11/17/2015 FALL 2015 NORTH CAROLINA STATE AND LOCAL TAX UPDATE Keith A. Wood, Attorney, CPA Carruthers & Roth, P.A. 235 N. Edgeworth Street Post Office Box 540 Greensboro, NC 27402 Phone: (336) 478-1185 Fax: (336) 478-1184 kaw@crlaw.com An Overview of Today’s Discussion 2 PART ONE – Federal and NC Tax Treatment of Section 179 Expense Elections and Section 168 Bonus Depreciation Rules PART TWO – Personal Income Tax - New Personal Income Tax Changes for 2015 and Beyond PART THREE - The Fowler Case – Am I A Resident of NC or Not? An Overview of Today’s Discussion 3 PART FOUR – NC Estate and Trust Fiduciary Tax Developments: The Kaestner Trust Case PART FIVE – Sales & Use Taxes PART SIX – NC Corporate Income Tax Changes PART SEVEN - NC Tax Collection Procedure PART EIGHT - Trust Fund Tax Collection 1
11/17/2015 PART ONE 4 NORTH CAROLINA “DECOUPLES” FROM SOME OF THE PROVISIONS OF THE FEDERAL TAX INCREASE PREVENTION ACT OF 2014 – Page 2 I. Section 179 Limits Under the Federal Income Tax Prevention Act of 2014 5 A. Federal Limits For 2014, $500,000 Section 179 Deduction Limit & Phase out beginning at $2 Million Section 179 Deduction Limit is $25,000 for 2015 Section 179 “Phases Out” for Purchases between $200,000 - $225,000 for 2015 Will Congress Extend Section 179 Deduction for 2015? I. Section 179 Limits 6 B. NC Limits $25,000 Limit for 2015 HB 14 (2013) 2
11/17/2015 II. New Section 179 Limits 7 2014 HB 1050 provides for “phase-outs” for acquisitions between $200,000 and $225,000 8 II. No NC Section 168 Bonus Depreciation; HB 82 (March 13, 2013) and HB 14 (August 23, 2013) – Page 4 A. Federal Law. The Federal 2014 Tax Increase Prevention Act of 2014 extended the 50% Section 168 Bonus Depreciation for 2014. However, the Federal bonus depreciation rules expired on December 31, 2014. Will Congress extend bonus depreciation for 2015? 9 B. HB 82 “De-couples” From Federal Section 168 Bonus Depreciation. House Bill 82 (2013) did not adopt the federal Section 168 bonus depreciation rules for North Carolina tax purposes for 2013 and thereafter. 3
11/17/2015 10 So, for 2015 and beyond, the North Carolina rules mandate an 85% "add back" for 2015 for Excess Federal Section 179 and Section 168 Deductions with 20% "add back" deductions over the next five (5) years beginning in 2016. - Page 3 11 III. Bonus Depreciation Deductions of a Transferor Can Be Added to Tax Basis of Transferee: House Bill 14 (2013) . Special rules apply where: property, subject to Section 168 bonus depreciation is transferred in a nonrecognition event, or where the ownership interests in the owner of property subject to Section 168 bonus depreciation is transferred in a nonrecognition event. 12 New N.C.G.S. 105- 130.5B(e) (for corporations) New N.C.G.S. 105- 134.6A(e) (for individuals): 4
11/17/2015 13 If there is a carryover basis transfer by gift, by a merger, by a Section 351 capital contribution to a corporation, or by a Section 721 contribution to a partnership), 14 the transferee may add any remaining unused 20% "add-back" deductions to the tax basis of the transferred asset, and the transferee may then depreciate the new adjusted tax basis in the property over its remaining useful life. NCDOR Clarifies Bonus Depreciation Adjustments Upon Non-Recognition Event Transfer 15 NCDOR Announcement (Feb. 21, 2014) – Page 4 5
11/17/2015 16 For transfers of Bonus Depreciation assets after 2012, in all events, the transferor is not allowed any remaining future bonus depreciation deductions associated with the transferred asset. 17 However, for personal income tax purposes , the transferee gets the basis addition only if the transferor (or the owner in a transferor) certifies in writing to the transferee that the transferor (or the owner in a transferor) will not take any remaining future 20% bonus depreciation deductions associated with the transferred asset. N.C.G.S. 105-134.6A(e). 18 Note: This Notice illustrates the importance of making sure that the transferee receives the certified written certification from the transferor (or its owners) that future bonus depreciation deductions will not be claimed by the transferor (nor by any of its owners). 6
11/17/2015 PART TWO I. Individual Income Tax Changes: HB 97 (September 18, 2015). 19 The 2015 Session Law 2015-241 (HB 97) made several changes to the North Carolina individual income tax system. These changes will go into effect beginning in 2015, 2016 and 2017. 20 A. Reduced Flat Tax Rates. Under HB 97 (2015), beginning in 2017, the North Carolina individual tax rate will drop to 5.499%. 1. New Flat Tax Rates: 2013 Graduated rates range from 6% to 7.75% 2014 5.8% 2015 and 2016 5.75% 2017 5.499% New N.C.G.S. 105-153.7. B. Medical Expense Deduction Reinstated for 2015 for Taxpayers Who Itemize on Federal Return. 21 Under prior law, beginning in 2014, taxpayers who itemized their deductions for federal tax purposes were limited to the following itemized deductions for North Carolina tax purposes beginning in 2014: 1. Charitable contributions. N.C.G.S. 105- 153.5(a)(2)a. 2. Qualified residence interest and real property taxes are deductible, but only up to $20,000 in combined total. N.C.G.S. 105-153.5(a)(2)b. 7
11/17/2015 22 However, under HB 97 (2015), beginning in 2015, the medical expense deduction for itemizers will be reinstated. So, for 2015 and beyond, North Carolina will allow the following itemized deductions: 1. Charitable contributions. N.C.G.S. 105-153.5(a)(2)a. 2. Qualified residence interest and real property taxes are deductible, but only up to $20,000 in combined total. N.C.G.S. 105-153.5(a)(2)b. 3. Medical expenses deductible under IRC Section 213. C. New Increased Standard Deduction Amounts. 23 2015 HB 97 (2015) increases the standard deduction beginning in 2016 as follows: 2016 2015 Standard Standard Deduction Deduction Filing Status Amounts Amounts Single $7,750 $ 7,500 Married filing separately $7,750 $ 7,500 Married filing jointly $15,500 $15,000 Head of Household $12,400 $12,000 New N.C.G.S. 105-153.5(a)(1). D. New Withholding Tables. 24 HB 97 (2015) revised N.C.G.S. 105-163.2(b) to now allow the North Carolina Secretary of Revenue to increase the individual income tax withholdings by 1/10 of one percent (or up to 100.1%) beginning in 2016 . 8
11/17/2015 25 Changes Applicable to Withholding for Tax Year 2016 Since the individual income tax rate remains at 5.75% for tax year 2016, the withholding rate on wages will be 5.85%. 26 Changes Applicable to Withholding for Tax Year 2017 Session Law 2015-241 also lowered the individual income tax rate from 5.75% to 5.499%, effective for taxable years beginning on or after January 1, 2017. However, during 2017, the withholding tax rate will be 5.599%. E. Overview of AGI Reductions From Federal AGI Under N.C.G.S. 105-153.5(b). 27 1. Interest income from U.S. and North Carolina debt obligations. N.C.G.S. 105- 153.5(b)(1); 2. Social Security and Railroad Retirement Benefits. N.C.G.S. 105-153.5(b)(3); 3. Federal and North Carolina retirement benefits that are exempt under the Bailey, Emory and Patton line of cases. N.C.G.S. 105-153.5(b)(5); 9
11/17/2015 E. Overview of AGI Reductions From Federal AGI Under N.C.G.S. 105-153.5(b). 28 4. State and local income tax refunds. N.C.G.S. 105-153.5(b)(4); 5. 20% deduction allowed due to the Section 168 or Section 179 "add back." N.C.G.S. 105- 153.5(b)(8); and 6. for property sold during the tax year, a reduction to the extent that the taxpayer's tax basis for North Carolina tax purposes exceeds the income tax basis for federal tax purposes. N.C.G.S. 105-153.5(b)(7). See revised N.C.G.S. 105-153.5(b). F. Additions To Federal AGI. 29 Here are some of the Federal AGI additions that apply for 2015 and thereafter: 1. Interest income from debt obligations of states other than North Carolina. N.C.G.S. 105- 153.5(c)(1); 2. Reduction in S corporation shareholder income by virtue of the Federal Section 1374 "built- in-gains" tax. N.C.G.S. 105-153.5(c)(2); F. Additions To Federal AGI. 30 3. 85% "add back" for excess Federal Section 179 and Section 168 deductions. N.C.G.S. 105-153.5(c)(5); and 4. For property sold during the tax year, the amount by which the taxpayer's tax basis for Federal tax purposes exceeds the income tax basis for North Carolina tax purposes. N.C.G.S. 105-153.5(c)(3). 10
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