North Carolina’s tax system creates clear rules for corporations, S corporations, partnerships, and LLCs operating in the state. At its core are the corporate income tax and the franchise tax, both of which apply to domestic and foreign corporations that earn income from North Carolina sources. The franchise tax is based on net worth, while the corporate income tax applies to net income attributed to the state. Pass-through entities such as S corporations and partnerships shift the responsibility to shareholders and partners, who must report their share of income on individual returns.
Businesses also face requirements for estimated tax payments, options for extensions, and penalties for late filings or payments. This blog provides a complete overview of how North Carolina taxes corporations and pass-through entities, along with details on filing forms, deadlines, and compliance measures.
Corporate Income & Franchise Tax
Every corporation, whether foreign or domestic, doing business in North Carolina or earning income from North Carolina sources must file a corporate income and franchise tax return.
- Franchise tax: The rate is $1.50 per $1,000 of the corporation’s net worth. The minimum franchise tax is $200, with no maximum except for qualified holding companies.
- Corporate income tax: The rate is 2.5% of net income attributed to North Carolina.
Filing requirements
Franchise and income tax returns are due on the 15th day of the fourth month following the close of the income year. The primary form for filing is Form CD-405, North Carolina Corporate Income and Franchise Tax Return.
Corporations may request an extension of time by filing Form CD-419, which typically grants an additional six months to file the return.
If a corporation expects to owe at least $500 or more in state income tax, it must file Form CD-429, Corporate Estimated Income Tax, and make estimated payments.
These rules ensure that North Carolina captures tax contributions from corporations consistently, regardless of their size or origin.
Pass through Entity Tax
Pass-through entities in North Carolina include S corporations, partnerships, LLCs, and LLPs. For these businesses, income is not taxed at the entity level but instead flows to the owners.
- S corporations and partnerships must file their federal tax returns by the 15th day of the fourth month following the close of their taxable year.
- Shareholders and partners must file their individual income tax returns using Form D-400, North Carolina Individual Income Tax Return. They must include schedules and forms to report their share of income, deductions, and credits from the entity.
This requirement applies to:
- Full-year residents
- Part-year residents
- Nonresidents earning income from North Carolina sources
All of these individuals must use the same tax year as their federal income tax return.
By treating pass-through entity income as personal income for tax purposes, North Carolina ensures that every shareholder or partner pays state tax proportionate to their share of earnings.
Extension to file
If a taxpayer receives an automatic extension to file a federal individual income tax return, that extension automatically applies to the North Carolina individual income tax return as well.
If no federal extension exists, the taxpayer may request more time by filing Form D-410, Application for Extension for Filing Individual Income Tax Return, by the original due date of the state return.
Estimated Tax Payment
Shareholders of S corporations and partners in partnerships, LLCs, or LLPs must make estimated tax payments if their liability exceeds $1,000 after tax withheld.
- The required form for estimated payments is Form NC-40.
This ensures that individuals tied to pass-through entities remain compliant and avoid underpayment penalties.
Penalty & Interest
North Carolina imposes strict penalties for late filing and late payment, applicable to both C corporations and pass-through entities.
- Failure to File Penalty: 5% of the tax due for each month (or part of a month) the return is late, up to a maximum of 25%.
- Failure to Pay Penalty: A 5% penalty applies to returns filed after the original due date, regardless of how late payment is made.
- Interest: Interest is charged at 7% (effective January 1, 2023) on taxes paid late, even if an extension to file was granted.
These measures highlight the state’s focus on timely compliance. Unlike some jurisdictions that differentiate between entities, North Carolina applies the same penalty and interest framework across corporations and pass-through businesses.
Conclusion
Taxation in North Carolina is structured to capture revenue from both corporations and individuals tied to pass-through entities. Corporations face obligations under both the income tax and franchise tax, with rates that depend on net worth and taxable income. Filing deadlines, extensions, and estimated tax rules make compliance an ongoing responsibility.
Pass-through entities shift the tax liability to shareholders and partners, who must file individual returns and may need to make estimated payments if liabilities cross the $1,000 threshold. Penalties for late filings or payments are steep, reinforcing the importance of timely compliance.
For businesses and individuals alike, understanding North Carolina’s tax requirements is essential to avoid unnecessary costs and maintain good standing with state authorities.
