H. Business and Nonbusiness Income (G.S. 105-130.4) (Section
- 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 that 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 inconsistency.
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, and 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 activity.
- 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
- The disposition is the liquidation of a separate and
distinct line of business of the company; the disposition
results in the cessation of that line of business; and
the taxpayer distributes all of the proceeds of the liquidation
to its shareholders and does not reinvest any of the proceeds
in the taxpayer's business.
- Such property was subsequently utilized principally
for the production of nonbusiness income for a period
of at least three years prior to the disposition and 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.
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:
If dividend income is not business income, it is nonbusiness
- 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.
- 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
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 must be consistent in the proration of such deductions
in filing returns under these regulations. (See Subject:
"Attribution of Expenses to Nontaxable Income and to Nonbusiness
Income and Property").