A few weeks ago the North Carolina General Assembly passed law G. S. 105-134.6(b)(22).
Here is the verbiage directly from the North Carolina Department of Revenue Directive:
This directive addresses a new deduction available for taxpayers who include net business income in federal adjusted gross income (AGI) as reported on the North Carolina individual income tax return. The law allows a deduction of up to $50,000 of net business income included in AGI that is not considered passive under the Internal Revenue Code (IRC). In the case of a married couple filing a joint return where both spouses report a net business income, the maximum dollar amount applies separately to each spouse’s net business income included in AGI, not to exceed a total of $100,000 (maximum $50,000 each). This deduction is available for tax years beginning on or after January 1, 2012.
Now that you’ve read the official verbiage – here it is broken down in layman’s terms.
–> The deduction can be for both spouses (husband and wife). So if your spouse doesn’t have any ownership in the business – it may be time to reconsider that. If you both are bringing in business income then you can get a deduction of up to $100,000 total.
–> The deduction is not for passive income. It only applies to your business if your are actively participating in the day-to-day workings of the business. If you are an entrepreneur who owns and runs his own company – this deduction is for you. If you own a business, or part of a business, strictly in a financial sense then you won’t receive a deduction.
–> The deduction is for individuals that OWN a business. Businesses owned by individuals include proprietorships, partnerships, LLCs, LLPs and “S” corporations.
–> The deduction is for NET business income. For example, if you have $55,000 of business income but $75,000 of business losses, you have 0 net business income, and therefore no deduction.
–> A $50,000 deduction does not save you $50,000. The full benefit comes from multiplying the net business deduction by your NC tax rate (up to 7.75%). This means that a full deduction at the top tax rate will save you AT MOST $3,875 per taxpayer ($7,750 per married couple).
If you have any additional questions about the new tax deduction and want to know if you qualify, feel free to give us a call at 919.267.6740.