Section 81-03-01.1-06 - Income tax exemption for new and expanding business1. When a taxpayer is granted an exemption from income tax pursuant to North Dakota Century Code chapter 40-57.1, the exemption must be prorated, when necessary, in the first and last years in order to exempt income for a period not to exceed sixty months.2. The amount of the yearly income tax exemption for new and expanding business is limited to income earned from the new business or expansion in each tax year that was included in federal taxable income.3. When the project operator is a passthrough entity, the income tax exemption flows through to the partners, shareholders, and members.4. The conditions for reapplication set forth in North Dakota Century Code chapter 40-57.1 apply to the income tax exemption. A project operator must reapply for the income tax exemption if these conditions are met.5. The office of the state tax commissioner shall be notified of any changes in ownership of a new industry which has been granted an income tax exemption. A change of ownership includes transfer of a partnership interest, a stock interest in a subchapter S corporation, or a membership in a limited liability company.6. A taxpayer with both exempt and nonexempt activities shall prorate its income pursuant to the provisions of North Dakota Century Code chapter 57-38.1. a. If the taxpayer has only North Dakota activity, exempt income must be determined by multiplying income from all activities, exempt and nonexempt, by a fraction, the numerator of which is the sum of its exempt property, sales, and payroll factors and the denominator of which is three. EXAMPLE: | | | |
Facts: | Exempt Plant | Other North Dakota Activity | Total North Dakota Activity |
Property | $5,000,000 | $10,000,000 | $15,000,000 |
Payroll | $750,000 | $1,000,000 | $1,750,000 |
Sales | $20,000,000 | $35,000,000 | $55,000,000 |
Apportionable income | $50,000,000 | | |
Determine North Dakota exempt income:
(1) Compute apportionment factor of exempt activities. |
Property factor =$5,000,000/$15,000,000 = | .333333 |
Payroll factor =$750,000/$1,750,000 = | .428571 |
Sales factor =$20,000,000/$55,000,000 = | .363636 |
1.125540/3 = | .375180 |
(2) Compute exempt income. | |
Apportionable income | $50,000,000 |
Apportionment factor of exempt activities | .375180 |
Exempt income | $18,759,000 |
b. If the taxpayer has multistate business activity, North Dakota income must first be determined by including all exempt and nonexempt activity in apportionable income and in the apportionment factor. North Dakota exempt income is then determined as in subdivision a. EXAMPLE:
Multistate corporation
Facts: Utilize the same facts in the prior example, and add: Total activity within and without North Dakota
Property $100,000,000
Payroll $5,000,000
Sales $200,000,000
Determine North Dakota exempt income:
(1) Compute the North Dakota apportionment factor, including tax-exempt activity. Property factor = | $15,000,000/$100,000,000 = | .150000 |
Payroll factor = | $1,750,000/$5,000,000 = | .350000 |
Sales factor = | $55,000,000/$200,000,000 = | .275000 |
| .775000/3 = | .258333 |
(2) Compute the apportionment factor of the North Dakota exempt activities. For this example, the computation would be the same as that in paragraph 1 of subdivision a and would yield a factor of .375180.(3) Compute exempt income. Apportionable income | $50,000,000 |
North Dakota apportionment factor | .258333 |
Income apportioned to North Dakota | $12,916,650 |
Apportionment factor of exempt activities | .375180 |
Exempt income | $4,846,069 |
c. When a partial exemption on a project or plant has been granted, the percentage of the project's nonexempt property, payroll, and sales would be added to the other North Dakota taxable activity's factors. For instance, a twenty percent exemption would mean eighty percent of the project's property, payroll, and sales would be added to the other North Dakota factors creating a taxable activity.d. When a company has only one operating facility which has been granted a partial exemption, North Dakota taxable income shall be computed based on total income of the operation, and a percentage of the income which is equal to the percentage of the exemption shall be deducted from the total.e. For determining the apportionment factor of exempt activities in subdivision b, the weighting of the three factors must be the same weighting as used to determine the apportionment factor for the taxable year.N.D. Admin Code 81-03-01.1-06
Effective March 1, 1990; amended effective June 1, 1992; August 1, 1994; April 1, 1995; July 1, 1998; June 1, 2002.Amended by Administrative Rules Supplement 2016-361, July 2016, effective 7/1/2016.General Authority: NDCC 57-38-56
Law Implemented: NDCC 40-57.1, 57-38.1