On November 18, 2021, Governor Roy Cooper signed the 2021-2022 Budget for the State of North Carolina. At the time of its signing, North Carolina was the last state in the United States to enact a budget. This is also the first budget signed into law by Governor Cooper.
While the budget itself is quite lengthy and touches a variety of issues, there are a few important provisions for North Carolina business owners and entrepreneurs to be aware of. This article provides a summary:
Corporate Income Tax Phase-Out
North Carolina’s corporate tax rate for 2021 was a nation-low 2.5%. The new budget states that NC will begin the process of phasing out the 2.5% corporate tax rate in 2025, with the tax reaching 0% in 2029. With this proposed corporate tax reduction, North Carolina will become just the seventh state in the US with no corporate income tax. This may be a response to Apple, Inc. plans to open a $1billion campus near Raleigh. At any rate, this only makes NC a more attractive location for all types of corporations!
S Corporations also received a significant victory in the new budget. Generally, S Corporations do not pay any corporate income tax, instead the tax passes through and falls on the shoulders of the individual shareholders. In North Carolina, S Corps pay a “Franchise Tax” in addition to the pass-through taxation on the members. The new budget lowers the cap on this tax to $150,000 per business. Further, the budget provides a simplified method for calculating the amount of Franchise Tax a business will pay based on net worth.
The SALT deduction is a federally established limit on the amount of state and local taxes that can be deducted from income. S corporations, partnerships, and LLCs that are treated as partnerships have particular interest in the SALT deduction, as this allows their legal entity to deduct money. The NC budget now allows for pass-through entities to elect to pay entity taxes at the state level and avoid the federal SALT limitation.
In the midst COVID-19, many businesses applied for Paycheck Protection Program (PPP) loans, which were federally funded loans to allow employers to continue paying their employees. The new budget follows the federal trend and allows deductions for business expenses that used funds from PPP loans. This protection will last through 2022.
If you have questions about how to start or structure your North Carolina business in 2022, give us a call! Our team looks forward to helping your grow your business from the ground up.
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