G. Capital Stock, Surplus and Undivided Profits Base (G.S. 105-122(b)
- 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.
- 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.
- 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
- 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
- Exclusion of Retained Earnings by Parent Corporation (Section
A parent corporation may exclude any retained earnings of existing
subsidiary corporations which it has capitalized or otherwise
recorded on its books, through an equity method of accounting.
- Investment in Subsidiary (Section .1105)
No reduction of the capital stock base is allowed for the investment
in a subsidiary.
- 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. Example: 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
|Less proportionate part:
XYZ's borrowed capital
XYZ's total assets
$300,000 x $200,000 =
|Net amount to be added by ABC Corporation
XYZ Corporation is entitled to deduct $150,000, the net amount
added by ABC Corporation, from its capital stock, surplus and
- 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.
- Exclusion Provision Limited to Indebtedness Owed (Section
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.
These provisions do not apply where the indebtedness in merely
endorsed or guaranteed.
- 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.
- 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.
- 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.
- Borrowed Capital Defined
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.
- Creditor Corporation Defined
The creditor corporation is considered to be the parent, subsidiary,
or affiliated corporation to which the indebtedness is directly
- 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.
- Corporate Members of LLCs (G.S. 105-114(c))
A corporation that is a member of a limited liability company
(LLC) and is entitled to receive at least seventy percent (70%)
of the LLC's assets upon dissolution is required to include the
LLC's assets in the corporation's franchise tax base. The member
corporation's investment in the LLC is excludible from the computation.
(Effective January 1, 2002 and applies to taxes due on or after