T. Exempt Corporations (G.S. 105-125, G.S. 105-130.11, and G.S.
- 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 3 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 that 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 of trade.
- 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.
Homeowner associations are taxed on gross income (excluding membership
income), less allowable deductions. The $1,000.00 specific deduction
does not apply to homeowner associations.
- Regulated Investment Companies and Real Estate Investment
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 return.
- 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 LLC 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 the event of
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.