For 2012, a new personal income tax deduction from your North Carolina tax return for net business income will reduce taxes for many business owners. Up to $50,000 of non-passive net business income will be deducted for individuals and up to $100,000 will be deducted for a married couple filing a North Carolina joint return if each spouse receives net business income.
Net business income includes income from sole proprietorships, LLCs, S corporations, and partnerships. It does not include “passive” income under the federal tax code.
Here are a few examples:
- Mark has a dental practice formed as an LLC. He has $150,000 net business income from his practice. He would receive a deduction of $50,000 of the net business income on his personal NC tax return.
- Bill is a 25% shareholder in an S corporation. His wife Susan is a 50% partner in a beauty shop. Bill reports a $20,000 loss from the S corp. Susan reports $60,000 income from the partnership. The couple may claim a net business income deduction of $50,000 on their NC return against the beauty shop income. The deduction is applied separately to each spouse’s net business income, not to exceed $50,000 per spouse.
- Robert reports $80,000 non-passive net business income from a Schedule C and his wife Joanna reports a net profit of $20,000 from her Schedule C real estate sales business. The couple is entitled to claim a NC net business deduction of $70,000 ($50,000 for Robert and $20,000 for Joanna).
- Chris reports $68,000 net income from her rental activities. Chris does not meet the criteria to be considered a real estate professional. This activity is considered passive income and the deduction is not allowed.
This state income tax deduction could result in tax savings of $3,500 for each $50,000 reduction in North Carolina taxable income based on an average state tax rate of 7%.