On May 26, the Senate Finance Committee approved a bevy of significant changes to state tax law along with a program to provide $1 billion in additional relief to businesses impacted by the COVID-19 pandemic.
The 41-page measure was presented as an amendment that rewrites HB 334, the House’s proposal to allow businesses to claim a state tax deduction for expenses associated with forgiven Paycheck Protection Program loans.
Tax Policy Changes
The Senate tax proposal would:
- Lower the personal income tax rate from 5.25% to 4.99%.
- Increase the personal income tax standard deduction to match the 2022 federal standard deduction.
- Increase the personal income tax child deduction by $500 and expand eligibility for the deduction.
- Phase-out the corporate income tax over five years, beginning with the 2024 taxable year.
- Simplify the franchise tax by eliminating the two property tax calculation requirements and basing the tax solely on the net income calculation.
- Extend the sunset on the mill rehabilitation tax credits for two years, modify the gross premiums tax and the tax on cigars, impose a sales tax on peer-to-peer vehicle rentals, and exempt vaccines and cemetery property from the local property tax base.
JOBS Grant Program
Instead of allowing PPP expense deductibility, the bill would appropriate $1 billion of federal funds to the Job Opportunity and Business Saving (JOBS) Grant Program. The program would provide grants to North Carolina businesses that received assistance from the COVID-19 Job Retention Program, EIDL Advance, Paycheck Protection Program, Restaurant Revitalization Fund, or Shuttered Venue Operators Grant Program on or before June 30, 2021. The grant amount would be determined by multiplying the assistance amount (up to a cap of $250,000) by 7.5%. The maximum grant a qualifying business could receive per assistance amount would be $18,750.
Grants would be awarded automatically by the Department of Commerce based on available data from the Small Business Administration or other sources. Any qualifying business that does not automatically receive a grant by September 30, 2021, may apply for a grant. The bill includes a provision that would allow for a state corporate and personal income tax deduction from federal taxable income for the amount received under the JOBS Grant Program.
Senator Paul Newton said that the number of businesses eligible for JOBS grants is more than double the number of businesses that would have benefitted from PPP expense deductibility.
IRC Conformity and Other Provisions
The amendment contains the Internal Revenue Code conformity provisions and other tax law changes previously added to SB 322, including:
- Creating a graduated late tax payment penalty (NCACPA legislative priority).
- Correcting an unintended consequence when the state decoupled from a provision in the CARES Act by allowing a taxpayer to fully deduct over five years the applicable amount of business interest expense under Section 163(j) (NCACPA legislative priority).
- Creating a SALT cap workaround for pass-through entities.
- Providing a separate net operating loss calculation for individual taxpayers.
- Enacting several technical, clarifying, and administrative changes to the tax law as suggested by the Department of Revenue and recommended by the Revenue Laws Study Committee.
Having cleared the Finance Committee, HB 334 will be referred to the Appropriations Committee for further consideration. It will then go to the Rules Committee to be scheduled for a floor vote. If the bill stalls in the House or is vetoed by the governor, Senate leaders say they will put these provisions into their budget proposal.
If you have questions about this issue or other policy matters, please contact NCACPA Director of Advocacy Robert Broome, CAE.