CORPORATE ACCOUNTING NEWS: THE NORTH CAROLINA SMALL BUSINESS TAX DEDUCTION
August 30, 2012
Guest blogger David Wilson is a Certified Public Accountant practicing at Blackman and Sloop CPAs, PA in Chapel Hill, North Carolina.
Last year, NC State legislators passed The Appropriations Act of 2011, an important law which affects many small business owners in North Carolina. Business owners in the Old North State should consult with their tax advisors to explore new possible deductions regarding their business income for tax years 2012 and 2013.
This new law allows most small business owners a substantial deduction, up to $50,000 (or if married up to $100,000, see below) on their personal income tax returns. Per the State of North Carolina, this temporary change in the law would affect at least 250,000 small businesses in the state and is intended to stimulate hiring and provide incentive for growth. Further, North Carolina legislators dropped from the bill an income limitation on how it defines small businesses for this deduction. Since there is no limit to the size of the business, the following small businesses, prevalent throughout our state, may qualify for this deduction:
• Schedule C – Sole Proprietorships
• Schedule E – Partnerships and S-Corporations
• Schedule F – Farming
In analyzing this tax deduction for small businesses, North Carolina enacted one rule that could limit some taxpayers. The small business income exclusion does not include income that is considered passive income under current IRS regulations. The taxpayer must actively manage the business in order to obtain the income exclusion on their personal income tax filing.
Married taxpayers with two business incomes could receive up to a maximum $100,000 deduction under the revised and temporary North Carolina laws ($50,000 deduction each). For example, both husband and wife own 50% of Partnership Z, LLC and are active participants in the business. Partnership Z, LLC reports $125,000 taxable income or $62,500 to each member at the end of 2012. After reducing their income by $50,000 each, husband and wife would only have to pay tax on $12,500 of Partnership Z income on their North Carolina income tax return for a total of $25,000 of taxable income instead of the full $125,000.
Using the 2011 NC income tax rates, they could save up to $7,750 in NC taxes. It is important to note that there are many factors to take into account when planning for this income tax deduction like guaranteed payments, personal W-2 wages from S-Corp income, and bonus depreciation.
David Wilson is a Certified Public Accountant practicing at Blackman and Sloop CPAs, PA in Chapel Hill, North Carolina. With an undergraduate degree from the University of North Carolina at Asheville and a master of accounting degree from the University of North Carolina at Greensboro, David works on the tax advisory team at Blackman and Sloop. The firm performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns, as well as technology consulting services regarding installation and training on QuickBooks. David services clients in the Raleigh/Durham/Chapel Hill area.