Tax Insight

North Carolina updates IRC conformity, requires Section 174A modifications, retroactively amends franchise tax calculation

Insight
5 minute read
August 06, 2026

What happened?

Legislation (S.B. 595) enacted on July 2 updates North Carolina conformity to the IRC through the date of the One Big Beautiful Bill Act’s (OBBBA’s) enactment and requires modifications with respect to Section 174A expensing of domestic R&E expenditures. Among other changes, the legislation also seeks to retroactively change the franchise tax net worth calculation with respect to intercompany debt and establishes a new process for reporting a partnership’s federal adjustments.

On July 23, the North Carolina Department of Revenue (Department) issued Important Notice: Impact of Recently Enacted Laws on North Carolina Individual and Corporate Income Tax Returns.

[S.B. 595, enacted 7/2/2026; Important Notice: Impact of Recently Enacted Laws on North Carolina Individual and Corporate Income Tax Returns, updated 7/29/2026]

Why is it relevant?

North Carolina’s IRC update impacts the 2025 tax year, and a recent Department of Revenue notice provides guidance to taxpayers filing original or amended North Carolina tax returns. The franchise tax change could impact current intercompany debt arrangements and create liabilities for prior years.

Actions to consider

Taxpayers should consider the impact of North Carolina’s conformity and required modifications, including with respect to federal R&E expenditure treatment and elections. Taxpayers also should consider the potential impact of franchise tax changes on planning that may have been put in place regarding intercompany debt.