Hi everyone ! I know it has been such a long time since I have posted some news. The last several months have been driving us North Carolina CPAs crazy ! Early in 2021, and throughout the 2020 tax return filing season during the first half of 2021, we have been trying to navigate dealing with the fact that NC did not seem to be conforming to the myriad of federal provisions that were meant to assist taxpayers during the Coronavirus pandemic. The resolution to a lot of these issues is FINALLY over because Gov. Cooper has just signed Senate Bill 105 !! So...although the 2020 filing season is over, there WILL be some changes needed to certain 2020 tax returns, despite the fact that they have already filed.
The 3 big issues for my clients were:
Does NC conform to the 2020 federal exemption of $10,200 unemployment income? The answer to this has been and remains NO. Therefore, case closed on this matter and no potential amended returns are needed for this topic.
Will NC conform to the Dec 2020 federal act that made EIDL grants tax-free ? At first, early on, it seemed that NC conformed to this treatment because NC did not explicitly de-couple from it. I filed my applicable clients' tax returns this way. Later, and after the filing season, it appeared that NC's position on this is that they WILL de-couple from this because they currently (at the time) stated to conform to the IRC (federal tax code) as of 5/1/2020 (prior to the feds making the grants tax-free). Yikes! I kept in mind that there may be potential amended tax returns needed unless NC "fixed" this. I was hopeful all along that they would, because logically, states would have no reason to NOT conform this. The money at issue really wasn't that much to justify the nightmare reporting complications. I am happy to report that the signed SB 105 has fixed this issue and the EIDL grants will be TAX-FREE in NC ! Phew....
Will NC conform to the federal treatment of forgiven PPP loans being "tax-free" ? Some background refresher is needed for this. Many small business clients of mine secured "PPP Loans" back in early 2020, and met the requirements for partial or full forgiveness of these loans (even if official forgiveness took place in 2021, the taxability issue would be for 2020). Pretty quickly, the IRS said that they would not tax these forgiven loans. However, in NC this was not the case, and the CPA community has been up in arms ever since. So during the 2020 filing season (in early 2021) we CPAs had to make a decision with our PPP Loan clients. Either:
a. File now under the current NC position, and report the forgiven PPP loans as
taxable in NC. The risk here was a future amend if NC changes their mind.
b. File now under the premise that NC will see the light eventually and report the
forgiven loans as NOT taxable in NC. The risk here was a future amend if NC
decides to be stubborn and keep the same bad position
c. File an extension and hope that later in 2021, the matter is decided by NC. The
risk with this was that NC would NOT decide on the matter by 9/15/2021, which is
exactly what happened, and my clients and I were forced to choose option a. or b.
anyway.
Various clients chose various options, so now that the matter is resolved, I will have to see who needs what done. Thankfully I believe that any amends needed will only be to get refunds, which is nice. I don't believe any amends will be needed for these if there is no tax impact. To be determined.....
Overall, the resolution of matter 2 and 3 is a GREAT win for us in NC. The bottom line is that NC has wisely conformed to the federal tax-free treatment of EIDL grants AND forgiven PPP Loans....YAY !
Senate Bill 105 contains many more tax changes, so stay tuned for a future blog on them.
HAPPY THANKSGIVING !!
