How to Report North Carolina Bonus Depreciation on Your Tax Return

North Carolina has its own rules for handling bonus depreciation, which differ from federal tax regulations. Businesses and individuals must adjust their state returns accordingly to ensure compliance. Failing to do so could lead to miscalculations affecting taxable income and deductions.

Qualifying Property

Not all assets qualify for bonus depreciation in North Carolina. Generally, property must have a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS). This includes machinery, equipment, furniture, and certain land improvements. Real estate, such as buildings and structures, is typically excluded unless specific provisions apply.

Qualified improvement property (QIP) often benefits from bonus depreciation. These are interior upgrades to nonresidential buildings made after they are placed in service, excluding expansions, elevators, and structural framework changes. While the federal government assigns QIP a 15-year recovery period, making it eligible for bonus depreciation, North Carolina requires adjustments at the state level.

Business vehicles can also qualify, but limitations apply. Passenger automobiles are subject to annual depreciation caps under Internal Revenue Code Section 280F, meaning that while federal rules allow accelerated depreciation, North Carolina may require an addback to taxable income. Businesses purchasing heavy SUVs, trucks, or vans over 6,000 pounds may have more flexibility in claiming depreciation benefits.

State Recognition Rules

North Carolina does not conform to federal bonus depreciation rules, requiring businesses to adjust taxable income when filing state returns. While federal law allows immediate expensing of qualifying assets under Internal Revenue Code Section 168(k), North Carolina mandates a 100% addback of the bonus depreciation claimed at the federal level. This increases state taxable income in the year the asset is placed in service.

To offset this, North Carolina permits a phased deduction over five years. Taxpayers can deduct 20% of the addback annually. For example, if a company claims $50,000 in federal bonus depreciation, it must add back the full amount to North Carolina taxable income in year one but can deduct $10,000 per year for five years.

This timing difference between federal and state tax liabilities can complicate financial planning. Businesses with significant capital expenditures should account for these adjustments when projecting cash flow and estimated tax payments. Failing to plan for the initial addback could lead to unexpected tax liabilities, while neglecting the subsequent deductions may result in missed tax savings.

Reporting on State Forms

Filing North Carolina taxes with bonus depreciation adjustments requires careful attention to state-specific forms. Individuals report adjustments on Form D-400 Schedule S, while corporations use Form CD-405. These forms contain specific lines where taxpayers reconcile differences between federal and state depreciation rules.

On Form D-400 Schedule S, taxpayers enter the required addback under “Other Additions to Federal Taxable Income,” increasing state taxable income in the year the asset is placed in service. In later years, the permitted 20% annual deduction is recorded under “Other Deductions.” For corporations, Form CD-405 follows a similar process, requiring the addback on Schedule H, Line 3, and subsequent deductions on Line 9.

Proper documentation is essential when completing these forms. The North Carolina Department of Revenue may request supporting schedules detailing the original federal depreciation calculation, the state-required addback, and the five-year deduction breakdown. Maintaining clear records ensures accuracy and prevents potential audit issues. While tax software often automates these adjustments, taxpayers should verify calculations to avoid errors that could lead to additional tax liability.

Adjustments for Depreciation Schedules

North Carolina’s decoupling from federal bonus depreciation affects long-term asset depreciation schedules. Since the state requires the full addback in year one but allows a phased deduction over five years, businesses must modify depreciation calculations to maintain accurate book-to-tax reconciliations. This impacts financial statement reporting and tax basis tracking for future asset sales.

Companies maintaining separate federal and state depreciation schedules will see discrepancies in accumulated depreciation over time. This affects deferred tax calculations under ASC 740, as the temporary difference between federal and state asset basis creates deferred tax liabilities or deferred tax assets depending on the timing of deductions. If a company sells an asset before fully realizing the state depreciation adjustments, the remaining deferred amounts must be recognized, leading to potential tax consequences.

The method of depreciation also plays a role in these adjustments. While federal returns may use Section 179 expensing or MACRS to accelerate deductions, North Carolina’s requirement to spread out bonus depreciation recovery necessitates an alternative approach. Businesses often reconcile this by maintaining detailed asset ledgers that separately track state and federal depreciation, ensuring compliance while optimizing tax efficiency.

Handling Documentation

Maintaining thorough records is necessary for compliance with North Carolina’s bonus depreciation adjustments. State tax authorities may request supporting documentation during audits or routine reviews, so businesses and individuals should keep detailed records of all depreciation-related calculations, including federal and state differences.

Taxpayers should retain depreciation schedules outlining the original federal bonus depreciation claim, the required North Carolina addback, and the subsequent five-year deductions. These schedules should reconcile with financial statements and tax filings to avoid discrepancies. Supporting documents such as purchase invoices, asset classification records, and tax workpapers should also be maintained. Businesses using tax software should ensure that state-specific depreciation adjustments are correctly applied and that records are archived for at least the statute of limitations period, which in North Carolina is typically three years from the date the return was filed.