House Bill 243 was signed into law by Governor Roy Cooper of North Carolina on March 17, 2022. (HB 243). The budget for the state of North Carolina was approved in November of last year, and the purpose of House Bill 243 was to make changes that were both technical and clarifying in nature. In our article on the Key Takeaways of the North Carolina Business Recovery Grant, we discussed the tax changes that were included in the budget plan for the state of North Carolina. HB 243 allows taxpayers who claimed the Employee Retention Credit (ERC) to take a deduction on their North Carolina returns for the amount of wages that were disallowed as a deduction on their federal return. Additionally, this bill made changes to expand eligibility for the North Carolina Business Recovery Grant (BRG).
Deduction from Federal Taxable Income for Employee Retention Credit Expenses Applicable to North Carolina
The CARES Act created the ERC at the federal level so that qualifying employers may make a claim for a credit against employment taxes provided they satisfied specified conditions.
- The CARES Act stipulated that “rules analogous to the provisions of section 51(i)(1) and 280C(a) of the Internal Revenue Code of 1986 must apply” as part of the process of claiming that credit.
- This meant that taxpayers who accepted the ERC had to lower their federal wage expenditure deduction to account for the wages that were used to compute the ERC. This was a requirement for taxpayers who took the ERC.
HB 243 includes new wording in North Carolina’s deductions from federal taxable income for both individuals and companies. This new language provides a deduction from North Carolina income tax for the following items:
- “The amount by which a deduction for an ordinary and necessary business cost was needed to be reduced or was not permitted under the Code because the taxpayer claimed a federal employee retention tax credit against employment taxes in place of a deduction. This deduction is only permissible to the extent that this chapter does not grant a credit that is analogous to the amount for which it is claimed.”
- These amendments to the revenue statutes of North Carolina will become operative “retroactively for taxable years starting on or after January 1, 2020.” [Citation needed]
Grants for the Reconstruction of Businesses, with Expanded Eligibility
In December of 2017, North Carolina passed a budget measure, which included provisions for the BRG. Specifics on that version of the program may be found in the Tax Alert that was referred to earlier in this part. Despite the fact that many aspects of the program have not changed (for example, applications must still be submitted through the North Carolina Department of Revenue), HB 243 introduced a number of changes to the BRG. Some of these changes are described in more detail below.
Adds federal income returns that can be used by applicants (along with North Carolina sales tax returns, although there is no double counting); these returns can be used to prove an economic loss of more than 20 percent and include the following information:
- Part 1a of Line 1 on the Form 1065
- Part 1a of either the Form 1120 or the Form 1120-S
- The first line of Schedule C, Form 1040.
- Line 9 of the Schedule F on the Form 1040
- Eliminates the requirement that businesses that do not fall under either NAICS Code 71 or 72 are ineligible for an award if they have previously received an award amount (defined to include North Carolina’s Job Retention Program, an Economic Injury Disaster Loan advance, Paycheck Protection Program, Restaurant Revitalization Fund, and/or the Shuttered Venue Operators Grant Program). This requirement was in place to prevent companies that did not fall under either NAICS Code 71 or 72 from receiving awards.
- Gives higher priority to applicants who have not received any previous award amounts in order to fully fund their BRG requests; if an applicant has received a previous award amount, the BRG award is reduced proportionately; the BRG award is prioritized for applicants who have not received any previous award amounts.
- If the extended list of federal returns can prove an extra economic loss above what was claimed in the first round of applications, businesses that have previously been granted a BRG award are permitted to re-file as part of the second round of applications.
- If there are still funds available after meeting all of the demands for the two categories of awards, those money will be doled out according to the following order of priority:
- Ignoring the limit of $500,000 for a BRG and distributing the remaining funds in proportion to each participant;
Increasing the proportional percentage of economic loss suffered by businesses until all awards given to businesses have surpassed the economic loss standards set by the BRG program;
- Handing over any unspent money to the State Office of Management and Budget
According to House Bill 243, the cutoff date for the second round of applications must be at least 165 days (but cannot be more than 195 days) after the day on which Senate Bill 105 takes effect.
- Changes in Addition
Additionally, the North Carolina deduction for some COVID-19 assistance programs at the state level was increased thanks to HB 243. A provision that would allow taxpayers to deduct BRG awards from their federal taxable income was included in the budget law in North Carolina that was also responsible for the creation of the BRG (to the extent included in federal taxable income). [7] The Mortgage, Utility, and Rent Relief (MURR) program and the ReTOOLNC award program are two other programs that have been added to that list as a result of House Bill 243. These changes will take effect for tax years that begin on or after January 1, 2020, and they will apply to any sums received by a taxpayer on or after that date.
Observations made using FORVIS
Expenses Related to Employee Retention Credits
Taxpayers who filed their federal return for the 2020 tax year and claimed the ERC while reducing their federal wage expenditure deduction for wages utilized to compute the ERC should consider modifying their North Carolina return for the 2020 tax year. As a part of this procedure, the taxpayer should also take into consideration North Carolina’s retroactive conformity to the income tax treatment of PPP loans under the federal government (exclusion of forgiven income and full deductibility of expenses paid for by a forgiven PPP loan).
Similarly, taxpayers whose tax year ends in the calendar year who reduced their federal wage expense deduction for wages used to calculate the ERC on their 2021 federal return should consider this legislation in light of their filing of their North Carolina income tax return in light of the fact that they reduced their federal wage expense deduction for wages used to calculate the ERC. If the taxpayer’s North Carolina income tax return for the year 2021 has already been submitted, they will need to consider filing an amendment in order to account for this change.
Taxpayers with a fiscal year-end in 2020 are ineligible to take a deduction for ordinary and necessary business expenses in North Carolina if those expenses were disallowed on the taxpayer’s corresponding federal income tax return as a result of the taxpayer taking the ERC. This is because the ERC disallows taxpayers from deducting those expenses. Nevertheless, these taxpayers should keep an eye on the legislation in North Carolina to see whether or not other changes are forthcoming.
The Economic Stimulus Package Grant Program
One of the most significant problems with the initial version of the BRG program was that it only permitted partnerships to use gross receipts from a federal income tax return as a criterion for eligibility, while corporations and sole proprietors were not permitted to use any criterion other than their North Carolina sales tax returns. This imbalance is addressed and corrected by HB 243.
Taxpayers who have previously applied for and been granted a BRG award should evaluate the possibility that the enlarged criteria for evaluating economic loss would enable them to earn a larger award than they had been eligible for previously.
Taxpayers who previously believed they were ineligible for a BRG award because they received a “award amount” should consider whether or not they meet the criteria of a 20 percent economic loss based on the revised criteria. o Taxpayers should consider whether or not they meet the criteria based on the revised criteria.
Changes in Added Areas
Taxpayers in North Carolina who have a calendar year-end who were awarded a ReTOOLNC grant or a MURR grant should consider whether or not to amend their 2020 North Carolina returns if any proceeds from these two programs were included in their federal taxable income. This is the case if either program resulted in a grant being awarded.
Similarly, taxpayers with a calendar year-end who were given a ReTOOLNC grant or a MURR grant in 2021 and included those awards in their federal taxable income should take these legislative changes into consideration when preparing their North Carolina tax returns for the year 2021 and/or deciding whether to amend a North Carolina tax return that was previously filed in the year 2021.
Taxpayers whose fiscal years expire in 2020 are ineligible to claim a deduction in North Carolina for either the ReTOOLNC grant or a MURR award since these grants were included toward the taxpayer’s taxable income on the federal level. In the same manner as with the ERC, these taxpayers should keep an eye on the legislation in North Carolina to see if or not any new solutions to this problem are on the horizon.