NC TAX REFORM BILLS INTRODUCED!

Last week two tax reform bills were introduced in the Senate. Neither of these bills encompasses the entirety of the components that Senator Bob Rucho proposed in his comprehensive tax reform concept. As you may remember his proposal included a 1% statewide transfer tax on real property. No such tax is included in either of these bills, however each does pose separate challenges.

 On Tuesday, (SB 363) that dealt specifically with the “Franchise Tax” – mainly dealing with the scope and capping the tax to a certain percentage of asset. Specifically, it would repeal most state level and all local privilege taxes and replace the franchise tax with a simplified business privilege tax, which would apply to business entities with limited liability, including LLCs, LLPs and other such entities.  The bill has been referred to the Senate Committee on Finance. The proposed business privilege tax would apply to domestic and foreign corporations and all other business entities whose form of organization confers limited liability on one or more of its owners. Excluded from the tax would be single member LLCs whose single member is a corporation subject to the new tax and whose net worth and property are included in the corporation’s tax base. Investment companies such as RICs, REITs other than non-captive REITS, and venture capital companies would have special provisions which would limit the effect of the new tax.  Also excluded from the tax are business entities exempt from federal income tax, certain insurance companies and real estate mortgage investment conduits

The tax would be imposed at a rate of $1.35 per $1000 of the business entity’s net worth tax base, with a minimum tax of $500 and a maximum tax of $5000 on business entities other than corporations and a maximum tax of $75,000 on holding companies. Net worth is defined as the entity’s total assets less its total liabilities computed in accordance with GAAP at the end of the entities taxable year, subject to certain adjustments for depreciation and amortization and to add backs for affiliated indebtedness.

On Friday, the second bill (SB 394) was introduced and is much more comprehensive and does a number of things.
1.       Caps personal income tax rate is 6%...currently capped at 7.75%
2.       Caps corporate income tax rate is 6%...current rate at 6.9%
3.       Franchise tax rate is .001%;
4.       Franchise tax is expanded to all business formations except single member LLCs;
5.       Franchise tax is not capped for anyone other than Holding Companies (capped at $75,000);
6.       Reduces the sales tax to 4.5%. from 4.75%
7.       No expansion of services to “professional” services;
8.       Taxes charged on property care and maintenance services – think pest control, landscaping, power washing, security services, carpet cleaning, etc.;
9.       No additional transfer tax included; Those in place will stand
10.   Taxation of short-term rentals remains the same;
11.   Charitable deductions are turned into a credit and are limited to $600/year;
12.   Eliminates Privilege Taxes charged by cities and counties;
13.   MOST IMPORTANT:  This proposal appears to eliminate the Mortgage Interest deduction and Local Property Tax Deduction.

NCAR is holding meetings with their leadership, and the consultants to establish an appropriate response and determine the strategy of the Senate leadership. Political Note: the Prime Sponsor of this bill is a Charlotte Democrat, however, Senator Bob Rucho has signed onto the bill as a co-sponsor now, along with several others. Conventional wisdom would tell us that it is highly unlikely the Republicans (who campaigned on Tax Reform) will move a bill through their chamber that has a democratic Prime Sponsor. It is possible/probable that this bill might have been introduced to gauge opposition and a subsequent bill may come shortly afterward. Stay tuned folks, and watch your emails for Calls to Action if and when they are sent.

Thanks to Tara Lightner Robbins of RRAR for this information