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New N.C. tax break could save small-business owners thousands

By Virginia Bridges
vbridges@newsobserver.com

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  • What is the tax break?

    A state law adopted as part of a budget deal in 2011 allows a tax deduction that is available to qualified taxpayers for the first time in 2012.

    The law created a state net business income tax deduction of up to $50,000, or in the case of some married couples, up to $100,000 on their personal income tax returns.

    In general, sole proprietorships, partnerships, S corporations, and farming business qualify for the deductions. Passive revenue and shareholders don’t qualify.

    For more information on the income tax deduction, go to www.dor.state.nc.us/index.html. For more information on passive and active revenue visit www.irs.gov.


  • Value of tax break questioned

    Proponents of the tax break say it will give small business owners capital to invest in their business and create jobs. Opponents say the tax break, one of the largest cuts in a decade, reduces needed revenue. Critics also point out that legislators dropped from the initial bill an income limitation for businesses that can benefit from the deduction. That means the tax break ultimately benefits owners of small and large firms alike, as long as the business has the proper structure and qualified revenue.

    A December report from the North Carolina Justice Center, a progressive advocacy and research organization that seeks to eliminate poverty in the state, contends that the tax deduction could end up costing the state $552 million and is unlikely to help support small business and job creation. About 70 percent of the tax cut goes to the top 20 percent of taxpayers with positive business income, according to the center’s report.

    The tax break was passed by the General Assembly as part of a 2011 budget deal, and no sunset date was listed. Senate Finance Committee co-chairman Sen. Bob Rucho, a Republican from Matthews, said the benefit has helped increase the number of private sector jobs in North Carolina and he doesn’t expect any changes in 2013. However, Rucho said, he does expect the tax break to be impacted in following years by broader state tax reform effort.



The husband and wife team behind Will Johnson Building Co. recently learned that they qualified for a North Carolina tax break that would save them at least $3,875.

The money was a welcome surprise for owners Laurie and Will Johnson, who plowed through their savings to keep their custom homebuilding and remodeling business in Chapel Hill afloat during the recession.

“Truthfully, I just said it was a gift from God,” said Laurie Johnson, who serves as secretary and treasurer of the family business,

The Johnsons are among hundreds of thousands of business owners who could qualify for a state income tax deduction on their personal income tax returns.

Effective Jan. 1 2012, the law allows sole proprietors and active shareholders of S corporations, partnerships and limited liability companies to deduct up to $50,000 of active net business income on their personal state income tax returns.

Tax professionals say many small-business owners and self-employed contractors don’t know about the tax break.

“It’s the best-kept secret there has been,” said J.A. Lesemann Jr., managing member of the Huntersville firm Lesemann & Associates and chair of the N.C. Association of Certified Public Accountants.

The deduction doesn’t apply to passive income, such as certain types of real estate and other investments, income claimed on Form W-2, and owners who aren’t active in the business.

The deduction can be found on the North Carolina individual tax return form D-400 on line 48, which is labeled “Adjustment for net business income that is not considered passive income.”

“If it was late at night or you are in a hurry, you might just glance right past it,” said Ward Simmons, a Charlotte certified public accountant and owner of Ward Simmons CPA, P.A.

Small business owners also need to make sure they don’t underestimate or overestimate their income that qualifies for the deduction, tax professionals say. The maximum that an individual could claim is about $3,875 and some married couples could claim double that.

Husband and wife S corporation shareholders can claim up to $100,000 in a net business income deduction, but only if revenue they receive from the business parallels that amount.

A surprise for many

Susan Shackelford, a freelance writer and editor based in Charlotte, said she would use the tax savings on a long-term care insurance policy or dental work.

While Shackelford is grateful, she was shocked to learn about the tax break given the state’s budget challenges. Shackelford said she is concerned about a lack of funding for essential services such as education and Medicaid.

“Given the straits that our state is in financially, I was just very, very surprised that was a tax break,” she said.

The N.C. General Assembly Fiscal Research Division estimated that the tax would cost the state about $336 million in revenue.

The division estimated 750,000 tax filers would qualify for the deduction, but only 450,000 would be able to use it due to business losses.

Tax professionals say some small-business owners may want to consider taking steps to maximize their tax benefit in 2013 by reducing the wages they pay themselves to increase an S corporation’s net revenue, or increasing a spouse’s share in the business.

Small-business owners should consult tax professionals to understand any implications of any changes, but changes should be made quickly, said Neely McLaughlin, a partner with accounting firm Blackman & Sloop in Raleigh.

“The earlier the better,” said McLaughlin, because the net income is generally determined by the number of days they own the business.

Bridges 919-829-8917
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