercial thermal or electrical generation from renewable energy crops or wood waste material. Includes any equipment used for converting, conditioning and storing the liquid fuels, gas and electricity produced with biomass equipment.

      2. Hydroelectric generators located at existing dams or waterways and related devices for water supply and control and converting, conditioning, and storing the electricity generated.

      3. Solar energy equipment that uses solar radiation as a substitute for traditional energy for water heating, active space heating and cooling, passive heating, daylighting, generating electricity, distillation, desalination, detoxification, or the production of industrial or commercial process heat. Includes any equipment used for collecting, storing, exchanging, conditioning, or converting solar energy to other useful forms of energy.

      4. Wind equipment required to capture and convert wind energy into electricity or mechanical power and related devices.

    4. Expiration of Credit (G.S. 105-129.16A(b))
      If the property is disposed of, taken out of service, or moved out of North Carolina during the five year installment period, the credit expires and a taxpayer may not take any remaining installment of the credit except for the portion of an installment that accrued in a previous year and has been carried forward. No credit is allowed to the extent the cost of the renewable energy property was provided by public funds.

    5. Credit Availability (G.S. 105-129.16A(d))
      A taxpayer may not claim a credit for renewable energy property under Article 3B if the taxpayer is claiming any other credit allowed in Chapter 105 with respect to renewable energy property. A taxpayer may not take a credit for property the taxpayer leases from another unless the taxpayer obtains the lessor's written certification that the lessor will not claim a credit with respect to the property.

  4. Credit for Low-income Housing (G.S. 105-129.16B) (Effective for taxable years beginning on or after January 1, 2000, and applies to buildings to which federal credits are allocated on or after January 1, 2000)

    1. Credit
      A taxpayer is allowed a tax credit for low-income housing for North Carolina tax purposes equal to a percentage of the total federal income tax credit allowed for the taxable year under Section 42 of the Code with respect to a qualified North Carolina low-income building.

    2. Qualified Building
      For purposes of the credit, a building is a "qualified North Carolina low-income building" if it was allocated a federal income tax credit under Section 42(h)(1) of the Internal Revenue Code, and meets any of the following conditions:

      1. It is located, at the time the federal credit is allocated to the building, in a tier one or tier two area.

      2. It is located, at the time the federal credit is allocated to the building, in a tier three or tier four area and 40% of its residential units are both rent-restricted and occupied by individuals whose income is 50% or less of the area median gross income.

      3. It is located, at the time the federal credit is allocated to the building, in a tier five area and 40% of it's residential units are both rent-restricted and occupied by individuals whose income is 35% or less of area median gross income. (G.S. 105-129.16B(c))

    3. Computation of Credit (G.S. 105-129.16B(a))
      The amount of the credit is equal to 75% of the total federal credit if the building is located in a tier one or tier two area. For buildings in other tier designations, the credit is equal to 25% of the total federal credit.

      The total federal credit is the total allowed during the 10-year federal credit period plus the disallowed first year credit allowed in the 11th year. The total federal credit is calculated based on the qualified basis as of the end of the first year of the credit period and is not recalculated to reflect subsequent increases in the basis. (G.S. 105-129.16B(a))

    4. Special Provision (G.S. 105-129.16B(c)(1a))
      Effective for taxable years beginning on or after January 1, 2001, if a taxpayer qualifies for a federal income tax credit for low-income housing under section 42 of the Code and the property is located in a county that, at the time the federal credit is allocated to the building, has been designated as having sustained severe or moderate damage from a hurricane or a hurricane-related disaster, according to the Federal Emergency Management Agency impact map, revised September 25, 1999, the taxpayer is allowed a credit equal to seventy-five percent (75%) of the total federal credit without regard to tier designation. (This provision expires January 1, 2005.)

    5. Timing of Credit (G.S. 105-129.16B(b))
      The credit is taken in five equal installments beginning in the first taxable year in which the federal credit is taken. The amount of the installment for the first year must be multiplied by the applicable fraction under Section 42(f)(2)(A) of the Code. Any reduction in the amount of the first installment as a result of this multiplication is carried forward and may be taken in the first taxable year after the fifth installment is allowed.

    6. Allocation (G.S. 105-129.16B(b1))
      Notwithstanding the provisions of G.S. 105-131.8 and G.S. 105-269.15, a pass-through entity that qualifies for the credit provided in this section may allocate the credit among any of its owners in its discretion as long as the amount of credit allocated to an owner does not exceed the owner's adjusted basis in the pass-through entity, as determined under the Code, at the end of the taxable year in which the federal credit is first claimed. Owners to whom a credit is allocated are allowed the credit as if they had qualified for the credit directly. A pass-through entity and its owners must include with their tax returns for every taxable year in which an allocated credit is claimed a statement of the allocation made by the pass-through entity and the allocation that would have bee required under G.S. 105-131.8 or G.S. 105-269.15.

    7. Expiration (G.S. 105-129.16B(d))
      If, in one of the five years in which an installment of the credit accrues, the taxpayer becomes ineligible for the federal credit, then the credit expires and the taxpayer may not take any remaining installments of the credit. However, the taxpayer may take the portion of an installment that accrued in a previous year and was carried forward.

    8. Forfeiture for Disposition (G.S. 105-129.16B(e))
      If the taxpayer is required to recapture all or part of the federal credit claimed, it forfeits the corresponding part of the credit allowed for North Carolina purposes. If the credit was allocated among the owners of a pass-through entity, the forfeiture applies to the owners in the same proportion that the credit was allocated.

    9. Forfeiture for Change in Ownership (G.S. 105-129.16B(f))
      If an owner of a pass-through entity that has qualified for the credit allowed under this section disposes of all or a portion of the owner's interest in the pass-through entity within five years from the date the federal credit is first claimed and the owner's interest in the pass-through entity is reduced to less than two-thirds of the owner's interest in the pass-through entity at the time the federal credit is first claimed, the owner forfeits a portion of the credit.

      The amount forfeited is determined by multiplying the amount of the credit by the percentage reduction in ownership, and then multiplying that product by the forfeiture percentage. The forfeiture percentage equals the recapture percentage found in the table in Section 50(a)(1)(B) of the Code. The remaining allowable credit is allocated equally among the five years in which the credit is claimed.

      Forfeiture as provided in this section is not required if the change in ownership is the result of any of the following:

      • The death of the owner.

      • A merger, consolidation, or similar transaction requiring approval by the shareholders, partners, or members of the taxpayer under applicable State law, to the extent the taxpayer does not receive cash or tangible property in the merger, consolidation, or other similar transaction.

    10. Liability from Forfeiture (G.S. 105-129.16B(g))
      A taxpayer or an owner of a pass-through entity that forfeits a credit under this section is liable for all past taxes avoided as a result of the credit plus interest at the rate established under G.S. 105-241.1(i) computed from the date the taxes would have been due if the credit had not been allowed. The due date for past taxes and interest is thirty days after the credit is forfeited. A taxpayer or owner of a pass-through entity that fails to pay the past taxes and interest by the due date is subject to the penalties provided in G.S. 105-236.

    11. Franchise, Income, or Gross Premium Tax Election (G.S. 105-129.17(a))
      Effective for taxable years beginning on or after January 1, 2001, a taxpayer may claim a credit for low-income housing against franchise, income or insurance gross premium tax. This applies to buildings that are placed in service on or after January 1, 2001. A taxpayer must elect the tax against which a credit will be claimed when filing the return on which the first installment of the credit is claimed. The election is binding. Any carryforwards of a credit must be claimed against the same tax.

  5. Credit for Investing in Non-Hazardous Dry Cleaning Equipment (G.S. 105-129.16C) (Effective for taxable years beginning on or after July 1, 2001)

    1. Credit
      If a taxpayer that has purchased or leased qualified dry-cleaning equipment, places it in service in this State for commercial purposes during the taxable year, the taxpayer is allowed a credit equal to twenty percent (20%) of the cost of the equipment.

    2. Qualified Equipment
      Qualified dry-cleaning equipment is equipment that is designed and used primarily to dry-clean clothing and other fabric and does not use any hazardous solvent or any other substance that the Department of Environment and Natural Resources determines to pose a threat to human health or the environment.

    3. Hazardous Solvent
      Hazardous solvent is a solvent, any portion of which consists of a chlorine-based solvent, a hydrocarbon-based solvent, a hazardous substance as defined in G.S. 130A-310(2), or any substance determined by the Administrator of the Environmental Protection Agency or the Director of the National Institute of Occupational Safety and Health to possess carcinogenic potential to humans.

    4. Restrictions (G.S. 105-129.16C(b))
      No credit is allowed to the extent the cost of the equipment was paid with public funds. A taxpayer that claims any other credit allowed under Chapter 105 of the General Statutes with respect to dry-cleaning equipment may not take the credit allowed in this section with respect to the same equipment.

    5. Substantiation (G.S. 105-129.16C(a))
      To claim the credit, the taxpayer must file, with the tax return on which the credit is claimed, a certification by the Department of Environment and Natural Resources that the equipment purchased or leased by the taxpayer is qualified dry-cleaning equipment.