Adjustment for Section 179 Expense Deduction

North Carolina has partially decoupled from the Code section 179 expense deduction for tax years 2010 through 2013.  The State decoupled to the extent the Code section 179 expense deduction for the tax year exceeds the deduction that would have been allowable under the Internal Revenue Code as of May 1, 2010.  A taxpayer who places section 179 property in service during a taxable year listed in the table below must add to the taxpayer’s federal taxable income or adjusted gross income, as appropriate, eighty-five percent (85%) of the amount by which the taxpayer’s expense deduction under section 179 of the Code exceeds the dollar and investment limitation listed in the table below for the taxable year. A taxpayer is allowed to deduct twenty percent (20%) of the add-back in each of the first five taxable years following the year the taxpayer is required to include the add-back in income.

Taxable Year of
85% Add-Back

Dollar Limitation

Investment Limitation
2010
$250,000
$800,000
2011
$250,000
$800,000
2012
$250,000
$800,000
2013
$ 25,000
$125,000**

**The Department has been advised by the staff of the General Assembly that there was a drafting error in Session Law 13-414. According to staff, the General Assembly intended the North Carolina section 179 investment limitation for tax year 2013 to be set at $200,000. The Department expects the General Assembly to make a technical change to N.C. Gen. Stats. §105-130.5B and §105-153.6 during the 2014 legislative session. Taxpayers affected by this legislation may consider filing their 2013 tax return under extension.

2012 and 2013

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA); H.R. 8; P.L. 112-240. Under ATRA, the section 179 expense deduction of $500,000 ($2,000,000 investment limitation) has been extended through 2013, retroactively for tax year 2012. This law also extended the expanded definition of qualified section 179 property to include real property (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property). The rule allowing off-the-shelf computer software was also extended. The North Carolina General Assembly did not adopt the increased deduction of $500,000 or the investment limitation of $2,000,000 for tax years 2012 and 2013.

For taxable years 2012 and 2013, individual income tax taxpayers are required to add to federal adjusted gross income and corporate taxpayers are required to add to federal taxable income 85% of the amount by which the taxpayer’s expense deduction under section 179 of the Code for property placed in service for taxable year 2012 or 2013 exceeds the amount that would have been allowed for the respective taxable years under section 179 of the Code as of May 1, 2010. For the purposes of calculating section 179 property expense under the Code as of May 1, 2010, the definition of section 179 property has the same meaning as under section 179 of the Code as of January 2, 2013. This means that real property which qualified as section 179 property under the section 179 of the Code as of January 2, 2013, is included in the calculation of section 179 property under the Code as of May 1, 2010.

This adjustment does not result in a difference in basis of the affected assets for state and federal income tax purposes. For tax year 2012, the amount added to an individual’s federal adjusted gross income should be entered on Line 36-Other Additions to Federal Adjusted Gross Income of the Form D-400. For tax year 2012, the amount added to a C-corporation’s federal taxable income should be entered on Schedule H, Line 1h-Other Adjustments to Federal Taxable Income of the Form CD-405.

Note: Individuals are allowed to deduct 20% of the addback amount in five equal installments over a five year period beginning the year after the section 179 expense was added to their State individual income tax return. Similarly, corporations are allowed to deduct 20% of the addback amount in five equal installments over a five year period beginning the year after the section 179 expense was added to the State corporate income tax return.

2010 and 2011

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (“HIRE”) Act; P.L. 111-47. The HIRE Act extended the enhanced section 179 expense deduction of $250,000 ($800,000 investment limitation). Session Law 2010-31, signed into law by Governor Perdue on June 30, 2010, updated the State’s statutory reference to the Internal Revenue Code (“Code”) to May 1, 2010. Therefore, North Carolina law adopted the maximum section 179 expense deduction of $250,000, with the phase-out for investment limitation beginning at $800,000 for qualifying property purchased during the year.

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010; P.L. 111-240. Under the Small Business Jobs Act of 2010, the section 179 expense deduction was increased to $500,000 ($2,000,000 investment limitation) for tax years beginning in 2010 and 2011. This law also temporarily expands the definition of qualified section 179 property to include real property (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property). Taxpayers are limited to expensing a cap of $250,000 of the total cost of these properties. Subsequently, on December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act of 2010); P.L. 111-312. The Tax Relief Act of 2010 provides for a $125,000 limit (indexed for inflation) and a $500,000 investment limitation (indexed for inflation) for tax years beginning in 2012 (and sunsetting after December 31, 2012). The Tax Relief Act of 2010 also extends the treatment of off-the-shelf computer software as qualifying property if placed in service before 2013.

North Carolina did not adopt the increased deduction of $500,000 or the investment limitation of $2,000,000 for tax years 2010 and 2011. Instead, taxpayers are required to add to federal taxable income 85% of the amount by which the taxpayer's expense deduction under section 179 of the Code for property placed in service in taxable year 2010 or 2011 exceeds the amount that would have been allowed for the respective taxable year under section 179 of the Code as of May 1, 2010. For purposes of calculating section 179 expense under the Code as of May 1, 2010, the definition of section 179 property has the same meaning as under section 179 of the Code as of January 1, 2011. This means that real property which qualified as section 179 property under the Code as of January 1, 2011, is included in the calculation of section 179 property under the Code as of May 1, 2010.

Note: Taxpayers are allowed to deduct 20% of the addback amount in five equal installments over a five year period beginning the year after the section 179 expense was added to their State income tax return.

Partnerships and S-Corporations

Because section 179 expense is a separately stated item on the federal K-1, partnerships and S-corporations that expense section 179 property for federal income tax purposes must include a statement with each NC K-1 issued to its partners or shareholders reporting each partner’s or shareholder’s share of section 179 expense as calculated under the Code as of May 1, 2010.