NC - Bonus Depreciation Addback

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NC -- Bonus Depreciation Addback

NC statute Sec. 105-130.5(a)(15) requires 100% of the bonus depreciation deducted for federal purposes under the Job Creation and Worker Assistance Act of 2002 (JCWAA) and Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) to be added back in years 2001-2002 and 70% added back in years 2003-2004. Beginning in 2005, taxpayers may begin to take the tax benefits that were previously disallowed by annually deducting one-fifth of the total bonus depreciation added back in 2001-2004 (Sec. 105-130.5(a)(21)).

NC statute Sec. 105-130.5(a)(15) states that the North Carolina bonus depreciation addback does not result in a difference in basis of the affected assets for North Carolina and federal income tax purposes. Essentially, if an affected asset is sold before 2009 when the entire amount of deferred bonus depreciation has been taken, a taxpayer will have to report a larger gain (or smaller loss) by using the federal basis, even though the taxpayer was not allowed to take the related deductions.

Additionally, NC statute Sec. 105-130.5(a)(21) does not specify that the taxpayer still hold the assets affected by the previously disallowed bonus depreciation in deducting 20% of the disallowed bonus deduction beginning in 2005. Therefore, it appears the 20% deduction of previously disallowed bonus depreciation is a deduction that may be taken by a taxpayer whether or not if the assets affected by the previously disallowed bonus depreciation have been sold or otherwise disposed of.

An official at the North Carolina Dept of Revenue confirmed that the gain or loss on the disposal of assets is the same as federal basis, and that if a taxpayer disposes of the assets that he owned during the bonus depreciation years, it may still take the annual 20% of the bonus over the next five years.

The North Carolina statutes do not address what happens to the 20% North Carolina bonus depreciation deduction from 2005-2009 if a taxpayer ceases to exist for North Carolina income tax purposes. As stated before, North Carolina complies with the Internal Revenue Code as enacted in January 1, 2005, except for certain specified provisions that have not been adopted.

Adm. Code Sec. 17:05C.1507 addresses the carryover of a North Carolina net economic loss in a merger by stating that when a loss corporation and a profit corporation merge, pre-merger losses may be offset against post-merger profits only to the extent that the group of assets which was previously operated at a loss is operated at a profit after the merger. In addition, there are several cases addressing the carryover of net economic losses that demonstrate North Carolina’s strict adherence to the "continuity of business enterprise" doctrine. Outside of NC Adm. Code Sec. 17:05C.1507, and the handful of cases addressing the carryover of net economic losses in a merger, North Carolina law does not specifically address the carryover of tax attributes in a transaction where IRC Sec. 381 would apply, making it appear that North Carolina would comply with federal laws.

A North Carolina Dept of Revenue official indicated that if a taxpayer conducts a reorganization and afterward no longer pays taxes (eg. merging into another entity or dissolution) the 20% North Carolina bonus depreciation deduction is lost. Despite this, it appears an argument could be made that the 20% deduction would fall under IRC Sec. 381(c) as either a net operating loss carryover, a method of accounting, or a method of computing depreciation allowance in a transaction or distribution where IRC Sec. 381 applies. Treating the 20% deduction as a method of computing depreciation seems most appropriate where the assets affected by the North Carolina bonus depreciation addback are acquired in the transaction, since IRC Sec. 381(c)(6) specifically mentions that the acquiring corporation inherits the depreciation method of the transferor or distributor only with respect to the property acquired from the transferor or distributor.

In a case where the assets affected by the North Carolina bonus depreciation addback are disposed of prior to the transaction covered by IRC Sec. 381, IRC Sec. 381(c)(6) seems less likely to apply. In this case the 20% North Carolina deduction may be more likely to fall under IRC Sec. 381(c) as a net operating loss carryover or a method of accounting.

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