What are the differences in depreciation schedules for a $10,000 production machine purchased in 2025 between North Carolina and federal tax, with bonus depreciation applied federally?
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To compare the depreciation schedules for a $10,000 production machine purchased in 2025 between North Carolina state tax law and federal tax law, with federal bonus depreciation applied, you must consider both the federal rules (including bonus depreciation under IRC §168(k)) and North Carolina’s specific decoupling adjustments. Here’s a step-by-step analysis:
1. Federal Tax Law (2025):
a. Bonus Depreciation (IRC §168(k))
- For property acquired after January 19, 2025: The One Big Beautiful Bill Act (OBBBA) restores 100% bonus depreciation for qualified property, including most tangible personal property with a recovery period of 20 years or less, such as a production machine.
- Application: The entire $10,000 cost of the machine can be deducted in the year placed in service (2025) as bonus depreciation, provided the property is eligible and the taxpayer does not elect out of bonus depreciation.
- Order of Deductions: Section 179 expensing (if elected and available) is applied first, then bonus depreciation, then regular MACRS depreciation on any remaining basis.
b. MACRS Depreciation
- If bonus depreciation is taken, the basis is reduced to zero, so no further MACRS depreciation is available for the asset.
Result: Federal deduction in 2025: $10,000 (full expensing via bonus depreciation).
2. North Carolina State Tax Law (2025):
a. Decoupling from Federal Bonus Depreciation
- North Carolina does NOT conform to federal bonus depreciation. Taxpayers must add back 85% of the federal bonus depreciation deduction to state taxable income in the year it is claimed, then deduct 20% of the add-back in each of the next five years.
- G.S. § 105-130.5B(a).
b. Regular MACRS Depreciation
- North Carolina allows regular MACRS depreciation (without bonus) on the asset, so the taxpayer computes depreciation as if no bonus depreciation was taken.
- For a production machine (typically 5-year MACRS property), the standard federal MACRS schedule (200% declining balance, switching to straight line) is used for state purposes, but without the bonus depreciation.
c. North Carolina Section 179 Expensing
- North Carolina has its own Section 179 limits ($25,000 expensing limit and $200,000 investment limit), which are much lower than the federal limits. Any federal Section 179 deduction in excess of the NC limit must be added back and then deducted over five years, similar to bonus depreciation.
d. Example Calculation for a $10,000 Machine (Assuming No Section 179 Expensing)
- Federal return: $10,000 deducted in 2025 (100% bonus depreciation).
- NC return:
- 2025: Add back 85% of the $10,000 bonus depreciation = $8,500.
- NC deduction in 2025: Only the regular MACRS depreciation for 2025 (as if no bonus was taken), which is $2,000 (20% of $10,000, per MACRS 5-year table, year 1).
- Net NC deduction in 2025: $2,000 (MACRS) – $8,500 (add-back) = ($6,500) (i.e., $6,500 is added to income, not deducted).
- 2026–2030: Each year, deduct 20% of the $8,500 add-back = $1,700 per year.
- Plus, continue to deduct regular MACRS depreciation for each year (per the 5-year MACRS schedule).
e. North Carolina Depreciation Schedule (Summary)
2025:
- MACRS deduction: $2,000
- Add-back: $8,500
- Net: ($6,500) (add to income)
2026:
- MACRS deduction: $3,200
- Add-back deduction: $1,700
- Net: $4,900
2027:
- MACRS deduction: $1,920
- Add-back deduction: $1,700
- Net: $3,620
2028:
- MACRS deduction: $1,152
- Add-back deduction: $1,700
- Net: $2,852
2029:
- MACRS deduction: $1,152
- Add-back deduction: $1,700
- Net: $2,852
2030:
- MACRS deduction: $576
- Add-back deduction: $1,700
- Net: $2,276
Total NC deductions over 6 years: $10,000 (MACRS) + $8,500 (add-back deductions) – $8,500 (initial add-back) = $10,000 (matches the asset’s cost, but the timing is much slower than federal).
3. Key Differences and Legal Reasoning
- Federal: Allows immediate expensing of the full $10,000 in 2025 via 100% bonus depreciation.
- North Carolina: Requires an add-back of 85% of the federal bonus depreciation in the year claimed, then allows the add-back to be deducted in equal installments over five years. Regular MACRS depreciation is allowed as if no bonus depreciation was taken.
- Result: The total deduction is the same over time, but the timing is much slower for North Carolina purposes, resulting in higher state taxable income in the first year and lower deductions in the early years compared to federal law.
Summary: For a $10,000 production machine purchased in 2025, federal law allows full expensing in 2025 via 100% bonus depreciation. North Carolina does not conform to this treatment: you must add back 85% of the federal bonus depreciation in 2025, then deduct that add-back in equal installments over five years, while also depreciating the asset under regular MACRS as if no bonus depreciation was taken. This results in a much slower recovery of the asset’s cost for North Carolina state tax purposes compared to federal tax law.
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