When a retroactive federal tax break included in the new COVID-19 relief bill created a compliance headache for tax preparers in North Carolina, NCACPA stepped in to urge the North Carolina Department of Revenue to issue guidance on the matter.
Sec. 9042 of the American Rescue Plan Act of 2021 (PL 117-2) excludes the first $10,200 of unemployment compensation from federal income tax for any taxpayer whose AGI is less than $150,000. Because North Carolina has not incorporated any of the tax law changes enacted in ARPA, any unemployment compensation excluded from AGI must be added back to determine state taxable income. There is no line for the addback on the D-400 Schedule S, however.
On March 19, the NCDOR issued a notice outlining a procedure for adding back 2020 unemployment compensation exempted from federal taxes. That notice was updated slightly on March 23 to include instructions for part-year resident or nonresident taxpayers.
The new guidance states that a taxpayer must first complete Form D-400 Schedule S, Part A for tax year 2020. Next, a taxpayer must add the amount of Form D-400 Schedule S, Line 17 to the amount of unemployment compensation excluded from AGI to calculate the amount of modified additions for tax year 2020 (“Modified Additions”). The amount of Modified Additions must be entered on Form D-400, Line 7.
NCACPA informed the NCDOR that several tax software systems provide a diagnostic disallowing electronic filing in this situation because the new total on Form D-400, Line 7 no longer equals Schedule S, Line 17.
In a meeting between NCACPA and NCDOR staff on March 23, the NCDOR reported that it is working closely with tax software vendors on this issue. The NCDOR disabled the rule in its programming that was blocking electronic filing when the there is a difference between Form D-400, Line 7 and Schedule S, Line 17.
The NCDOR discourages the filing of paper returns and encourages tax preparers to wait for the software vendor community to update their systems so that returns may be filed electronically.
If you have questions about this issue or other policy matters, please contact NCACPA Director of Advocacy Robert Broome, CAE.