Income Tax Adjustments for Code Section 179 Expenses

For tax years 2010 through 2013, North Carolina did not conform to the provisions of federal law in its entirety with respect to Code section 179 expensing. North Carolina law provided different dollar and investment limitations as reflected in the table below:

Taxable Year

North Carolina Dollar Limitations

North Carolina Investment Limitations
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 the law with respect to the North Carolina investment limitation for taxable year 2013. According to staff, the General Assembly intended the North Carolina investment limitation for taxable year 2013 to be $200,000. The Revenue Laws Study Committee has voted to recommend that the General Assembly change the North Carolina investment limitation for the taxable year 2013 to $200,000 during the 2014 legislative session. Taxpayers subject to this adjustment for the taxable year 2013 may consider filing their 2013 tax returns under extension.

A corporate or individual income taxpayer that places Code section 179 property in service during a taxable year must add to federal taxable income (federal adjusted gross income for individual income tax purposes for taxable years 2012 and 2013) an amount equal to 85% of the difference between the amount deducted on the federal return for Code section 179 expenses, using the federal dollar and federal investment limitations, and the amount that would be deductible for Code section 179 expenses using the North Carolina dollar and North Carolina investment limitations. If the cost of all qualifying Code section 179 property placed in service during the taxable year exceeds the North Carolina investment limitation for a given year, a taxpayer must reduce the North Carolina dollar limitation, but not below zero, by the amount the cost of all qualifying Code section 179 property placed in service during the taxable year exceeds the North Carolina investment limitation. The add-back is calculated as follows:

Add-back = (Deduction on Federal Return – Deduction Using North Carolina Dollar and Investment Limitations) X 85%.

A taxpayer may deduct 20% of the total amount of Code section 179 expense added to federal taxable income (federal adjusted gross income for individual income tax purposes for taxable years 2012 and 2013) in each of the first five taxable years following the taxable year in which the add-back is reported.

See Examples 1 through 4 in Important Notice: Income Tax Adjustments For Code Section 179 Expenses for examples of how to determine the add-back for investments in Code section 179 property.

Code Section 179 Investments and Pass-through Entities

A corporation or individual, in addition to its own investments in qualifying Code section 179 property, may be an owner of a pass-through entity that also invests in qualifying Code section 179 property. For both federal and North Carolina income tax purposes, the Code section 179 deduction limitations apply both to the pass-through entity and to each of its owners. The pass-through entity determines its Code section 179 deduction subject to the applicable limitations but does not deduct the allowable expense on the pass-through entity tax return. Instead, it allocates the Code section 179 expense deduction among its owners.

For federal income tax purposes, the pass-through entity reports the owner’s allocated share of the federal Code section 179 deduction on the owner’s federal K-1. For North Carolina income tax purposes, if a pass-through entity has allocated a Code section 179 expense to its owners for federal income tax purposes, the pass-through entity must provide a statement on each North Carolina K-1 that notifies the owner that North Carolina’s dollar and investment limitations are different than the federal limitations and an addition may be required on the owner’s North Carolina income tax return. The statement must also provide the amount of Code section 179 expense allocated to the owner using the North Carolina limitations. A sample statement follows:

You have been allocated Code section 179 expenses on your federal K-1 based on federal dollar and investment limitations. North Carolina has different dollar and investment limitations and requires an add-back on the North Carolina income tax return for 85% of the difference between the amount deducted on the federal return for Code section 179 expenses and the amount of Code section 179 expenses that would be deductible using the North Carolina dollar and investment limitations. The amount of Code section 179 expenses that would be allocated to you using North Carolina’s dollar and investment limitations is $___. Use this amount in calculating the add-back for Code section 179 expense on your North Carolina return.

You are allowed to take a deduction in each of the first five taxable years following the taxable year in which the add-back is reported. The deduction in each of those years is 20% of the add-back.

The pass-through entity does not report the add-back or the subsequent deductions on the pass-through entity income tax return.

The total investment in Code section 179 property by the pass-through entity is not added to the owner’s own investments when applying the investment limitation. However, the owner of the pass-through entity must add the amount of Code section 179 expense allocated to it by a pass-through entity to its own Code section 179 investments before applying the dollar limitation.

See Examples 5 through 8 in Important Notice: Income Tax Adjustments For Code Section 179 Expenses for examples of how a pass-through entity determines the amount to include in the statement on each owner’s NC K-1 and how the owner determines the add-back for investments in Code section 179 property.