North Carolina Response to Bonus Depreciation

RIA, 10/4/02:

On September 30, 2002, Governor Mike Easley signed the North Carolina Budget Bill, which delays the effective date of certain tax breaks enacted in the 2001 session, including the elimination of the marriage penalty for standard deduction filers and the increase in the child tax credit. In addition, the budget bill conforms several North Carolina tax provisions to federal provisions, sets forth procedures for the treatment of the additional 30% bonus depreciation claimed under the federal provisions, closes certain franchise tax loopholes, and establishes various regulatory fees. (L. 2002, S1115 (c. 126), eff. 7/1/2002, unless otherwise stated.)

Internal Revenue Code reference update. The law provides that references to the Internal Revenue Code will be to the Code as amended as of May 1, 2002, (formerly, January 1, 2001). Any amendments to the Internal Revenue Code enacted in 2001 that increase North Carolina taxable income for the 2001 taxable year become effective for taxable years beginning on or after January 1, 2002. In general, North Carolina's pension and estate tax provisions are tied to the changes made by the federal Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA).

Income taxes. Additional 30% bonus depreciation: Effective January 1, 2002, the law requires corporate and individual income taxpayers to make an addition to taxable income for the amount of the additional 30% bonus depreciation claimed for federal tax purposes as follows: 2002 tax year, 100%; 2003 tax year, 70%; and 2004 tax year and thereafter, 0%. The law allows taxpayers to deduct in each of their first five taxable years beginning on or after January 1, 2005, an amount equal to 20% of the amount added to taxable income in a previous year as accelerated depreciation. In addition, taxpayers who were allowed a 30% accelerated depreciation deduction under Internal Revenue Code Sec. 168(k) or Internal Revenue Code Sec. 1400L in a taxable year beginning before January 1, 2002, and whose North Carolina taxable income in that earlier year reflected such a deduction, must add to federal taxable income in the taxpayer's first taxable year beginning on or after January 1, 2002, the full amount of the deduction allowed in the earlier taxable year.

Estate and gift tax. Annual exclusion: Applicable to decedents dying on or after January 1, 2002, the law provides that the estate tax is the maximum credit for state death taxes allowed under Internal Revenue Code Sec. 2011 without regard to the phase-out of that credit under Internal Revenue Code Sec. 2011(b)(2) . Effective January 1, 2002, the law further conforms the North Carolina annual exclusion amount for gift taxes to the federal amount.

CCH, 6/7/02

The North Carolina Department of Revenue has recommended that the state legislature adopt the provisions of the federal Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) (JCWAA) for North Carolina corporate and personal income tax purposes. Adopting the provisions would allow North Carolina corporate and personal income taxpayers to claim the 30% bonus depreciation deduction for property placed in service after September 10, 2001, but before September 11, 2004, included in the federal Act. For North Carolina personal income taxpayers, adoption also would extend the carryback period for net operating losses (NOLs) occurring in tax years ending in 2001 and 2002 from two to five years. The extension of the carryback period does not affect North Carolina corporate income taxpayers because North Carolina does not follow federal NOL provisions for corporate income tax purposes.

As an alternative to adopting the bonus depreciation provisions of the Act, the Department recommends that the taxpayer be required to make an addition to federal taxable income in the amount of the 30% bonus depreciation in the year the bonus depreciation is claimed for federal purposes and that the taxpayer be allowed to deduct that amount in five equal installments in later tax years. As an alternative to extending the NOL carryback, the Department recommends that a taxpayer be allowed a deduction either in the year that is two years before the loss is incurred or in the year following the year the loss is incurred for the amount of NOL carried to and used in the fifth, fourth, and third years before the year in which the loss was incurred. (Release, North Carolina Department of Revenue, June 3, 2002.)

FROM: COMMERCE CLEARINGHOUSE (CCH), 4/2/02

The North Carolina Department of Revenue has advised taxpayers that it is unclear whether the Legislature will adopt the retroactive "bonus" depreciation and NOL carryback provisions of P.L. 107-147 (the release does not discuss the teacher supplies deduction). The North Carolina Legislature does not convene until May 28, 2002. The Department has decided to process original returns claiming the 30% "bonus" depreciation as if North Carolina law includes the provisions of the stimulus bill. If the Legislature decides not to incorporate the retroactive depreciation provision, taxpayers would be required to file amended returns and pay additional tax and interest. If a taxpayer files an amended return claiming the "bonus" depreciation, the Department will not process the return until the issue is resolved legislatively.

The Department also indicated that amended personal income tax returns to claim the extended NOL carryback should not be filed until the Legislature makes its determination, and that any amended return would not be processed by the Department until that time. North Carolina corporate taxpayers do not follow the IRC as it relates to NOL provisions (Press Release, March 19, 2002).