New 2012 Tax Deduction for North Carolina Small Businesses: Are You Taking Full Advantage?
If you are the owner of a North Carolina small business, a new state tax deduction is available that may have you consider changing your ownership structure. If your company is an LLC or Subchapter S Corporation, and you are receiving any income as an owner of the business, you may be eligible for the new tax deduction created by the North Carolina legislature.
House Bill 200, which passed by veto override in June of 2011, allows for an individual to deduct up to $50,000.00 of "net business income" for the taxable year as long as that "net business income" was not passive. In the original draft of the bill, it was unclear what exactly would qualify as "net business income" but a later version, S.B. 267, it was made clear that "net business income" includes S-Corporation distributions and makes it clear that a married couple may each take the deduction as long as both spouses have the requisite business income.
WHAT THIS MEANS TO YOU:
If you are married and your company is currently owned by only one spouse, you may want to consider adding the other spouse as a business owner to take advantage of these tax deductions. If you and your spouse owned the corporation together and your net business income is $100,000 or less, you would not owe any North Carolina income tax on that net business income.
If your savings from this deduction were all applied to income in the top tax rates (7.75%), the tax savings, if your company ownership is optimized to take full advantage of the deduction, would be $7,750 per year. In certain circumstances, the income qualifying as "net business income" for the North Carolina deduction will allow you to avoid paying certain federal payroll taxes.
WHAT INFORMATION WE NEED TO REVIEW:
To determine whether your company could be restructured to take full advantage of this tax law change, it would be important to review the income you currently receive from the company and whether that income is received as salary, dividend or distribution. Income you or your spouse receive from other companies may also be a factor in determining whether restricting your company would be beneficial. It is also important to consider other tax planning you have in place, as well as other legal issues that could arise due to the restructuring of your company. Please feel free to contact the attorneys at Hull & Chandler, P.A. to assess whether your company could benefit from restructuring.
