North Carolina Enacts Legislation That Expands Pass-Through Entity Tax Election Eligibility for Partnerships, Among Other Important Changes

The North Carolina General Assembly on September 22 ratified the 2023 Appropriations Act, House Bill 259 (HB 259), which became law on October 3 without Governor Roy Cooper’s signature. 

HB 259 contains numerous tax law changes, including revisions to the state’s pass-through entity (PTE) tax election eligibility for partnerships, accelerated reductions to the North Carolina personal income tax rates, and modification of the franchise tax computation for C corporations. The new law also includes various sales tax and excise tax updates.

Expanded Eligibility for Partnership PTE Tax Election

Effective for tax years beginning on or after January 1, 2022, partnerships are now eligible to make a PTE election if the partnership has one or more entity partners taxed as corporations for federal income tax purposes and/or trusts whose beneficiaries are all individuals, estates, trusts, and/or exempt organizations that are eligible S corporation shareholders.. A partnership that was not previously eligible to make the PTE election on its timely filed tax return may now make the election by filing an amended return on or before October 15, 2023. 

In response to HB 259, the North Carolina Department of Revenue (NCDOR) on October 4 issued Directive TA-23-1. The directive provides additional information explaining the expansion of the North Carolina PTE tax election, as well as procedures for making 2022 tax year elections by October 15. 

Personal Income Tax Rate Reduction

HB 259 accelerates the reductions to North Carolina’s personal income tax rates as reflected below: 

HB 259 also sets forth further rate reduction triggers beginning in fiscal year 2025-2026 through fiscal year 2032-2033 if the General Fund revenue account surpasses a certain amount during the state’s fiscal year. For those future years, the reduction will be equal to the previous year’s tax rate minus 0.50%, or 2.49%, whichever is greater. 

Corporate Franchise Tax Computation

Effective for tax years beginning on or after January 1, 2025, and applicable to the calculation of the franchise tax reported on the 2024 and later North Carolina corporate income tax returns, C corporations will pay $500 of franchise tax on the first $1 million of their tax base, plus an additional $1.50 for every $1,000 of their tax base that exceeds $1,000,000. Previously, C corporations would calculate their franchise tax liability at a rate of $1.50 for every $1,000 of their tax bases. 

Miscellaneous Provisions

State Privilege Tax on Professionals Repealed: The North Carolina privilege tax, which imposes a $50 fee on professionals under N.C. Gen. Stat. §105-41, has been repealed for tax years beginning on or after July 1, 2024. The North Carolina privilege tax applied to individuals who practice in specific professions, such as public accounting, law, engineering, and real estate. 

Transportation Commerce Tax Added: Effective July 1, 2025, a new Transportation Commerce Tax will be imposed on for-hire ground transportation services. This excise tax will be imposed on the taxpayer’s gross receipts at a rate of 1.5% for an exclusive-ride service, or 1% for a shared-ride service. This new tax is imposed on transport services such as Uber, Lyft, and taxi services. 

BDO Insights

The North Carolina legislature’s updates to the PTE tax election eligibility comes just weeks before the extended due date of the North Carolina partnership return. Based on Directive TA-23-1 issued by the North Carolina Department of Revenue, partnerships that have corporate, trust, or certain exempt organization partners have only until October 15, 2023, to amend their 2022 North Carolina partnership tax returns to make the PTE tax election.

Reach out to your tax advisor immediately if this update applies to you.