Gregory S. Connor, Attorney-at-Law

B.A. History, B.A. Political Science – Boston College,
magna cum laude
J.D. – Duke University School of Law
2004-2010 – General Counsel, Chapel Hill Chamber of Commerce
1995 – Admitted to North Carolina State Bar
U.S. District Court, Middle and Eastern District of NC
United States Fourth Circuit Court of Appeals

Business Law, Commercial Litigation, Estate Planning, Bankruptcy Law

Gregory Connor has 18 Years of experience litigating in state and federal courts in North Carolina.

North Carolina Business Income Deduction – New for 2012 Tax Year

NC Small Business Tax Deduction1. Summary of NC Tax Deduction.

New for 2012 the North Carolina General Assembly has provided a tax deduction for, mostly, small business owners, that report non-passive business income in their adjusted gross income (AGI) of their personal federal income tax returns. Specifically, the amended North Carolina General Statute 105-134.6(b)(22) provides that the first $50,000.00 of this non-passive business income is deducted from your North Carolina Income Tax Return. This deduction applies to each spouse so each spouse may deduct $50,000.00 for an aggregate amount of no more than $100,000.00 as a deduction from North Carolina income.

2. Passive Income Versus Non-Passive Income.

First, only active income business income is applicable, but does not apply to passive-income. This definition is governed by IRC Section 469, and Treasury Regulation 1-469 provides guidance on this definition. Generally though, business income reported on Schedules C, E, and F on IRS Form 1040, that does not include passive losses or passive income. With regard to income reported on Part II of Schedule E – non-passive income is computed by subtracting from non passive income, all non-passive loss and deductions under Section 179.

With regard to rental income, the definition of passive versus non-passive income turns primarily on whether the taxpayer is a “real estate professional” as that term is defined in the Internal Revenue Code or whether the taxpayer has actively participated in the rental income production.

3. Income from S-Corporations and C-Corporations are partially limited or totally excluded.

With regard to C-Corporations, Section 105-134.6(22) specifically excludes from such income from benefiting from the deduction. C-Corporation income is also not reported on Schedule C, E, or F of IRS Form 1040. With regard to S-Corporations, any business income reported on the taxpayer’s K-1 is eligible for the deduction, however, this specifically excludes any salaries paid to individual taxpayers. The reasonable compensation rule for S-Corporations provides that an officer of a S-Corporation should receive a salaried compensation (with appropriate wage taxes and withholding) that represents at least 1/2 of a shareholder’s compensation paid as a distribution (not subject to employment taxes).

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