H. Business and Nonbusiness Income (G.S. 105-130.4) (Section .0700)

  1. 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 this State.

    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.

  2. 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 income.

  3. 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.

    1. 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.

    2. 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. 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.
      2. 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.
    3. Interest
      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.
    4. Dividends
      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:
      1. The dividend arises out of or is acquired in the regular course of the corporation's trade or business.
      2. 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.
      3. The dividend is paid by a unitary subsidiary.

      If dividend income is not business income, it is nonbusiness income.

    5. 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.

  4. 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 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").