North Carolina — Corporate Income / Franchise Tax

North Carolina imposes both a corporate income tax and a franchise tax on corporations doing business in the state. Unless specifically exempt under G.S. 105-125, all active and inactive domestic corporations, and all foreign corporations with a Certificate of Authority to do business in North Carolina, are required to file Form CD-405. A foreign corporation operating in North Carolina may be liable for income tax even if it is not required to obtain a certificate of authority. Even for a year in which a domestic corporation or a foreign corporation with a certificate of authority conducted no business activity or did not earn any net income in the state, it must file an income tax return.

Source: NCDOR Filing Requirements; G.S. 105-122; G.S. 105-125; 17 NCAC 05C .0101

North Carolina imposes a corporate income tax on the State net income of every C corporation doing business in the state. For taxable years beginning in 2025, the rate is 2.25%. The rate is scheduled to decrease to 2% for 2026, 1% for 2028, and 0% for taxable years beginning after 2029. S corporations are not subject to the corporate income tax.

Source: G.S. 105-130.3

North Carolina imposes an annual franchise tax on corporations doing business in the state. For C corporations, the rate is $1.50 per $1,000 of the tax base, with a maximum of $500 for the first $1 million of the tax base. For S corporations, the rate is $200 for the first $1 million of the tax base and $1.50 per $1,000 of the tax base exceeding $1 million. The minimum franchise tax is $200. The tax base is the greatest of: (1) the corporation's apportioned net worth, (2) 55% of the appraised value of its North Carolina real and tangible personal property, or (3) the corporation's total actual investment in tangible property in North Carolina.

Source: G.S. 105-122

For taxable years beginning on or after January 1, 2018, North Carolina apportions corporate income using a single sales factor. All apportionable income is apportioned to North Carolina by multiplying the income by the sales factor, which is a fraction with total sales in North Carolina during the income year as the numerator and total sales everywhere during the income year as the denominator. This replaced the prior formula that included property and payroll factors.

Source: G.S. 105-130.4(i)

North Carolina adopted market-based sourcing rules effective for taxable years beginning on or after January 1, 2020. Under G.S. 105-130.4(l), "receipts are in this State if the taxpayer's market for the receipts is in this State." If the market for a receipt cannot be determined, the state or states of assignment must be reasonably approximated. In cases where a taxpayer cannot ascertain the state or states to which receipts are assigned through reasonable approximation, the receipts must be excluded from the denominator of the taxpayer's sales factor.

Tangible personal property. Under G.S. 105-130.4(l)(2), sales of tangible personal property are sourced to North Carolina "if and to the extent the property is received in this State by the purchaser." This includes drop shipments: the statute provides that "direct delivery into this State by the taxpayer to a person or firm designated by the purchaser from within or without the State shall constitute delivery to the purchaser in this State."

Real property. Sales, rentals, leases, or licenses of real property are sourced to North Carolina under G.S. 105-130.4(l)(1) if and to the extent the property is located in this state.

Services — fundamental change from cost-of-performance. Receipts from services are sourced to North Carolina to the extent the service is delivered to a location in North Carolina under G.S. 105-130.4(l)(3). The regulations at 17 NCAC 05G .0701(a) clarify that "the term 'delivered to a location' refers to the location of the taxpayer's market for the service, which may not be the location of the taxpayer's employees or property." This represents a fundamental departure from North Carolina's pre-2020 law, which sourced services based on where the taxpayer's income-producing activities were performed (cost-of-performance sourcing).

The regulations establish detailed rules for specific service categories:

• In-person services (17 NCAC 05G .0802): Services performed on the body of a person (such as hair cutting or x-ray services) or in the physical presence of a customer are received in North Carolina if the customer is located in North Carolina. Services performed on real estate are received in North Carolina if the property is located in North Carolina. Services performed on tangible personal property that is shipped or delivered to the customer are received in North Carolina if the property is shipped or delivered to a customer located in North Carolina.

• Professional services to individual customers (17 NCAC 05G .1004(1)): Where the service is a professional service and the customer is an individual representing less than 5% of the taxpayer's sales of services, receipts are assigned to the customer's state of primary residence. If the taxpayer cannot reasonably identify that state, receipts are assigned to the state of the customer's billing address.

• Professional services to business customers (17 NCAC 05G .1004(2)): Receipts are assigned to the state where the contract with the customer is managed by the customer. If that state cannot be determined or reasonably approximated, receipts are assigned to the customer's billing address, and if that cannot be determined, to the customer's state of commercial domicile.

Intangible property. Receipts from licenses or sales of intangible property are assigned based on the nature of the intangible. The regulations at 17 NCAC 05G .1102 through .1201 distinguish between marketing intangibles (generally sourced based on where the intangible is used to reach the taxpayer's customers) and production intangibles (generally sourced to the customer's commercial domicile). The assignment rules are detailed and fact-specific; practitioners should consult the full regulations.

Industry-specific rules. North Carolina has adopted special sourcing rules that deviate from the general framework for: wholesale content distributors (G.S. 105-130.4A), banks (G.S. 105-130.4B), pipeline companies (G.S. 105-130.4(s2)), electric power companies (G.S. 105-130.4(s3)), and air and water transportation corporations (G.S. 105-130.4(r)).

Elective cost-of-performance for certain taxpayers. For taxpayers with a State net loss balance from 2019, G.S. 105-130.4(t3) provides an election to apportion receipts from services based on the percentage of income-producing activities performed in North Carolina (the pre-2020 cost-of-performance methodology). The election must be made on the 2020 tax year return in the form prescribed by the Secretary of Revenue and containing any supporting documentation the Secretary may require. The election is binding and irrevocable until the existing net loss balance is fully utilized or has expired. The election does not apply to franchise tax apportionment under G.S. 105-122(c1).

Administrative rules. The North Carolina Department of Revenue adopted comprehensive market-based sourcing regulations at 17 NCAC 05G pursuant to S.L. 2019-246, section 3, which directed the Codifier of Rules to enter the rules into the Administrative Code. The regulations became effective January 1, 2020, and establish uniform rules for determining to what extent the market for a sale is in North Carolina, methods for reasonable approximation, and provisions for excluding receipts from the sales factor when the state of assignment cannot be determined or reasonably approximated.

Source: G.S. 105-130.4; G.S. 105-130.4A; G.S. 105-130.4B; 17 NCAC 05G

North Carolina imposes corporate income tax on every C corporation "doing business" in the state. Nexus is based on business activities in North Carolina, subject to Public Law 86-272 protection for certain interstate sellers of tangible personal property. North Carolina law does not include a bright-line economic nexus threshold (such as a dollar amount of sales into the state) comparable to the thresholds many states have adopted for sales tax; instead, nexus turns on the activities described in statute and regulation.

"Doing business" defined. Under 17 NCAC 05C .0102, "doing business" means "the operation of any business enterprise or activity in North Carolina for economic gain." The regulation provides a non-exclusive list of activities that create nexus:

• Maintaining an office or other place of business in North Carolina
• Maintaining inventory in North Carolina for sale, distribution, or manufacture (whether on the taxpayer's premises or in a public or rented warehouse)
• Selling or distributing merchandise to North Carolina customers directly from a company-owned or operated vehicle when title transfers at the time of sale or distribution
• Rendering services to clients or customers in North Carolina by agents or employees of a foreign corporation
• Owning, renting, or operating business or income-producing property in North Carolina, including realty, tangible personal property, or intangible property such as trademarks, trade names, franchise rights, computer programs, copyrights, patented processes, and licenses

A corporation that is a partner in a partnership or joint venture operating in North Carolina is considered to be "doing business" in the state. The partnership's North Carolina activities flow through to establish nexus for the corporate partner.

Public Law 86-272 protection. G.S. 105-130.4(a)(2) defines "business activity" for apportionment purposes as "any activity by a corporation that would establish nexus, except as limited by 15 U.S.C. § 381"—the codification of Public Law 86-272. Under 17 NCAC 05C .0103, a foreign corporation whose only activity in North Carolina is the solicitation of sales of tangible personal property by resident or nonresident salesmen is not required to file income tax returns. However, if the corporation maintains an office or other place of business in North Carolina, or owns business property in the state, it is subject to tax even if its only operations are part of interstate business.

The North Carolina Department of Revenue has applied P.L. 86-272 protection in published guidance. In Technical Advice Memorandum CTAM 97-15 (September 16, 1997), the Department analyzed a furniture manufacturer that leased a North Carolina showroom annually but occupied it only for two-week periods three times per year and employed salespersons in the state. The Department stated that the corporation's activity "is protected and not subject to tax in this State by application of Public Law 86-272 if, for example, the shows are conducted no more than three times per year and are limited in duration to periods of fourteen days or less." This fact-specific guidance illustrates the Department's approach to limited-duration in-state activity; practitioners should review the full memorandum and consult current Department guidance for their fact patterns.

Franchise tax nexus is broader than income tax nexus. A franchise tax is imposed on corporations for the privilege of doing business in the state even though the corporation's activities may be exempt from income tax under P.L. 86-272. Under G.S. 105-122, all active and inactive domestic corporations and all foreign corporations with a Certificate of Authority to do business in North Carolina, or which are in fact doing business in the state, are subject to the annual franchise tax. For a corporation subject to both income tax and franchise tax, the apportionment factor is the same for both taxes. A corporation subject to franchise tax but not income tax (because its income tax activities are protected by P.L. 86-272) still must file a return, pay franchise tax, and compute its apportionment factor as if it were subject to income tax.

Source: G.S. 105-130.3; G.S. 105-130.4; G.S. 105-122; 17 NCAC 05C .0102; 17 NCAC 05C .0103; NCDOR Filing Requirements; CTAM 97-15