Overview
- North Carolina Senate Bill 595 (“SB595”) was signed on July 2, 2026.
- It makes significant tax changes, including updating the date that the state conforms to the Internal Revenue Code of 1986 (the “Code”) and changes to the net worth calculation for franchise tax purposes.
- It also extends the date for the waiver of interest on tax due for counties impacted by Hurricane Helene and addresses the state treatment of final federal partnership audit adjustments.
Background
SB 595 was passed by the North Carolina General Assembly and signed by Governor Josh Stein on July 2, 2026. There are several legislative changes in SB595; below is an overview of the significant tax changes.
Updated Date of Conformity to Internal Revenue Code - Section 12(a)
SB595 updates North Carolina’s date of conformity to the Code from January 1, 2023, to July 5, 2025. Absent specific decoupling language, this update incorporates changes made by H.R. 1 (P.L. 119-21) – more commonly known as the One Big Beautiful Bill Act (“OBBBA”).
SB595 decouples from provisions in OBBBA that would allow full expensing of domestic research costs under Section 174A of the Code. Taxpayers who elect to expense domestic research costs under OBBBA will now be required to add back 80% of that amount to the taxpayer’s federal taxable income for purposes of calculating North Carolina taxable income. Taxpayers will then be allowed to deduct 25% of the addback each year for the following four years. Please note that the decoupling adjustments do not result in a difference in basis of the affected assets for North Carolina and federal income tax purposes.
Under OBBBA, certain small businesses can retroactively expense domestic research costs amortized in tax years 2022 through 2024. Under SB595, North Carolina will decouple from this retroactive treatment.
Of the other “Big 3” domestic provisions in OBBBA, North Carolina previously decoupled from bonus depreciation in Section 168(k) and (n). The decoupling from 168(n) is a remnant of decoupling from a prior version of 168(n) that was no longer in effect; since OBBBA included the newer version of 168(n) and SB595 did not repeal this language, it operates to decouple from the newer version as well. For interest expense, North Carolina will conform to the OBBBA treatment and the use of EBIDTA will be the start for calculating the taxpayer’s allowable business interest expense.
Forvis Mazars Insight: North Carolina’s updated conformity to the Code provides clarity to taxpayers and practitioners. Taxpayers who previously extended their 2025 North Carolina return have the certainty needed to file; taxpayers who previously filed their 2025 North Carolina returns will want to consider an amended return based on SB595’s changes to North Carolina tax law.
In addition, SB595’s decoupling language for specific provisions of Section 174A may allow taxpayers to utilize the “catch-up” provisions contained within OBBBA on their North Carolina returns.
Franchise Tax Changes - Section 8.4 & 8.7
Historically, North Carolina required an addback to the franchise tax base of a debtor corporation for affiliated indebtedness but allowed a corresponding deduction to the creditor corporation for affiliated indebtedness added by the debtor corporation to its franchise tax base. SB595 removes the deduction available to the creditor corporation on a retroactive basis. This change applies for franchise tax calculated and reported on 2020 and forward corporate tax returns.
Inclusion of Insurance Company Investments in Net Worth Base
SB595 adds a deduction to North Carolina’s franchise tax base for a direct or indirect investment by a corporation in an insurance company if:
- The insurance company is either subject to North Carolina’s gross premiums tax or would be if the insurance company were doing business in North Carolina; and
- The parent’s ownership investment in the subsidiary is more than 80%.
As with the adjustment for affiliated indebtedness, this change is retroactive and applies to the calculation of franchise tax reported on the 2018 and forward corporate income tax returns.
Forvis Mazars Insight: SB595’s removal of the deduction for intercompany receivables held by a creditor corporation that was added back to the North Carolina franchise tax base of the debtor corporation would appear to be a response to the North Carolina Supreme Court’s decision in North Carolina Department of Revenue v. Philip Morris USA, Inc., 919 S.E.2d 175 (N.C. 2025). Taxpayers who have filed North Carolina returns with this adjustment should consider the impact of this retroactive statutory change for all tax years open under North Carolina’s statute of limitations.
Likewise, corporations subject to the North Carolina franchise tax that have investments in insurance companies should review the retroactive nature of this provision and determine whether refunds may be available for all open years under the statute of limitations.
Date Extended for Waiver of Interest for Certain State Taxes - Section 1.7
SB595 extends the date to waive interest accrued on an underpayment of tax from May 1, 2025, until September 25, 2025. Previous legislation had followed the IRS waiver on interest accrued on an underpayment of tax from September 25, 2024, through May 1, 2025. Taxpayers impacted by this change include franchise, corporate income, and personal income taxpayers that reside in or are located in a county impacted by Hurricane Helene. These counties include any county declared a major disaster by the President of the United States under the Stafford Act (P.L. 93‑288) because of Hurricane Helene.1 The IRS extended previously the federal interest waiver from May 1, 2025, to September 25, 2025 for affected taxpayers.
Forvis Mazars Insight: This provision would be beneficial for taxpayers subject to North Carolina’s corporate income/franchise tax or personal income tax who delayed making payments from September 25, 2024, through September 25, 2025. North Carolina had already agreed to the delayed filing deadline and waiver of penalties, but the North Carolina Department of Revenue (“Department”) cannot waive interest. The General Assembly’s action here largely conforms North Carolina’s tax treatment to the federal income tax treatment and taxpayers who paid accrued interest on included taxes should consider filing for a refund.
Conformity to Federal System for Auditing Partnerships - Section 2(a)
SB595 allows a partnership to make an irrevocable election to report a final federal partnership audit adjustment and pay any resulting tax at the partnership level. The North Carolina Secretary of Revenue will prescribe the manner of making this election and the partnership has six months to file an income tax return reflecting the partnership’s final federal partnership adjustment and pay any additional North Carolina tax due. While tiered partnerships are eligible to make this election, partnerships that made a PTE election in North Carolina or did not have nexus with North Carolina during the audit year are ineligible to make the election.
SB595 includes the following modifications and administrative changes in this regard:
- An addition modification to federal taxable income of the amount by which the taxpayer’s distributive share of partnership income is increased because of a final federal partnership adjustment.
- A deduction modification to federal taxable income of the amount by which the taxpayer’s distributive share of partnership income is decreased because of a final federal partnership adjustment.
- The statute of limitations for refunds is updated so that if a taxpayer files a return on time that reflects a final federal partnership adjustment, they may request a refund one year from when they file the return with the adjustment, or three years from when the original return was filed or due to be filed, whichever is later.
- The general statute of limitations for proposing an assessment is three years after the due date of the return or three years after the taxpayer filed the return, whichever is later. Exceptions to the general statutes of limitations are as follows:
- If a return reflecting a final partnership adjustment is filed on time, the period of proposing an assessment of tax due is one year after the return is filed or three years after the original return was filed or due to be filed, whichever is later.
- If the return with a final federal partnership adjustment is not filed on time, the period for proposing an assessment of any tax due is six years after the date the Secretary received the final report of the final federal partnership adjustment.
Forvis Mazars Insight: This proposed legislation is useful for complex partnerships and simplifies federal partnership adjustments by allowing the partnership to remit the tax.
How Forvis Mazars Can Help
Forvis Mazars can help you to identify a strategic approach to the changes to the North Carolina statutes made by SB595.
- 1Counties declared a major disaster by the President of the United States under the Stafford Act (P.L. 93‑288) as a result of Hurricane Helene: Alexander, Clay, Lincoln, Stanly, Alleghany, Cleveland, Macon, Surry, Ashe, Forsyth, Madison, Swain, Avery, Gaston, McDowell, Transylvania, Buncombe, Graham, Mecklenburg, Union, Burke, Haywood, Mitchell, Watauga, Cabarrus, Henderson, Wilkes, Caldwell, Iredell, Polk, Yadkin, Catawba, Jackson, Rowan, Yancey, Cherokee, Lee, Rutherford, Nash