North Carolina Franchise Tax Requirements
Navigate North Carolina's franchise tax, a distinct corporate liability based on the greater of three separate calculations involving net worth and property values.
The North Carolina franchise tax is a levy imposed on corporations for the privilege of conducting business within the state. This is a separate tax from the corporate income tax, and it is possible for a company to owe franchise tax even if it has no net income for the year. This tax is based on a company’s net worth apportioned to North Carolina, reflecting the benefits and protections the state provides to the business. All corporations, both domestic and those formed in other states but operating in North Carolina, must consider their potential liability for this tax annually.
Determining Franchise Tax Applicability
The requirement to pay North Carolina’s franchise tax extends to specific business structures that are either formed in the state or actively conduct business there. This includes all domestic corporations, whether active or inactive, and foreign corporations that have obtained a Certificate of Authority to transact business in North Carolina. Limited liability companies (LLCs) that elect to be taxed as a C-Corporation or an S-Corporation are also subject to the franchise tax.
A company is considered to be “doing business” in North Carolina, and thus establishes a tax nexus, if it engages in activities that are significant and regular. This can include having employees, owning or leasing property, or maintaining a consistent sales presence in the state. Even without a physical office, activities that are exempt from state income tax under federal law, such as mere solicitation of sales, do not exempt a company from the franchise tax if it is otherwise availing itself of the privilege of operating in the state.
Certain entities may be specifically exempt from the franchise tax under state law. These exemptions are narrowly defined and apply to specific types of non-profit organizations or other entities granted special status under North Carolina law.
Calculating the Franchise Tax Liability
The method for calculating North Carolina’s franchise tax is based on a single tax base: the corporation’s apportioned net worth. The total net worth is multiplied by an apportionment factor, which represents the proportion of the company’s business activity that occurs within North Carolina, primarily based on its sales within the state.
The tax rate applied to this base depends on the corporation’s structure. For C-Corporations, the tax is $500 on the first $1 million of the tax base, plus an additional $1.50 for every $1,000 above that amount. For S-Corporations, the initial tax is $200 for a tax base up to $1 million, with an additional charge of $1.50 for every $1,000 that exceeds $1 million.
Required Information and Forms
The primary source of information will be the company’s end-of-year balance sheet, which is necessary to determine the net worth base. The primary forms for filing are the Form CD-405 for C-Corporations and the Form CD-401S for S-Corporations. These forms, along with their instructions, are available on the North Carolina Department of Revenue (NCDOR) website. The structure of these forms guides the taxpayer through the net worth calculation, which is detailed on Schedule C of the corporate tax return. The process involves transferring the gathered financial data onto the appropriate lines of Schedule C, which requires inputting figures for capital stock, paid-in surplus, and retained earnings.
Filing and Payment Procedures
The due date for the North Carolina franchise tax return is the 15th day of the fourth month following the close of the business’s fiscal year. For companies operating on a standard calendar year, this means the deadline is April 15th. An extension to file can be requested, but it does not extend the time to pay any tax that is due.
The NCDOR encourages electronic filing through its eFile portal, which is a secure and efficient method for both C-Corporations and S-Corporations. This online system allows for direct debit payments and provides a confirmation receipt upon successful submission.
For those who choose to file by mail, the completed tax forms and any accompanying payment must be sent to the address specified in the form instructions. Using the correct post office box designated for corporate returns is recommended to avoid processing delays. Filers can track the status of their return and payment through the department’s online portal.