NC Corporate Tax

North Carolina Corporate Income & Franchise Tax

North Carolina corporate income tax is phasing out under S.L. 2021-180 (SB 105): the rate dropped from 2.5% in 2024 to 2.25% in 2025, and continues to 2.00% (2026), 2.00% (2027), 1.00% (2028), 0.50% (2029), and 0.00% (2030 and later). The franchise tax remains under N.C. Gen. Stat. § 105-122 at $1.50 per $1,000 of apportioned capital, with a $200 minimum and a $150,000 maximum for holding companies. NC uses single-sales-factor apportionment with market-based sourcing for services. S-corps are exempt from corporate income tax but still owe franchise tax. A pass-through entity (PTE) election is available under § 105-153.9A. The combined return is Form CD-405. Tax year 2025.

1. Scope

This skill covers North Carolina state-level entity-level taxes:

• Corporate income tax (N.C. Gen. Stat. § 105, Article 4, Part 1) — imposed on C-corporations doing business in or deriving income from NC sources.
• Franchise tax (N.C. Gen. Stat. § 105-122) — imposed on every C-corp, S-corp, and LLC taxed as a corporation that is incorporated, domesticated, or doing business in NC. Limited to a single "net worth-based" base from 2025 onward.
• Pass-Through Entity Tax (PTET) election under N.C. Gen. Stat. § 105-153.9A — optional entity-level tax for partnerships and S-corps designed to work around the federal $10,000 SALT cap.
• Estimated-payment, NOL, and apportionment rules as they apply to corporate income.

In scope: Form CD-405 (C-corp combined income and franchise return), Form CD-401S (S-corp franchise + informational return), Form D-403 (partnership/LLC informational + PTE), Form CD-429 (estimated income payments), Form CD-V (payment voucher), and Form NC-NA (nonresident agreements where applicable).

Out of scope (refer elsewhere):

• NC personal income tax (PIT) — covered by nc-income-tax.md. The 2025 flat PIT rate is 4.25% (continuing its own phase-down under SB 105).
• NC sales and use tax — covered by nc-sales-tax.md.
• Federal corporate income tax (Form 1120) — covered by federal skills.
• Insurance companies (subject to gross premiums tax under Article 8B, not Article 4).
• Banks and savings institutions filing combined returns under Subchapter VIII — special rules not covered here.
• Captive REITs / captive RICs — special add-back rules outside the standard playbook.
• Counties and municipalities — NC has no local corporate income tax.

⚠️ Authority confirmation rule. Before relying on a rate, threshold, or form line in production, confirm against the current NCDOR publications (Form CD-405 instructions, the franchise tax sections of the Corporate Income and Franchise Tax Bulletin, and the NCDOR Tax Directives). The phase-out schedule below is statutory but interim legislative sessions can amend the schedule. Statutes change.

2. Corporate Income Tax — Phase-Out Schedule

Corporate Income Tax Phase-Out Schedule (S.L. 2021-180 (SB 105); § 105-130.3)

Income Year Beginning On or After	Rate	Statutory Basis
Jan 1, 2017	3.00%	Pre-SB 105 baseline
Jan 1, 2019	2.50%	Prior phase-down (S.L. 2017-57)
Jan 1, 2022	2.50%	SB 105 confirms
Jan 1, 2023	2.50%	SB 105 confirms
Jan 1, 2024	2.50%	SB 105 confirms
Jan 1, 2025	2.25%	SB 105, § 42.1.(a)
Jan 1, 2026	2.00%	SB 105
Jan 1, 2027	2.00%	SB 105
Jan 1, 2028	1.00%	SB 105
Jan 1, 2029	0.50%	SB 105
Jan 1, 2030 and later	0.00%	SB 105 — full repeal of CIT

2. Corporate Income Tax — Phase-Out Schedule

S.L. 2021-180 (Session Law of November 18, 2021), known as SB 105, enacted the largest single rate-reduction package in NC corporate income tax history. Under § 105-130.3 as amended, the corporate income tax rate is:

2.1 What "phase-out" means in practice

• Tax base unchanged during phase-out — The corporate income tax base (NC taxable income, after apportionment and NC additions/subtractions to federal taxable income) continues to be computed under the existing rules during the phase-out. Only the rate is changing. (§ 105-130.3)
• Fiscal-year filer blended rate — For fiscal-year filers, NC applies a blended rate computed by weighting each calendar period's rate by the number of days in the fiscal year that fall in that calendar year. NCDOR publishes a fiscal-year proration table each year; for 2025 returns it is in the CD-405 instructions. (CD-405 instructions)
• Franchise tax base unchanged by CIT phase-out — The franchise tax base is unchanged by the phase-out. Even after 2030, when the income tax rate is 0.00%, every C-corp, S-corp, and corporate LLC must still file CD-405/CD-401S and pay franchise tax (subject to the $200 minimum). This is a key revenue commitment in SB 105. (SB 105)
• PTE rate follows phase-down with one-year lag — The PTE election rate (§ 105-153.9A) follows the same phase-down with a one-year lag — see § 7 below. The 2024 PTE rate was 2.5%; tax practitioners modeling 2025+ PTE elections should treat the rate as tracking the corporate income tax schedule. (§ 105-153.9A)
• ASC 740 remeasurement of NC deferred tax assets — Practitioners modeling deferred tax assets (federal ASC 740 purposes) for NC purposes must remeasure NC DTAs each year the schedule changes; under ASC 740-10-25-47, the remeasurement is recognized in the period the rate change is enacted, which for SB 105 was Q4 2021. By 2025 most public filers have already exhausted the major remeasurement adjustments. (ASC 740-10-25-47)

2.2 Effective-rate examples (income tax only, before franchise)

Effective-rate examples for $1,000,000 NC apportioned taxable income (SB 105 phase-out schedule)

Year	Rate	NC Income Tax
2024	2.50%	$25,000
2025	2.25%	$22,500
2026	2.00%	$20,000
2028	1.00%	$10,000
2029	0.50%	$5,000
2030+	0.00%	$0

Compared with a 2017 baseline of $30,000 (3.00%), a 2030 NC C-corp will save $30,000 per $1,000,000 of NC taxable income annually in state income tax. Franchise tax (next section) remains.

3. Franchise Tax — Surviving the CIT Phase-Out

The franchise tax is the principal NC entity-level tax that survives the SB 105 phase-out. It is sometimes mischaracterized as a privilege tax; technically it is a privilege tax under Article 3 of Chapter 105.

3.1 Rate and base

• Franchise tax rate — $1.50 per $1,000 of the apportioned franchise tax base per $1,000 of base (Equivalent to 0.15% of the base) (N.C. Gen. Stat. § 105-122)
• Franchise tax base (post-2025 reform) — Total proportionate share of capital of the corporation, multiplied by the NC apportionment factor. Prior to S.L. 2023-12 / 2024 modifications, NC franchise tax used the greatest of three alternative bases (capital stock + surplus, 55% of appraised property value, or actual investment in tangible property). Starting with tax years beginning on or after Jan 1, 2025, the alternative bases are eliminated for non-holding companies; only the simplified capital base applies. Holding companies have a separate cap (see § 3.4). (S.L. 2023-12; § 105-122)
• Franchise tax minimum — $200 USD (Per filing entity per year; every corporation, S-corp, and corporate LLC pays at least $200 even with zero capital or zero NC apportionment.) (N.C. Gen. Stat. § 105-122)
• Franchise tax maximum (holding companies only) — $150,000 USD (Per year under the holding company cap) (N.C. Gen. Stat. § 105-122)

3.2 Computing the franchise tax base — 2025 simplified method

• 2025 simplified franchise tax base computation — Step 1. Begin with the corporation's "total proportionate share of capital" (essentially: paid-in capital + retained earnings + accumulated other comprehensive income, computed on a worldwide basis, with certain NC-specific add-backs — see § 105-122(b)). Step 2. Multiply by the NC single-sales apportionment factor (see § 5). The resulting amount is the "NC apportioned franchise tax base." Step 3. Multiply by $1.50 / $1,000 (i.e., 0.0015). Step 4. Compare to the $200 minimum. Compare to the $150,000 holding-company maximum (if applicable). Tax = greater of (Step 3 amount, $200); capped at $150,000 if a qualifying holding company. (§ 105-122(b))

3.3 Add-backs and adjustments under § 105-122(b)

• Capital base adjustments — The capital base must be adjusted for: - Indebtedness owed to a parent, subsidiary, or affiliate (intercompany debt is added back — historically a major audit issue). - Deferred tax assets and liabilities (excluded from capital). - Treasury stock (excluded — i.e., treasury stock does NOT reduce capital for franchise tax purposes in the same way it does for GAAP equity). - Reserves not deductible for federal income tax. (§ 105-122(b))
• Long-term indebtedness under 2025 simplified rules — Bonds, notes, or other indebtedness with a stated maturity of more than 5 years can no longer create a separate "investment in NC tangible property" base under the simplified 2025 rules; they remain part of capital under Step 1. (§ 105-122(b))

3.4 Holding company definition and cap

• Holding company definition — A corporation that: 1. Receives more than 80% of its gross income from sources outside NC, AND 2. Receives more than 50% of its gross income from dividends from corporations in which it owns at least 50% of the outstanding voting stock. (§ 105-122(d))
• Qualifying holding company treatment — A qualifying holding company: Pays franchise tax computed under the standard formula (0.15% of apportioned capital), BUT Is capped at $150,000 in franchise tax per year (the holding-company maximum), AND Has alternative computation methods available that frequently bring it well below the cap. (§ 105-122(d))
• Holding company cap history note — Note: S.L. 2017-204 reduced the holding-company franchise tax max from a previously higher amount of effective $150,000 by tier; for tax years 2025+, the operative max remains $150,000. Practitioners must verify the cap each year because the General Assembly has revisited the holding-company cap in multiple sessions. (S.L. 2017-204)

3.5 Who pays franchise tax

Who pays franchise tax table (§ 105-122; § 105-130.11)

Entity Type	NC Franchise Tax	NC Corporate Income Tax (2025 = 2.25%)
C-corp (domestic NC or foreign doing business in NC)	YES — Form CD-405	YES — Form CD-405
S-corp (federal Subchapter S election in effect)	YES — Form CD-401S	NO — owners pay PIT on their share
LLC taxed as C-corp (federal election)	YES — Form CD-405	YES — Form CD-405
LLC taxed as S-corp	YES — Form CD-401S	NO — owners pay PIT
Multi-member LLC (default partnership)	NO franchise tax	NO entity income tax; partners pay PIT (or PTE election)
Single-member LLC (disregarded)	NO franchise tax	NO entity-level tax; member reports on PIT
Limited partnership (LP)	NO franchise tax	NO entity income tax; partners pay PIT
Nonprofit § 501(c)(3) corporation	NO if exempt under § 105-130.11	NO if exempt
Insurance company	NO (subject to gross premiums tax instead)	NO (separate regime)

⚠️ Multi-member LLCs and partnerships are not subject to NC franchise tax. This is a frequent error among new NC practitioners migrating from states (e.g., Delaware) where LLCs pay an annual franchise tax. NC's franchise tax follows corporate-form, not entity-of-record.

4. S-Corp and LLC Treatment

4.1 S-corporations

• S-corp NC treatment — A federal S-corp election under IRC § 1362 automatically carries to North Carolina; there is no separate NC S-election. An S-corp: Does not pay NC corporate income tax. Does pay NC franchise tax at the standard rate, with the $200 minimum, on Form CD-401S. Files Form CD-401S annually, reporting income that flows through to shareholders. Schedule K-1 equivalents (NC K-1) are issued to shareholders. Shareholders include their pro-rata share of NC-source income on Form D-400 (NC PIT) and pay the flat NC PIT rate (4.25% for 2025, scheduled to decline to 3.99% in 2026 and beyond under separate SB 105 PIT provisions). May elect into the PTE regime (§ 7) — this can be advantageous federally because the entity-level PTET payment is deductible on the federal Form 1120-S, escaping the $10,000 SALT cap for shareholders. (IRC § 1362)

4.2 LLCs

LLC federal-to-NC treatment table (IRC Form 8832 / Form 2553)

Federal Tax Treatment	NC Income Tax	NC Franchise Tax
LLC elects C-corp (Form 8832)	Subject (2.25% in 2025; phasing out)	Subject
LLC elects S-corp (Form 2553)	Not subject	Subject
Multi-member LLC, default partnership	Not subject at entity (partners pay PIT)	Not subject
Single-member LLC, disregarded	Not subject at entity	Not subject

The disregarded-entity SMLLC and the default partnership multi-member LLC are the two cases where a NC business pays no entity-level tax. All NC tax falls on the owner(s) via their individual D-400.

4.3 LLC electing C-corp — special trap

• LLC C-corp election trap — An LLC that affirmatively elects C-corp treatment by filing federal Form 8832 (or Form 2553 followed by revocation) becomes subject to both NC income tax (2.25% in 2025, phasing to 0%) and NC franchise tax (CD-405, $200 min). The election is binding for NC purposes as well. Practitioners should verify the federal election before assuming an LLC owes only PIT-level NC tax. (Form 8832; CD-405)

5. Apportionment — Single Sales Factor, Market-Based Sourcing

5.1 Single sales factor (effective 2018)

• Single sales factor apportionment formula — NC Sales Apportionment = ----------- Everywhere Sales (N.C. Gen. Stat. § 105-130.4(i))
• Single sales factor effective date and effect — For tax years beginning on or after January 1, 2018, NC uses a single sales factor apportionment formula. Payroll and property factors are no longer part of the formula (except for special industries like railroads, motor carriers, and qualified air carriers). This represents a substantial revenue advantage for companies with significant NC payroll and property but limited NC sales — typical of NC-headquartered manufacturers selling nationally. (§ 105-130.4(i))

5.2 Market-based sourcing for services (effective 2020)

• Market-based sourcing rule and hierarchy — For tax years beginning on or after January 1, 2020, NC adopted market-based sourcing for receipts from services and intangibles. Services receipts are sourced to NC if the customer receives the benefit of the service in NC. The hierarchy under NCDOR's market-sourcing rules is: 1. Location where the service is delivered (for services to individuals: customer's primary residence; for services to businesses: customer's primary place of business or location where the contract is principally administered). 2. State where the customer ordered the service (if delivery location cannot be determined). 3. State where the customer's billing address is located (if order location cannot be determined). 4. Throw-out rule: If none of the above can be determined, the receipt is excluded from both numerator and denominator (effectively reducing the apportionment factor). (§ 105-130.4(l))
• Intangible property and SaaS sourcing — Receipts from intangible property are sourced based on where the property is used. Software-as-a-service (SaaS) receipts are sourced to the customer's primary location, mirroring NC sales tax sourcing. (§ 105-130.4(l))

5.3 Special industries

Special industry apportionment methods (§ 105-130.4)

Industry	Apportionment Method	Citation
Railroads	Property-weighted formula (gross earnings)	§ 105-130.4(o)
Motor carriers	Vehicle-mile formula	§ 105-130.4(p)
Air carriers	Departures + revenue tons + originating revenue	§ 105-130.4(r)
Telephone companies	Special formula	§ 105-130.4(s)
Banks	Combined apportionment available	§ 105-130.4(t1)

5.4 Alternative apportionment

• Alternative apportionment petition — A taxpayer (or NCDOR) may petition for an alternative apportionment method under § 105-130.4(t) if the statutory formula does not "fairly represent" the corporation's NC income. Alternative methods include separate accounting, exclusion of factors, or inclusion of additional factors. NCDOR rarely grants taxpayer-initiated alternative apportionment in practice and may require combined reporting (§ 6). (§ 105-130.4(t))

5.5 NOL limitation interaction with apportionment

• Order of apportionment vs NOL deduction — Apportionment is applied after NC modifications to federal taxable income but before the NOL deduction. The NC NOL is computed on a post-apportionment basis. (§ 105-130.8A)

6. NOL Rules

NC has two distinct NOL regimes:

6.1 Pre-2014 NOLs (grandfathered)

• Pre-2014 NOL rules — NOLs generated in tax years beginning before January 1, 2015 follow pre-existing NC rules: 15-year carryforward, no carryback (NC has never allowed corporate NOL carrybacks), no percentage-of-income limitation. These NOLs are increasingly aged out — most pre-2014 NOLs have already expired (the latest expire with tax year 2029). (Pre-2015 NC NOL rules)

6.2 Post-2014 NOLs (current regime under § 105-130.8A)

• Post-2014 NOL rules — For NOLs generated in tax years beginning on or after January 1, 2015, NC applies a federal-style limitation: 80% of pre-NOL NC taxable income limit on the deduction (mirroring the post-TCJA federal § 172(a)(2)(B) limit). No carryback. Indefinite carryforward (no 20-year limit). Computed and tracked on Schedule NOL of Form CD-405. (§ 105-130.8A)
• NOL value declines with rate phase-out — The 80% limitation interacts with the income tax phase-out: as the rate declines toward 0% in 2030, the value of stockpiled NOLs declines proportionately. This makes it strategically important to use NC NOLs against high-rate-year income; a 2025 deduction at 2.25% is more valuable than the same deduction in 2029 at 0.50%, and a deduction in 2030+ is worth zero. Practitioners should model the timing of NC income realization for clients sitting on large NOL inventories. (§ 105-130.8A)

6.3 NOL carryforward in mergers and acquisitions

• NC § 382 conformity — NC follows federal § 382 by reference for ownership-change limitations. The NC § 382 limitation is computed independently using NC values and apportionment but mirrors federal mechanics. NCDOR has issued no published guidance distinct from federal § 382 — practitioners apply federal computations and adjust for NC apportionment. (IRC § 382 (by reference))

7. PTE Election (Pass-Through Entity Tax)

7.1 Statutory basis

• PTE statutory basis and history — N.C. Gen. Stat. § 105-153.9A authorizes a pass-through entity tax election for partnerships and S-corps. The election was enacted in 2021 (S.L. 2021-180) as a SALT-cap workaround responding to IRS Notice 2020-75, which blessed state PTE regimes as deductible at the entity level for federal purposes. (N.C. Gen. Stat. § 105-153.9A; S.L. 2021-180; IRS Notice 2020-75)

7.2 Mechanics

• PTE election mechanics — Election is annual, made on Form D-403 (partnership) or Form CD-401S (S-corp). Once filed for the year, the election is irrevocable for that year. The electing entity pays NC tax at the PTE rate on its NC-apportioned share of partner/shareholder income. Resident partners/shareholders receive a refundable credit on their D-400 equal to their share of the PTE tax paid. Nonresident partners/shareholders are typically removed from the composite return (D-403) if the PTE election is made; they claim the PTE credit on their own D-400 nonresident return. (§ 105-153.9A)

7.3 PTE rate schedule

PTE rate schedule (§ 105-153.9A; working assumption per prose)

Tax Year	PTE Rate
2024	2.5%
2025	2.25% (working assumption — confirm with current NCDOR Directive)
2026	2.00%
2028	1.00%
2029	0.50%
2030+	0.00% (effective sunset)

⚠️ The PTE rate published in 2024 NCDOR Form D-403 instructions was 2.5%. Practitioners filing 2025 returns must confirm the current PTE rate against the latest NCDOR Directive. Treat the table above as a planning estimate, not a filing position.

7.4 When the PTE election makes sense

• When PTE election is beneficial — The PTE election is generally beneficial when: 1. The owner has federal SALT deduction exposure — i.e., is already at or above the $10,000 SALT cap on their federal Schedule A. The PTE payment becomes a business deduction on the federal Form 1065/1120-S, bypassing the cap. 2. The owner is a resident of NC (avoiding nonresident credit complications). 3. The owner is not subject to AMT issues at the federal level (rare post-TCJA but possible). 4. The entity has stable, taxable income — PTE is not useful for loss years.
• When PTE election is not beneficial — A PTE election is generally not beneficial if: The owner has very little federal SALT (e.g., already itemizes minimally). The entity has significant nonresident owners in states that do not give credit for NC PTE. The federal SALT cap is repealed (which would moot the entire PTE regime — track legislative developments).

7.5 PTE phase-out interaction

• PTE benefit sunset with rate phase-out — As the PTE rate declines to 0% in 2030, the SALT-cap benefit of the election proportionately disappears. By 2029 (rate 0.50%), the federal SALT deduction generated by a $1,000,000 NC PTE payment is only $5,000 (compared to $25,000 at 2024 rates). The PTE election effectively sunsets with the corporate income tax.

8. Filing and Estimated Payments

8.1 Forms

Forms table (NCDOR form list)

Form	Used By	Reports
CD-405	C-corps and LLCs taxed as C-corps	Combined NC corporate income tax + franchise tax
CD-401S	S-corps and LLCs taxed as S-corps	NC franchise tax + S-corp informational income reporting; PTE election option
D-403	Partnerships and multi-member LLCs	Informational; PTE election option
CD-429	All entities owing estimated income tax	Quarterly estimated tax voucher
CD-V	All entities making annual payment	Payment voucher
CD-419	All entities	Application for extension (automatic 6-month)
NC-NA	Nonresident shareholders/partners	Agreement to pay NC tax (alternative to composite/PTE)
Schedule NOL	C-corps with NOL carryforwards	NOL tracking
Schedule O	Holding companies	Holding-company qualification statement

8.2 Due dates

• Filing due dates and extension — Calendar-year filers: April 15 of the year following the tax year (15th day of the 4th month after year-end). Fiscal-year filers: 15th day of the 4th month after the close of the fiscal year. Extension: Automatic 6-month extension by filing Form CD-419 by the original due date. Extension extends time to file, not time to pay. Late-payment penalty (10% of tax due) and interest run from the original due date. (Form CD-419)

8.3 Estimated payments

• Estimated payment requirement threshold — more than $500 in NC income tax USD (Corporations expecting to owe more than this must make quarterly estimated payments on Form CD-429) (Form CD-429)

Estimated payment installment schedule (Form CD-429)

Installment	Due Date (calendar year)	Cumulative % of Estimated Tax
1st	April 15	25%
2nd	June 15	50%
3rd	September 15	75%
4th	December 15	100%

• Underpayment safe harbor and franchise tax exclusion — Note that the 4th installment is due December 15, earlier than the federal December 15 (which matches). Underpayment penalty is computed under § 105-163.41 using a safe harbor of 100% of prior year's tax (or 90% of current year's tax). Franchise tax is not subject to estimated payments — it is paid in full with the annual return. (§ 105-163.41)

8.4 Penalties and interest

• Penalty and interest schedule — Late filing: 5% per month, max 25%. Late payment: 10% of unpaid tax (single penalty, not monthly). Negligence: 10% of underpayment. Fraud: 50% of underpayment. Failure to make estimated payments: Computed under § 105-163.41 using statutory interest rate. Interest rate: Set semi-annually by the Secretary of Revenue. For 2025 the rate is published in NCDOR Directive TA-25-1 (statutory minimum 5% per annum). (§ 105-163.41; NCDOR Directive TA-25-1)

8.5 Combined and consolidated returns

• Combined reporting rules — NC does not mandate combined reporting for unitary groups by default. Combined reporting may be: Required by NCDOR under § 105-130.5A if separate-entity reporting fails to reflect economic reality (typically intercompany pricing audits). Elected by the taxpayer under § 105-130.14 in narrow circumstances (parent-subsidiary 80%-ownership consolidations). (§ 105-130.5A; § 105-130.14)

Most NC consolidated returns are filed only after NCDOR demands one or after a closing agreement on alternative apportionment. The default presumption is separate-entity reporting, even for taxpayers filing federal consolidated returns. This is a frequent issue in restructuring planning.

9. Worked Examples

9.1 Example A — Small NC C-corp, 2025 vs. 2028 modeling

Acme Widgets, Inc. is a NC-domiciled C-corp manufacturing widgets. Calendar-year filer. For 2025:

• Federal taxable income: $500,000

• NC additions: $20,000 (state taxes deducted federally, added back)

• NC subtractions: $5,000 (federal bonus depreciation timing)

• Total proportionate share of capital (book equity, adjusted): $2,000,000

• 100% of sales delivered to NC customers. NC apportionment factor: 1.0000.

• Step 1 — NC taxable income (2025) — Federal taxable income 500,000 + NC additions 20,000 - NC subtractions (5,000) = NC pre-apportionment income 515,000 × NC apportionment factor 1.0000 = NC apportioned income 515,000 - NOL deduction 0 = NC taxable income 515,000 (Example A worked calculation)

• Step 2 — NC corporate income tax (2025 rate 2.25%) — 515,000 × 2.25% = $11,587.50 (Example A worked calculation)

• Step 3 — NC franchise tax (2025) — Capital base 2,000,000 × NC apportionment factor 1.0000 = NC apportioned capital base 2,000,000 Franchise tax = 2,000,000 × 0.0015 = $3,000.00 (Above $200 minimum, no holding-company cap) (Example A worked calculation)

• Step 4 — Total 2025 NC tax — Income tax $11,587.50 Franchise tax $3,000.00 Total $14,587.50 (Example A worked calculation)

• Step 5 — Repeat the analysis for 2028 (rate 1.00%, all else equal) — Income tax: 515,000 × 1.00% = $5,150.00 Franchise tax: unchanged $3,000.00 Total: $8,150.00 (Example A worked calculation)

• Step 6 — 2030 modeling (rate 0.00%, all else equal) — Income tax: 515,000 × 0.00% = $0.00 Franchise tax: unchanged $3,000.00 Total: $3,000.00 (Example A worked calculation)

Over six years (2025 → 2030), Acme's annual NC entity-level tax burden drops from $14,587.50 to $3,000.00 — a reduction of nearly 80%. The franchise tax becomes the residual NC tax. For planning purposes, Acme's controller should consider accelerating deductions into 2025 (highest residual rate among the phase-out years) and deferring income into 2028+ where feasible. Standard rate-arbitrage planning, similar to the deferred-revenue strategies used during the federal 2017 TCJA transition.

9.2 Example B — S-corp owing only franchise tax

Carolina Consulting, Inc. is an NC S-corp providing management consulting services. Single shareholder, NC resident. Calendar 2025:

• Federal Form 1120-S taxable income: $300,000 (passes through to shareholder)

• NC additions/subtractions: net zero

• Total proportionate share of capital: $400,000

• Sales: 100% to NC customers. NC apportionment: 1.0000.

• No PTE election.

• Step 1 — NC corporate income tax at entity level — $0 — S-corps are exempt from NC corporate income tax. (Example B worked calculation)

• Step 2 — NC franchise tax (CD-401S) — Capital base 400,000 × NC apportionment factor 1.0000 = NC apportioned capital base 400,000 × 0.0015 = Franchise tax $600.00 Above $200 minimum, so $600 is owed. (Example B worked calculation)

• Step 3 — Shareholder-level NC PIT (separate return) — The $300,000 of S-corp income passes through to the shareholder's K-1 and onto Form D-400. The shareholder pays NC PIT at the 2025 flat rate of 4.25%: 300,000 × 4.25% = $12,750.00 (paid by shareholder on D-400) (Example B worked calculation)

• Step 4 — Total NC tax burden across entity + owner — Entity-level franchise tax $600.00 Shareholder PIT $12,750.00 Total $13,350.00 (Example B worked calculation)

• Step 5 — PTE election alternative (counterfactual) — If the corporation makes the PTE election for 2025 (assumed rate 2.25%): Entity-level PTE tax: 300,000 × 2.25% = $6,750.00 Entity franchise tax (unchanged): $600.00 Total entity-level $7,350.00 Shareholder D-400: 300,000 of S-corp income Less PTE credit: (6,750) Net NC PIT base: still 300,000 × 4.25% with credit Or equivalent: 4.25% × 300,000 = 12,750 - 6,750 credit = $6,000 PIT Total NC tax = $7,350 (entity) + $6,000 (shareholder) = $13,350. NC-side, the PTE election is revenue-neutral: the PTE tax paid at the entity level is credited dollar-for-dollar against shareholder PIT. The benefit is federal: the $6,750 of PTE tax is deductible on the corporation's federal 1120-S, reducing federal pass-through income by $6,750 and saving the shareholder roughly $1,485–$2,498 in federal tax (depending on the marginal bracket, 22%–37%). If the shareholder is already at the $10,000 federal SALT cap, this federal saving is essentially "free money." (Example B worked calculation)

S-corps in NC pay only franchise tax at the entity level (in this example, $600). The PTE election does not change NC tax but generates federal SALT-cap relief — worth considering for any NC S-corp shareholder with significant other state-and-local-tax deductions.

9.3 Example C — Holding company hitting the maximum franchise tax

Tarheel Holdings, Inc. is a Delaware-incorporated holding company domesticated in NC. It holds 100% of two operating subsidiaries (one in NC, one in TX). 2025 financials:

• 95% of gross income consists of dividends from its 100%-owned subsidiaries (qualifies as a holding company under § 105-122(d) — both >80% out-of-state-income and >50% from majority-owned subsidiary dividends).

• Total proportionate share of capital: $200,000,000 (mostly retained earnings from accumulated subsidiary dividends).

• NC apportionment factor: 0.6500 (NC sub generates most of dividend income receipts; market-sourcing applies).

• Step 1 — Holding-company qualification check — Out-of-state-income test: >80% of gross income from non-NC sources? YES (dividends). Subsidiary-dividend test: >50% of gross income from ≥50%-owned subs? YES (95%). → Qualifies as a holding company. Cap of $150,000 applies. (§ 105-122(d))

• Step 2 — Compute franchise tax under standard formula — Capital base $200,000,000 × NC apportionment factor 0.6500 = NC apportioned capital base $130,000,000 × 0.0015 = Franchise tax (uncapped) $195,000 (Example C worked calculation)

• Step 3 — Apply $150,000 holding-company cap — $195,000 standard formula vs. $150,000 holding-company maximum → Tax = $150,000 (cap applies) (§ 105-122(d))

• Step 4 — Corporate income tax (2025) — Dividends from majority-owned subsidiaries are eligible for the NC dividends-received deduction under § 105-130.5(b)(3a) (100% DRD for dividends from corporations in which the taxpayer owns at least 50% of the stock). Effectively zero taxable income. NC income tax: 0 × 2.25% = $0.00 (§ 105-130.5(b)(3a))

• Step 5 — Total 2025 NC tax — Income tax $0.00 Franchise tax $150,000.00 Total $150,000.00 (Example C worked calculation)

Tarheel Holdings' franchise tax is capped at $150,000, a substantial savings versus the $195,000 uncapped computation. The cap rewards holding companies that have grown to a scale where the standard formula would otherwise produce franchise tax well into six or seven figures. The income tax phase-out doesn't materially affect Tarheel because most of its income is already 100% DRD-eligible. The franchise tax is, and will remain, its only meaningful NC tax liability.

9.4 Example D — Mid-size C-corp using NC NOL during phase-out (planning illustration)

Pinecone Corp, an NC C-corp, has a $1,000,000 NC NOL carryforward at the start of 2025 (post-2014 NOL, subject to 80% limit). Expected NC apportioned income:

Expected NC apportioned income by year (2.25%)

Year	Projected NC Income	Rate
2025	$500,000	2.25%
2026	$500,000	2.00%
2027	$500,000	2.00%
2028	$500,000	1.00%
2029	$500,000	0.50%

• Strategy 1 — Use NOL in earliest years (recommended) — 2025: 80% × 500,000 = 400,000 NOL used. Remaining = 600,000. Taxable: 100,000 × 2.25% = $2,250 2026: 80% × 500,000 = 400,000 NOL used. Remaining = 200,000. Taxable: 100,000 × 2.00% = $2,000 2027: 80% × 500,000 = 400,000 NOL CAP, but only 200,000 left. Use 200,000. Taxable: 300,000 × 2.00% = $6,000 2028: NOL exhausted. Taxable: 500,000 × 1.00% = $5,000 2029: Taxable: 500,000 × 0.50% = $2,500 Total 5-year tax: $17,750 (Example D worked calculation)
• Strategy 2 — Defer NOL usage (illustrative — not generally allowed; NOL must be used in earliest profitable year) — NC does not permit elective deferral of NOL usage; it must be applied in the earliest year of available income (subject to the 80% cap). Strategy 1 is mandatory. The illustration is to confirm there's no planning lever here on NOL timing — the only lever is income timing (accelerate deductions into 2025, defer income into 2028+).

Even setting aside NOL-timing planning, Pinecone's marginal NC tax rate is mechanically declining, making any 2025-2029 income-deferral planning valuable. Each $100,000 of income shifted from 2025 to 2029 saves $1,750 of NC tax (2.25% − 0.50%). Each $100,000 shifted from 2025 to 2030 saves $2,250.

10. Quick Reference Table

Quick Reference Table (Quick Reference Table)

Item	2024	2025	2026	2028	2030+
NC corporate income tax rate	2.50%	2.25%	2.00%	1.00%	0.00%
NC franchise tax rate	$1.50 / $1,000	$1.50 / $1,000	$1.50 / $1,000	$1.50 / $1,000	$1.50 / $1,000
Franchise tax minimum	$200	$200	$200	$200	$200
Holding-company franchise cap	$150,000	$150,000	$150,000	$150,000	$150,000
NC PIT rate (for context)	4.50%	4.25%	3.99%	3.99%	3.99%
PTE rate (working assumption)	2.50%	2.25%	2.00%	1.00%	0.00%
Filing form (C-corp)	CD-405	CD-405	CD-405	CD-405	CD-405
Filing form (S-corp)	CD-401S	CD-401S	CD-401S	CD-401S	CD-401S
Single sales factor?	Yes	Yes	Yes	Yes	Yes
Market sourcing services?	Yes	Yes	Yes	Yes	Yes
NOL 80% limit / no carryback / indefinite carryforward?	Yes	Yes	Yes	Yes	Yes

11. Provenance and Authority

11.1 Primary statutory authority

• N.C. Gen. Stat. Chapter 105, Article 4, Part 1 — Corporate Income Tax (§§ 105-130 through 105-130.48). (N.C. Gen. Stat. Chapter 105, Article 4, Part 1)
• N.C. Gen. Stat. § 105-130.3 — Corporate income tax rate. As amended by S.L. 2021-180 (SB 105). (N.C. Gen. Stat. § 105-130.3)
• N.C. Gen. Stat. § 105-130.4 — Apportionment (single sales factor and market-based sourcing). (N.C. Gen. Stat. § 105-130.4)
• N.C. Gen. Stat. § 105-130.5 — Adjustments to federal taxable income. (N.C. Gen. Stat. § 105-130.5)
• N.C. Gen. Stat. § 105-130.8A — NOL deduction (post-2014 regime). (N.C. Gen. Stat. § 105-130.8A)
• N.C. Gen. Stat. § 105-122 — Franchise tax on corporations. (N.C. Gen. Stat. § 105-122)
• N.C. Gen. Stat. § 105-122(d) — Holding-company definition and $150,000 cap. (N.C. Gen. Stat. § 105-122(d))
• N.C. Gen. Stat. § 105-131 et seq. — S-corp provisions. (N.C. Gen. Stat. § 105-131 et seq.)
• N.C. Gen. Stat. § 105-153.9A — PTE election (pass-through entity tax). (N.C. Gen. Stat. § 105-153.9A)
• N.C. Gen. Stat. § 105-163.40 et seq. — Corporate estimated tax. (N.C. Gen. Stat. § 105-163.40 et seq.)

11.2 Session laws (key reforms)

• S.L. 2021-180 (SB 105), signed November 18, 2021 — Statutory phase-out of corporate income tax to 0% by 2030; PTE election enacted; PIT phase-down to 3.99%. (S.L. 2021-180 (SB 105))
• S.L. 2017-57 (HB 334) — Earlier-stage franchise tax reform and rate reductions. (S.L. 2017-57 (HB 334))
• S.L. 2017-204 — Holding-company franchise tax cap adjustments. (S.L. 2017-204)
• S.L. 2023-12 — Franchise tax base simplification (eliminating alternative bases for non-holding companies, effective 2025). (S.L. 2023-12)
• Pre-2018 reform (S.L. 2015-241) — Movement toward single sales factor (completed 2018). (S.L. 2015-241)
• Market-sourcing adoption (effective 2020) — S.L. 2019-246. (S.L. 2019-246)

11.3 Administrative guidance

• NCDOR Form CD-405 instructions (annual) — Corporate income and franchise tax return.
• NCDOR Form CD-401S instructions (annual) — S-corp return.
• NCDOR Form D-403 instructions (annual) — Partnership return + PTE.
• NCDOR Tax Directives — Issued periodically on specific issues; check the NCDOR website for current Directives covering market-sourcing, PTE rate, and apportionment edge cases.
• NCDOR Corporate Income and Franchise Tax Bulletin — Comprehensive annual bulletin published by NCDOR.
• NCDOR Personal Taxes Bulletin — For PTE flow-through to D-400 (relevant for PTE shareholders).

11.4 Cross-references in this skill bundle

• nc-income-tax.md — NC personal income tax (D-400), relevant for S-corp shareholders, LLC members, and PTE credit pass-through.
• nc-sales-tax.md — NC sales and use tax (separate regime, no overlap with corporate income/franchise tax).
• us-federal-return-assembly.md — Federal corporate return assembly (Form 1120) feeding NC starting taxable income.
• us-s-corp-election-decision.md — Federal/state S-corp election decision framework, including NC franchise-tax consideration.

11.5 Verification status

• Verified by: pending (skill is in draft; awaiting credentialed NC CPA/EA review per the verification model).
• Verification scope when complete: entire skill (rates, forms, statutory citations, worked examples).
• Known open questions for verifier:
  1. Confirm 2025 PTE rate in current NCDOR Directive / D-403 instructions (working assumption: 2.25%).
  2. Confirm holding-company cap remains $150,000 (no 2024–2025 legislative session changes).
  3. Confirm fiscal-year proration table for SB 105 phase-out years (NCDOR's annual table in CD-405 instructions).
  4. Confirm the post-2025 franchise simplification took effect as scheduled (no last-minute legislative deferral).
  5. Verify Schedule NOL mechanics in 2025 form revisions.

11.6 Citation discipline

• All statutory rate, threshold, and cap claims must be re-verified against the cited statute on each filing-season run.
• All NCDOR form line references must be re-verified against the current-year form in NCDOR's forms library; line numbers change year-to-year.
• Worked examples are illustrative; the precise mechanics on the actual form may differ in line ordering. Cross-tie to CD-405 instructions in production.
• This skill is not a substitute for credentialed reviewer signoff under the OpenAccountants verification model (lead + contributors per country).

End of nc-corporate-tax.md

End of nc-corporate-tax.md (v0.1, 2025-11-15).

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