NC Legislation Update - One Step Closer to Conformity with New Federal Tax Laws

On March 1, the NC State Senate will discuss S.B. 94, which would accept, for North Carolina income tax purposes, several provisions of the recently enacted federal tax legislation. However, several provisions are not expected to be accepted. Check back for future updates on this important tax development.

--- Smith Miller & Buff, CPA, PA team
________________________________________

Legislation has been approved by the North Carolina House and Senate Committees on Finance that, if enacted, would generally update the state’s Internal Revenue Code (IRC) conformity date from May 1, 2010, to January 1, 2011, for personal and corporate income tax purposes. However, the legislation would partially decouple from federal amendments made by the Small Business Jobs Act of 2010 (2010 Jobs Act) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) that increased and extended the IRC §168 bonus depreciation deduction and the IRC §179 asset expense deduction.

Bonus Depreciation

The 2010 Jobs Act extended the 50% bonus depreciation provision to property placed in service in taxable years 2010 and 2011. The 2010 Tax Relief Act boosted the 50% bonus depreciation to 100% for property acquired and placed in service after September 8, 2010, and before January 1, 2012, and it provided 50% bonus depreciation for property placed in service after December 31, 2012, and before January 1, 2013. If the North Carolina legislation is enacted, North Carolina would partially decouple from the extension of the IRC §168(k) additional bonus depreciation and the IRC §168(n) additional bonus depreciation deduction for disaster-related property. Taxpayers would be required to make an addition adjustment equal to 85% of the deduction claimed on the 2010 through 2012 federal returns but could subsequently deduct the amount added back ratably over a five-year period.

IRC §179 Asset Expense Deduction

Similarly, the legislation would partially decouple from the increase and extension of the IRC §179 asset expense deduction for the 2010 and 2011 taxable years. Prior to the enactment of the 2010 Jobs Act the deduction limit was $250,000 and the investment limit was $800,000 for both federal and North Carolina income tax purposes. The expensing limits were scheduled to revert to their prior levels in 2011. Amendments made by the 2010 Jobs Act and the 2010 Tax Relief Act did the following:

• expanded the deduction limits from $250,000 to $500,000 for the 2010 taxable year and from $25,000 to $500,000 for the 2011 taxable year;
• expanded the investment limits from $800,000 to $2 million for the 2010 taxable year and from $200,000 to $2 million for the 2011 taxable year;
• expanded the deduction limit from $25,000 to $125,000 for the 2012 tax year;
• expanded the investment limit from $200,000 to $500,000 for the 2012 tax year; and
• broadened the definition of "qualified property" to include certain real property investments for the 2010 and 2011 taxable years.

Thereafter, the expensing deduction and investment limits are scheduled to revert in 2013 to their prior levels of $25,000 and $200,000, respectively. If enacted, the North Carolina legislation would maintain the 2010 deduction and investment limits of $250,000 and $800,000 for taxable years 2010 and 2011. The proposed legislation would require taxpayers to add back 85% of the additional expensing taken under federal law in 2010 and 2011 and would allow taxpayers to deduct 20% of the addback amount over the succeeding five years. The proposal would conform to the expensing limits of $125,000/$500,000 for the 2012 taxable year and would also conform to the expansion of the definition of "qualified property" to include certain real property investments for the 2010 and 2011 tax years.

H.B. 124 and S.B. 94, as approved by the House and Senate Committees on Finance, February 23 and 24, 2011; H.B. 124 Legislative Fiscal Note, General Assembly of North Carolina Fiscal Research Division, February 22, 2011

--- CCH Incorporated