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. For tax year 2010, the adjustment should be entered on Line 41 of Form D-400, and on Schedule, H, Line 1h of Form CD-405.

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.

Last modified on: 05/24/11 08:09:33 AM.