Change The Net Economic Loss (NEL) Carryover
To A Net Operating Loss (NOL) Carryover

Position: The North Carolina General Assembly should conform the state’s current net economic loss (NEL) calculation to the federal net operating loss (NOL) calculation. Although conformity to the former federal 15-year carryover period contained in HB 1326 (Chapter 98-171) was a good first step, North Carolina will not be truly competitive with its neighboring states until the NEL calculation is replaced with the NOL calculation currently in use by the federal government and most state departments of revenue.

Explanation:  To more accurately reflect normal business cycles and long-range planning done by business enterprises, the federal tax code and most state tax codes allow companies to deduct current losses from future (and past) earnings.  These net operating loss (NOL) carryover provisions recognize that the annual tax reporting period is artificial.  They are designed to prevent unfairly penalizing companies with year-to-year fluctuations in earnings and capital investment.

North Carolina is the only state in the nation that requires businesses to use a net economic loss (NEL) calculation rather than a net operating loss (NOL) calculation for purposes of deducting business losses in future years.  In most other states, a business with a net operating loss may deduct those losses against income in future (and in some cases past) years. In North Carolina that business with the same net operating loss must add back nontaxable income (for example, dividends from subsidiaries) to calculate its NEL. Only if its deductions exceed both taxable and nontaxable income can the North Carolina business offset the loss against income in future years.

The unique North Carolina rule places the State at a distinct competitive disadvantage against other states, particularly neighboring states (e.g., Alabama, South Carolina, Virginia, Delaware, Kentucky, Florida and Tennessee), all of which use an NOL computation. Specifically, the NEL rule:

• Penalizes the use of subsidiaries in corporate structure – Because the North Carolina rule forces companies to add back dividends from subsidiaries in the NEL calculation, it adds significant costs to a company’s ability to create an optimal corporate structure.
• Discourages establishment of corporate headquarters in North Carolina - The tax penalty for using corporate subsidiaries creates a disincentive to locate the headquarters operations of a corporate group (and its high-salary jobs) in North Carolina.
• Creates additional administrative and compliance burdens – Taxpayers in North Carolina are forced to track and calculate the NEL carryforward separately from federal and other state NOLs, thereby creating an additional and unnecessary compliance burden for North Carolina taxpayers. In short, by limiting carryforward losses to net economic losses, North Carolina’s unique NEL rule places it at a competitive disadvantage with most other states, particularly its neighbors.

Continue N.C. Budget Reform

Contingent Fee Audits

Defining "Doing Business" In North Carolina

Property Tax Exemptions For Construction In Progress And Product Samples

Machinery Tax And Sales Tax

Remove Credit Balances From The Definition Of Unclaimed Property

Remove Inventories From Franchise Tax Base

Sales Tax Discount

Single Sales Factor

Proposed Model Unclaimed Property Act
Allow an R&D Credit for the Actual Amount of N.C. Expenditure