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Differences Between Federal and North Carolina Income Tax Returns - Carland & Andersen, Inc. - Certified Public Accountants

There are a number of differences in the way that items of income and deduction are treated on federal and North Carolina income tax returns. We’ll approach a list of these, dealing first with items that are different- all types of business and individual returns-, and then with certain other items that are only targeted towards individuals.

Federal treatment differs from North Carolina in regards to business, whether corporate, partnership, fiduciary or individual:


Bonus depreciation and federal Section 179 depreciation deductions

For many years, and especially since the tragedy of 9-11, the federal tax code contained several relief efforts aimed at helping businesses recover through targeted tax breaks. They did this by using accelerated methods of writing off the cost of capital equipment, vehicles, alternative energy generating devices and even business real estate improvements.

Bonus depreciation generally provided for the immediate expensing (federal) of 50% of qualifying new capital equipment, and Section 179 generally allowed for the immediate expensing of up to $200,000 of new or used capital equipment items. This was a great relief to many businesses, including sole proprietors, who report the results of their wholly owned business as a part of their personal tax return. Other businesses did so through their corporation or partnership tax returns. 

Since 2008, North Carolina has not recognized the bonus depreciation, and requires tax payers to add back 85% of any bonus depreciation taken that year on the federal return, in calculating their state taxable income. For the next five years thereafter, North Carolina allows a deduction of 1/5th of the amount originally added back, as a deduction.

North Carolina historically had used the federal annual limits on Section 179 depreciation expense, until 2013 when they parted way with the feds, and reduced the state limit on this item from $250,000 down to $25,000 where it stands today. Just like the bonus depreciation, the excess amount of Section 179 deductions is added back 85% in the year of the federal deduction, and then allowed, ratably, over the next five years as a state tax return item.


State Income Tax Expense As A Deduction
For business entities that pay state income taxes, C corporations primarily, the amount of state income tax is allowed as a deduction in computing federal taxable income. Likewise, many individuals, if they claim itemized deductions in lieu of the federal standard deduction, also use their state income taxes as a deduction. North Carolina does not allow state income taxes as a deduction in arriving at state taxable income, on any type of income tax return. Nor, for that matter, do they allow a deduction for federal income taxes.


Differences on Individual Income Tax Returns, Federal Versus State

Residence Mortgage Interest and Property Taxes
On federal income tax returns, notwithstanding complications from alternative minimum tax, mortgage interest on up to $1.1 million of home acquisition indebtedness on up to one principal residence and one vacation residence, and the property taxes on all real estate owned is allowed as an itemized deduction. For North Carolina purposes, there is a cap of $20,000.

Investment Interest Expense Deduction
Individual taxpayers can generally claim an itemized deduction on their federal income tax return for interest expense on debts used to buy investment property. These items include margin loans of brokerage accounts, mortgages to purchase investment properties, and pass-through interest expense from other entities such as investment partnerships. North Carolina has eliminated allowing a deduction for this item. Conversations with the NC Department of Revenue concerning whether an adjustment to the cost basis of the investment property for purposes of determining the amount of taxable gain for state purposes have been disappointing.

Other Investment Related Expenses, Including Advisory Fees
Individual taxpayers can generally claim an itemized deduction on their federal income tax return for investment related expenses, including research materials, journals, and fees paid to investment advisors. North Carolina eliminated this deduction, in their substantial re-write of the tax code in 2015.

Gambling Losses
Individual taxpayers can generally claim an itemized deduction on their federal income tax return for gambling losses, but not in excess of gambling winnings. North Carolina eliminated this deduction, in their substantial re-write of the tax code in 2015.