S Corporation With Accumulated E And P In North Carolina
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Currently, North Carolina's franchise tax is levied on the largest of three bases: (1) the taxpayer's North Carolina apportioned net worth; (2) 55% of the appraised value of all real and tangible personal property in the state; or (3) the taxpayer's total investment in tangible property in the state.
Per the NC Corporation Instructions: "Franchise tax is computed by applying the rate of $1.50 per $1,000.00, and can be no less than $200." Note No franchise tax is calculated on a final return.
After conversion from a C corp, an S corporation can inherit income such as rent, interest, retained earnings, funds derived from stock sales, etc. Passive income that makes up more than 25% of an S corp's gross income is subject to tax.
Once calculated, current E&P is pro ratably applied to distributions made during the taxable year. If the earnings and profits of the taxable year are sufficient in amount to cover all the distributions made during that year, then each distribution is a taxable dividend.
North Carolina treats businesses that file as an S corp for federal income tax purposes the same way when it comes to income tax from the state. That is, the same pass-through taxation that applies to federal income taxes applies to state income taxes.
Overview: Section 11.2 of S.L. 2024-1 clarifies that the franchise tax cap on the first $1 million of C Corporation's tax base is a maximum of $500 and not a flat rate of tax.
For C-Corporations, the franchise tax rate is $1.50 per $1,000. The minimum franchise tax is $200. For S-Corporations: The tax rate for an S-Corporation is $200 for the first one million ($1,000,000) of the corporation's tax base and $1.50 per $1,000 of its tax base that exceeds one million dollars ($1,000,000).
The Accumulated Adjustments Account (AAA) tracks your S Corporation's gross income, expenses, and distributions. This account is found on Form 1120-S on Schedule M-2. The goal of the Accumulated Adjustment account is to determine if you took any taxable distributions during the year.
Because of the one-class-of-stock restriction, an S corporation cannot allocate losses or income to specific shareholders. Allocation of income and loss is governed by stock ownership, unlike partnerships or LLCs taxed as partnerships where the allocation can be set in the partnership agreement or operating agreement.
