§ 105-130.5. Adjustments to federal taxable income in determining State net income.

NORTH CAROLINA STATUTES AND CODES

§ 105-130.5. Adjustments to federal taxable income in determining State net income.

§ 105‑130.5. Adjustments to federal taxable income in determining State net income.

(a) The followingadditions to federal taxable income shall be made in determining State netincome:

(1) Taxes based on ormeasured by net income by whatever name called and excess profits taxes.

(2) Interest paid inconnection with income exempt from taxation under this Part.

(3) The contributionsdeduction allowed by the Code.

(4) Interest incomeearned on bonds and other obligations of other states or their political subdivisions,less allowable amortization on any bond acquired on or after January 1, 1963.

(5) The amount by whichgains have been offset by the capital loss carryover allowed under the Code.All gains recognized on the sale or other disposition of assets must beincluded in determining State net income or loss in the year of disposition.

(6) (Effective fortaxable years beginning before January 1, 2009) The net operating lossdeduction allowed by the Code; and

(6) (Effective fortaxable years beginning on or after January 1, 2009) Any amount allowed asa net operating loss deduction under the Code.

(7) Repealed by SessionLaws 2001‑327, s. 3(a), effective for taxable years beginning on or afterJanuary 1, 2001.

(8) Repealed by SessionLaws 1987, c. 778, s. 2.

(9) Payments to orcharges by a parent, subsidiary or affiliated corporation in excess of faircompensation in all intercompany transactions of any kind whatsoever pursuantto the Revenue Laws of this State.

(10) The total amountsallowed under this Chapter during the taxable year as a credit against thetaxpayer's income tax. A corporation that apportions part of its income to thisState shall make the addition required by this subdivision after it determinesthe amount of its income that is apportioned and allocated to this State andshall not apply to a credit taken under this Chapter the apportionment factorused by it in determining the amount of its apportioned income.

(11) The amount by whichthe percentage depletion allowance allowed by sections 613 and 613A of the Codefor mines, oil and gas wells, and other natural deposits exceeds the costdepletion allowance for these items under the Code, except as otherwiseprovided herein. This subdivision does not apply to depletion deductions forclay, gravel, phosphate rock, lime, shells, stone, sand, feldspar, gemstones,mica, talc, lithium compounds, tungsten, coal, peat, olivine, pyrophyllite, andother solid minerals or rare earths extracted from the soil or waters of thisState. Corporations required to apportion income to North Carolina shall firstadd to federal taxable income the amount of all percentage depletion in excessof cost depletion that was subtracted from the corporation's gross income incomputing its federal income taxes and shall then subtract from the taxableincome apportioned to North Carolina the amount by which the percentagedepletion allowance allowed by sections 613 and 613A of the Code for solidminerals or rare earths extracted from the soil or waters of this State exceedsthe cost depletion allowance for these items.

(12) The amount allowedunder the Code for depreciation or as an expense in lieu of depreciation for autility plant acquired by a natural gas local distribution company, to theextent the plant is included in the company's rate base at zero cost inaccordance with G.S. 62‑158.

(13) Repealed by SessionLaws 2001‑427, s. 4(b), effective for taxable years beginning on or afterJanuary 1, 2002.

(14) Royalty paymentsrequired to be added by G.S. 105‑130.7A, to the extent deducted incalculating federal taxable income.

(15) (Effective fortaxable years beginning before January 1, 2008) The applicable percentageof the amount allowed as a special accelerated depreciation deduction undersection 168(k) or section 1400L of the Code, as set out in the table below. Inaddition, a taxpayer who was allowed a special accelerated depreciationdeduction under section 168(k) or section 1400L of the Code in a taxable yearbeginning before January 1, 2002, and whose North Carolina taxable income inthat earlier year reflected that accelerated depreciation deduction must add tofederal taxable income in the taxpayer's first taxable year beginning on orafter January 1, 2002, an amount equal to the amount of the deduction allowedin the earlier taxable year. These adjustments do not result in a difference inbasis of the affected assets for State and federal income tax purposes. Theapplicable percentage is as follows:

TaxableYear Percentage

2002 100%

2003 70%

2004 70%

2005and thereafter 0%

(15) (Effective fortaxable years beginning on or after January 1, 2008) For taxable years 2002‑2005,the applicable percentage of the amount allowed as a special accelerateddepreciation deduction under section 168(k) or section 1400L of the Code, as setout in the table below. In addition, a taxpayer who was allowed a specialaccelerated depreciation deduction under section 168(k) or section 1400L of theCode in a taxable year beginning before January 1, 2002, and whose NorthCarolina taxable income in that earlier year reflected that accelerateddepreciation deduction must add to federal taxable income in the taxpayer'sfirst taxable year beginning on or after January 1, 2002, an amount equal tothe amount of the deduction allowed in the earlier taxable year. Theseadjustments do not result in a difference in basis of the affected assets forState and federal income tax purposes. The applicable percentage is as follows:

TaxableYear Percentage

2002 100%

2003 70%

2004 70%

2005 0%

(15a) (Effective for taxableyears beginning on or after January 1, 2008, and before January 1, 2009)The applicable percentage of the amount allowed as a special accelerateddepreciation deduction under section 168(k) of the Code for property placed inservice after December 31, 2007, but before January 1, 2009. In addition, ataxpayer who was allowed a special accelerated depreciation deduction intaxable year 2007 for property placed in service during that period, and whoseNorth Carolina taxable income for that year reflected that accelerateddepreciation deduction must add to federal taxable income in the taxpayer's2008 taxable year an amount equal to the applicable percentage of the deductionamount allowed in the 2007 taxable year. These adjustments do not result in adifference in basis of the affected assets for State and federal income taxpurposes. The applicable percentage under this subdivision is eighty‑fivepercent (85%).

(15a) (Effective fortaxable years beginning on or after January 1, 2009) The applicable percentageof the amount allowed as a special accelerated depreciation deduction undersection 168(k) or 168(n) of the Code for property placed in service afterDecember 31, 2007, but before January 1, 2010. The applicable percentage underthis subdivision is eighty‑five percent (85%).

Inaddition, a taxpayer who was allowed a special accelerated depreciationdeduction in taxable year 2007 or 2008 for property placed in service duringthat year, and whose North Carolina taxable income for that year reflected thataccelerated depreciation deduction must make the adjustments set out below.These adjustments do not result in a difference in basis of the affected assetsfor State and federal income tax purposes.

a. A taxpayer must addto federal taxable income in the taxpayer's 2008 taxable year an amount equalto the applicable percentage of the accelerated depreciation deductionreflected in the taxpayer's 2007 North Carolina taxable income.

b. A taxpayer must addto federal taxable income in the taxpayer's 2009 taxable year an amount equalto the applicable percentage of the accelerated depreciation deductionreflected in the taxpayer's 2008 North Carolina taxable income.

(16) The amount excludedfrom gross income under Subchapter R of Chapter 1 of the Code.

(17) The amount excludedfrom gross income under section 199 of the Code.

(18) Repealed by SessionLaws 2006‑220, s. 1, effective for taxable years beginning on and afterJanuary 1, 2007.

(19) The dividend paiddeduction allowed under the Code to a captive REIT, as defined in G.S. 105‑130.12.

(20) (Effective fortaxable years beginning before January 1, 2008) The amount of a donationmade to a nonprofit organization for which a credit is claimed under G.S. 105‑129.16H.

(20) (Effective fortaxable years beginning on or after January 1, 2008) The amount of adonation made to a nonprofit organization or a unit of State or localgovernment for which a credit is claimed under G.S. 105‑129.16H.

(21) (Effective fortaxable years beginning on or after January 1, 2009) The amount of incomedeferred under section 108(i)(1) of the Code from the discharge of indebtednessin connection with a reacquisition of an applicable debt instrument.

(22) (Effective fortaxable years beginning on or after January 1, 2009) The amount allowed asa deduction under section 163(e)(5)(F) of the Code for an original issuediscount on an applicable high yield discount obligation.

(b) The followingdeductions from federal taxable income shall be made in determining State netincome:

(1) Interest upon theobligations of the United States or its possessions, to the extent included infederal taxable income: Provided, interest upon the obligations of the UnitedStates shall not be an allowable deduction unless interest upon obligations ofthe State of North Carolina or any of its political subdivisions is exempt fromincome taxes imposed by the United States.

(1a) Interest upon theobligations of any of the following, net of related expenses, to the extentincluded in federal taxable income:

a. This State, apolitical subdivision of this State, or a commission, an authority, or anotheragency of this State or of a political subdivision of this State.

b. A nonprofiteducational institution organized or chartered under the laws of this State.

(2) Payments receivedfrom a parent, subsidiary or affiliated corporation in excess of faircompensation in intercompany transactions which in the determination of the netincome or net loss of such corporation were not allowed as a deduction underthe Revenue Laws of this State.

(3) Repealed by SessionLaws 2003‑349, s. 1.1, effective January 1, 2003.

(3a) Dividends treated asreceived from sources outside the United States as determined under section 862of the Code, net of related expenses, to the extent included in federal taxableincome. Notwithstanding the proviso in subdivision (c)(3) of this section, thenetting of related expenses shall be calculated in accordance with subdivision(c)(3) of this section and G.S. 105‑130.6A.

(3b) Any amount includedin federal taxable income under section 78 or section 951 of the Code, net ofrelated expenses.

(4) Losses in the natureof net economic losses sustained by the corporation in any or all of the 15preceding years pursuant to the provisions of G.S. 105‑130.8. Acorporation required to allocate and apportion its net income under theprovisions of G.S. 105‑130.4 shall deduct its allocable net economic lossonly from total income allocable to this State pursuant to the provisions ofG.S. 105‑130.8.

(5) Contributions orgifts made by any corporation within the income year to the extent providedunder G.S. 105‑130.9.

(6) Amortization inexcess of depreciation allowed under the Code on the cost of any sewage orwaste treatment plant, and facilities or equipment used for purposes ofrecycling or resource recovery of or from solid waste, or for purposes ofreducing the volume of hazardous waste generated as provided in G.S. 105‑130.10.

(7) Depreciation ofemergency facilities acquired prior to January 1, 1955. Any corporation shall bepermitted to depreciate any emergency facility, as such is defined in section168 of the Code, over its useful life, provided such facility was acquiredprior to January 1, 1955, and no amortization has been claimed on such facilityfor State income tax purposes.

(8) The amount of lossesrealized on the sale or other disposition of assets not allowed under section1211(a) of the Code. All losses recognized on the sale or other disposition ofassets must be included in determining State net income or loss in the year ofdisposition.

(9) With respect to ashareholder of a regulated investment company, the portion of undistributedcapital gains of such regulated investment company included in suchshareholder's federal taxable income and on which the federal tax paid by theregulated investment company is allowed as a credit or refund to theshareholder under section 852 of the Code.

(10) Repealed by SessionLaws 1987, c. 778, s. 2.

(11) If a deduction for anordinary and necessary business expense was required to be reduced or was notallowed under the Code because the corporation claimed a federal tax creditagainst its federal income tax liability for the income year in lieu of adeduction, the amount by which the deduction was reduced and the amount of thededuction that was disallowed. This deduction is allowed only to the extentthat a similar credit is not allowed by this Chapter for the amount.

(12) Reasonable expenses,in excess of deductions allowed under the Code, paid for reforestation andcultivation of commercially grown trees; provided, that this deduction shall beallowed only to those corporations in which the real owners of all the sharesof such corporation are natural persons actively engaged in the commercialgrowing of trees, or the spouse, siblings, or parents of such persons.Provided, further, that in no case shall a corporation be allowed a deductionfor the same reforestation or cultivation expenditure more than once.

(13) The eligible incomeof an international banking facility to the extent included in determiningfederal taxable income, determined as follows:

a. "Internationalbanking facility" shall have the same meaning as is set forth in the lawsof the United States or regulations of the board of governors of the federalreserve system.

b. The eligible incomeof an international banking facility for the taxable year shall be an amountobtained by multiplying State taxable income as determined under G.S. 105‑130.3(determined without regard to eligible income of an international bankingfacility and allocation and apportionment, if applicable) for such year by afraction, the denominator of which shall be the gross receipts for such yearderived by the bank from all sources, and the numerator of which shall be theadjusted gross receipts for such year derived by the international bankingfacility from:

1. Making, arrangingfor, placing or servicing loans to foreign persons substantially all theproceeds of which are for use outside the United States;

2. Making or placingdeposits with foreign persons which are banks or foreign branches of banks(including foreign subsidiaries or foreign branches of the taxpayer) or withother international banking facilities; or

3. Entering intoforeign exchange trading or hedging transactions related to any of thetransactions described in this paragraph.

c. The adjusted grossreceipts shall be determined by multiplying the gross receipts of theinternational banking facility by a fraction the numerator of which is theaverage amount for the taxable year of all assets of the international bankingfacility which are employed outside the United States and the denominator ofwhich is the average amount for the taxable year of all assets of theinternational banking facility.

d. For the purposes ofthis subsection the term "foreign person" means:

1. An individual who isnot a resident of the United States;

2. A foreigncorporation, a foreign partnership or a foreign trust, as defined in section7701 of the Code, other than a domestic branch thereof;

3. A foreign branch ofa domestic corporation (including the taxpayer);

4. A foreign governmentor an international organization or an agency of either, or

5. An internationalbanking facility.

Forpurposes of this paragraph, the terms "foreign" and"domestic" shall have the same meaning as set forth in section 7701of the Code.

(14) The amount by whichthe basis of a depreciable asset is required to be reduced under the Code forfederal tax purposes because of a tax credit allowed against the corporation'sfederal income tax liability. This deduction may be claimed only in the year inwhich the Code requires that the asset's basis be reduced. In computing gain orloss on the asset's disposition, this deduction shall be considered asdepreciation.

(15) The amount paidduring the income year, pursuant to 7 U.S.C. § 1445‑2, as marketingassessments on tobacco grown by the corporation in North Carolina.

(16) The amount of naturalgas expansion surcharges collected by a natural gas local distribution companyunder G.S. 62‑158.

(17) To the extentincluded in federal taxable income, 911 charges imposed under G.S. 62A‑43and remitted to the 911 Fund under that section.

(18) Interest, investmentearnings, and gains of a trust, the settlors of which are two or moremanufacturers that signed a settlement agreement with this State to settleexisting and potential claims of the State against the manufacturers fordamages attributable to a product of the manufacturers, if the trust meets allof the following conditions:

a. The purpose of thetrust is to address adverse economic consequences resulting from a decline indemand of the manufactured product potentially expected to occur because ofmarket restrictions and other provisions in the settlement agreement.

b. A court of this Stateapproves and retains jurisdiction over the trust.

c. Certain portions ofthe distributions from the trust are made in accordance with certificationsthat meet the criteria in the agreement creating the trust and are provided bya nonprofit entity, the governing board of which includes State officials.

(19) To the extentincluded in federal taxable income, the amount paid to the taxpayer during thetaxable year from the Hurricane Floyd Reserve Fund in the Office of StateBudget and Management for hurricane relief or assistance, but not includingpayments for goods or services provided by the taxpayer.

(20) Royalty paymentsreceived from a related member who added the payments to income under G.S. 105‑130.7Afor the same taxable year.

(21) In each of the taxpayer'sfirst five taxable years beginning on or after January 1, 2005, an amount equalto twenty percent (20%) of the amount added to taxable income in a previousyear as accelerated depreciation under subdivision (a)(15) of this section.

(21a) (Effective fortaxable years beginning on or after January 1, 2008, and before January 1,2009) In each of the taxpayer's first five taxable years beginning on orafter January 1, 2009, an amount equal to twenty percent (20%) of the amountadded to taxable income in taxable year 2008 as accelerated depreciation undersubdivision (a)(15a) of this section.

(21a) (Effective fortaxable years beginning on or after January 1, 2009) An amount equal totwenty percent (20%) of the amount added to federal taxable income as accelerateddepreciation under subdivision (a)(15a) of this section. For a taxpayer whomade the addition for accelerated depreciation in the 2008 taxable year, thededuction allowed by this subdivision applies to the first five taxable yearsbeginning on or after January 1, 2009. For a taxpayer who made the addition foraccelerated depreciation in the 2009 taxable year, the deduction allowed bythis subdivision applies to the first five taxable years beginning on or afterJanuary 1, 2010.

(22) To the extentincluded in federal taxable income, the amount paid to the taxpayer during thetaxable year from the Disaster Relief Reserve Fund in the Office of StateBudget and Management for hurricane relief or assistance, but not includingpayments for goods or services provided by the taxpayer.

(23) A dividend receivedfrom a captive REIT, as defined in G.S. 105‑130.12.

(24) (Effective fortaxable years beginning on or after January 1, 2008, and expiring for taxableyears beginning on or after January 1, 2015) Five percent (5%) of the grosspurchase price of a qualified sale of a manufactured home community. Aqualified sale is a transfer of land comprising a manufactured home communityin a single purchase to a group composed of a majority of the manufactured homecommunity leaseholders or to a nonprofit organization that represents such agroup. To be eligible for this deduction, a taxpayer must give notice of thesale to the North Carolina Housing Finance Agency under G.S. 42‑14.3.

(25) (Effective fortaxable years beginning on or after January 1, 2009) The amount added tofederal taxable income as deferred income under section 108(i)(1) of the Code.This deduction applies to taxable years beginning on or after January 1, 2014.

(1) In determining Statenet income, no deduction shall be allowed for annual amortization of bondpremiums applicable to any bond acquired prior to January 1, 1963. The amountof premium paid on any such bond shall be deductible only in the year of saleor other disposition.

(2) Federal taxableincome must be increased or decreased to account for any difference in theamount of depreciation, amortization, or gains or losses applicable to propertywhich has been depreciated or amortized by use of a different basis or rate forState income tax purposes than used for federal income tax purposes prior tothe effective date of this Part.

(3) No deduction isallowed for any direct or indirect expenses related to income not taxed underthis Part; provided, no adjustment shall be made under this subsection foradjustments addressed in G.S. 105‑130.5(a) and (b). G.S. 105‑130.6Aapplies to the adjustment for expenses related to dividends received that arenot taxed under this Part.

(4) The taxpayer shalladd to federal taxable income the amount of any recovery during the taxableyear not included in federal taxable income, to the extent the taxpayer'sdeduction of the recovered amount in a prior taxable year reduced thetaxpayer's tax imposed by this Part but, due to differences between the Codeand this Part, did not reduce the amount of the taxpayer's tax imposed by theCode. The taxpayer may deduct from federal taxable income the amount of any recoveryduring the taxable year included in federal taxable income under section 111 ofthe Code, to the extent the taxpayer's deduction of the recovered amount in aprior taxable year reduced the taxpayer's tax imposed by the Code but, due todifferences between the Code and this Part, did not reduce the amount of thetaxpayer's tax imposed by this Part.

(5) A savings and loanassociation may deduct interest earned on deposits at the Federal Home LoanBank of Atlanta, or its successor, to the extent included in federal taxableincome.

(d) Repealed by SessionLaws 1987, c. 778, s. 3.

(e) Notwithstanding anyother provision of this section, any recapture of depreciation required underthe Code must be included in a corporation's State net income to the extent requiredfor federal income tax purposes.

(f) Expired. (1967, c. 1110, s. 3; 1969,cc. 1113, 1124; 1971, c. 820, s. 1; c. 1206, s. 1; 1973, c. 1287, s. 4; 1975,c. 764, s. 4; 1977, 2nd Sess., c. 1200, s. 1; 1979, c. 179, s. 2; c. 801, s.32; 1981, c. 704, s. 20; c. 855, s. 1; 1983, c. 61; c. 713, ss. 70‑73,82, 83; 1985, c. 720, s. 1; c. 791, s. 43; 1985 (Reg. Sess., 1986), c. 825;1987, c. 89; c. 637, s. 1; c. 778, ss. 2, 3; c. 804, s. 3; 1991, c. 598, ss. 3,10; 1991 (Reg. Sess., 1992), c. 857, s. 1; 1993 (Reg. Sess., 1994), c. 745, ss.4, 5; 1995, c. 509, s. 50; 1996, 2nd Ex. Sess., c. 14, ss. 4, 10; 1997‑439,s. 1; 1998‑98, ss. 1(c), 4, 69; 1998‑158, s. 5; 1998‑171, s.7; 1999‑333, s. 2; 1999‑337, s. 1; 1999‑463, Ex. Sess., s.4.6(b); 2000‑140, s. 93.1(a); 2000‑173, s. 19(c); 2001‑327,ss. 1(d), (e), 3(a), (b); 2001‑424, s. 12.2(b); 2001‑427, ss. 4(b),10(a); 2002‑72, s. 14; 2002‑126, ss. 30C.2(a), 30C.2(c); 2002‑136,ss. 1, 4; 2003‑284, s. 37A.3; 2003‑349, s. 1.1; 2005‑1, s.5.7(b); 2005‑276, ss. 35.1(b), 39.1(e); 2006‑220, s. 1; 2007‑323, ss. 31.18(a), (b); 2007‑383, s.5; 2007‑397, s. 13(b); 2008‑107, ss. 28.1(c), (d), (g), 28.25(b),28.27(a); 2008‑134, s. 2(b); 2009‑451, s. 27A.6(c), (d).)