NC & PPP

From the Director of Advocacy at NCACPA regarding the PPP/EIDL law changes: The NCDOR is currently working on new guidance that will be published in the form of an Important Notice.

He advised to hold off filing amendments if we could until this Notice came out. Just FYI.

I don't know if anyone noticed but the NC changes also includes not taxing military pensions, retroactive to Jan 1, 2021.
More amendments...

Only if you've been in the service 20 years or militarily disabled (for want of a better term), but that is a valuable benefit. I imagine anyone with twenty years will have a pension that creates quite nice disposable income and I think that is what the state is aiming to encourage.

The NOL provisions are something I will have to devote time to. I have numerous clients with large carryovers so I'd better make sure I get it right.

From the Director of Advocacy at NCACPA regarding the PPP/EIDL law changes: The NCDOR is currently working on new guidance that will be published in the form of an Important Notice.

He advised to hold off filing amendments if we could until this Notice came out. Just FYI.

Thanks!!!! I just filed my 9/30 C-Corp and alerted the client.

I did NOT subject his PPP to taxation.

We'll see what happens.

Southpark, you should be good on the originally filed return. I think NCACPA is working with DOR to try to simplify/possibly eliminate some amended returns that will need to be filed for corrections.

Howard, thanks for the reminder! Wonder how this applies. I have several clients that are civilians that work for and are paid by the Dept. of Defense as well as a few retirees. I guess they are not really military, at least not active duty. Assume their pension would not qualify to be excluded?

Seaside, in the enabling section, there are references to other titles in the US Code. I think that should be the starting point. I have one client that I know of who is not Bailey-qualified but worked on a military base before retiring and that is something I will be researching.

The Bailey settlement previously exempted certain retired military pensions.
Now retired active or reserve military with at least 20 years service or qualified disability retirement are exempt.
Presumably those who took advantage of the early retirement programs do not qualify.
I'll wait on DOR guidance before amending any returns.

Yes, I have the same situation Sumwun. Not Bailey qualified due to the hire date, but wondering if they could be eligible for exemption based on the new law. Guess I’ve got to find some research time!!

ELIMINATE TAX ON MILITARY PENSION INCOME
SECTION 42.1A.(a) G.S. 105-153.5(b) reads as rewritten:
"(b) Other Deductions. – In calculating North Carolina taxable income, a taxpayer may
deduct from the taxpayer's adjusted gross income any of the following items that are included in
the taxpayer's adjusted gross income:
…
(5a) The amount received during the taxable year from the United States
government for the payments listed in this subdivision. Amounts deducted
under this subdivision may not also be deducted under subdivision (5) of this
subsection. The payments are:
a. Retirement pay for service in the Armed Forces of the United States
to a retired member that meets either of the following:
1. Served at least 20 years.
2. Medically retired under 10 U.S.C. Chapter 61. This deduction
does not apply to severance pay received by a member due to
separation from the member's armed forces.
b. Payments of a Plan defined in 10 U.S.C. § 1447 to a beneficiary of a
retired member eligible to deduct retirement pay under
sub-subdivision a. of this subdivision.
…."
SECTION 42.1A.(b) This section is effective for taxable years beginning on or after
January 1, 2021.

The bill will allow expenses paid with PPP funds to be deductible.

I'm a bit confused. Although I'm not in NC, I've been trying to determine whether NC allows expenses paid with PPP funds to be deductible. I know that in NC, forgiven PPP loans are excluded from income, but what I read in SB 105 tells me that the expenses are still not deductible.

G.S. 105-130.5(a)(32) currently reads as follows:

§105-130.5. Adjustments to federal taxable income in determining State net income.
(a) The following additions to federal taxable income shall be made in determining State net income:
* * * * *
(32) The amount of any expense deducted under the Code to the extent that payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act and the income associated with the forgiveness is excluded from gross income pursuant to section 1106(i) of the CARES Act. The term "covered loan" has the same meaning as defined in section 1106 of the CARES Act.

SB 105 (pages 593-594) amended it for years after 2022 to read as follows:

§105-130.5. Adjustments to federal taxable income in determining State net income.
(a) The following additions to federal taxable income shall be made in determining State net income:
* * * * *
(32) For taxable years beginning on or after January 1, 2023, the amount of any expense deducted under the Code to the extent the expense is allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes imposed by this Part.

I don’t see how this changes the non-deductibility of the expenses. What am I missing?

105-130 covers corporations. The starting point for corporations is federal taxable income, determined by the IRC in effect as at 4.1.21. Obviously, that means that PPP forgiveness is not gross income in NC, nor are expenses reduced by the amount of the forgiveness. The original 105-130.5(a)(32) was passed last year (June?) and has now been replaced by the new version.

The practical effect of the new NCGS 105-130.5(a)(32) is to allow a deduction for expenses paid by PPP or EIDL funds in 2020, 2021 and 2022. However, I can see an argument that the change does not apply until the date the Governor signed the bill (November 18th 2021, I think). See s. 42.4.(e) at p594 of the Session Law. However, it is clear from the debate in the General Assembly (I tried to listen to Second Reading debates when I could) that the intent is to afford relief for 2020, 2021 and 2022. From discussions between NCSEA and NCDOR, the Department expects the provisions to be effective for 2020-2022.

Look at section 42.4(a) on page 591. Treatment of PPP and related business assistance conforms to the federal treatment until 1-1-23.

Howard, it appears to me that the exclusion of military retirement pay is beginning in 2021 so should not require any amended returns. Correct?

Seaside...you are correct. I misread my own post!

I'm still confused because I don't see that the legislative language supports what you're saying --- that the PPP expenses are deductible.

G.S. 105-153.5(c2)(20), which is for individual income tax, said this before SB 105:

(c2) Decoupling Adjustments. – In calculating North Carolina taxable income, a taxpayer must make the following adjustments to the taxpayer's adjusted gross income:
* * * * *
(20) A taxpayer must add the amount of any expense deducted under the Code to the extent that payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act, and the income associated with the forgiveness is excluded from gross income pursuant to section 1106(i) of the CARES Act. The term "covered loan" has the same meaning as defined in section 1106 of the CARES Act.

https://www.ncleg.gov/EnactedLegislation/Statutes/PDF/BySection/Chapter_105/GS_105-153.5.pdf

And here is this section as amended by SB 105:

(c2) Decoupling Adjustments. – In calculating North Carolina taxable income, a taxpayer must make the following adjustments to the taxpayer's adjusted gross income:
* * * * *
(20) For taxable years beginning on or after January 1, 2023, a taxpayer must add the amount of any expense deducted under the Code to the extent the expense is allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes imposed by this Part.

https://www.ncleg.gov/Sessions/2021/Bills/Senate/PDF/S105v8.pdf (page 593)

If the taxpayer must add back to North Carolina taxable income any expense to the extent it is allocable to excluded income, and since the forgiven PPP loan is excluded income, then doesn't this make the expense NOT deductible?

I’m just trying to understand this.

It is only an add back in years beginning in 2023. For PPP funds already received and spent, the expenses are now deductible.

It is only an add back in years beginning in 2023. For PPP funds already received and spent, the expenses are now deductible.

Can you point me to something that says that? Because as I said, G.S. 105-153.5(c2)(20), which is for individual income tax, said this before SB 105:

(c2) Decoupling Adjustments. – In calculating North Carolina taxable income, a taxpayer must make the following adjustments to the taxpayer's adjusted gross income:
* * * * *
(20) A taxpayer must add the amount of any expense deducted under the Code to the extent that payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act, and the income associated with the forgiveness is excluded from gross income pursuant to section 1106(i) of the CARES Act. The term "covered loan" has the same meaning as defined in section 1106 of the CARES Act.

https://www.ncleg.gov/EnactedLegislatio ... -153.5.pdf

NCDOR also says this:
https://www.ncdor.gov/taxes-forms/individual-income-tax/paycheck-protection-program

https://files.nc.gov/ncdor/documents/files/2020-7-20-Important-Notice-Code-Update-Decoupling_0.pdf

Nov 18, 2021
Today, Governor Roy Cooper signed the following bills into law:

Senate Bill 105: 2021 Appropriations Act. (linked to:)

https://www.ncleg.gov/Sessions/2021/Bills/Senate/PDF/S105v7.pdf

CONFORM TO FEDERAL TAX TREATMENT FOR PPP LOANS AND RELATED
BUSINESS ASSISTANCE/IRC UPDATE
SECTION 42.4.(c) G.S. 105-153.5(c2) reads as rewritten:
"(c2) Decoupling Adjustments. – In calculating North Carolina taxable income, a taxpayer
must make the following adjustments to the taxpayer's adjusted gross income:
...
(20) A For taxable years beginning on or after January 1, 2023, a taxpayer must
add the amount of any expense deducted under the Code to the extent that
payment of the expense results in forgiveness of a covered loan pursuant to
section 1106(b) of the CARES Act, and the income associated with the
forgiveness is excluded from gross income pursuant to section 1106(i) of the
CARES Act. The term "covered loan" has the same meaning as defined in
section 1106 of the CARES Act.the expense is allocable to income that is
either wholly excluded from gross income or wholly exempt from the taxes
imposed by this Part

Agrees with post #55.

Obviously, I'm not getting through to you people. I read the statute (before and after SB 105) to DISALLOW the expenses, not allow them. You take the Federal return (which allows the expenses), then for NC, you have to ADD THEM BACK to arrive at NC taxable income. That's a disallowance of the expenses.

Maybe refer to this:
https://taxnews.ey.com/news/2021-2174-north-carolina-enacts-significant-tax-law-changes-for-businesses-and-individuals

If that doesn't answer your question perhaps you could rephrase it so we understand what you are asking.

It pretty clearly says for taxable years beginning after January 1, 2023 you make the addback.

(20) For taxable years beginning on or after January 1, 2023, a taxpayer must add

From your post #54