Create a year-by-year comparison of depreciation expense for a $10,000 production machine under federal tax law and North Carolina rules that decouple from federal bonus depreciation?
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To compare year-by-year depreciation expense for a $10,000 production machine under federal tax law and North Carolina rules, we must:
- Determine Federal Depreciation (2025):- Assume the machine is 5-year MACRS property (typical for production equipment).- Federal law (as of 2025) allows 100% bonus depreciation for property acquired and placed in service after January 19, 2025, due to the One Big Beautiful Bill Act (OBBBA).- If bonus depreciation is claimed, the entire $10,000 is expensed in Year 1; no further MACRS depreciation is available in later years.
- Determine North Carolina Depreciation:- North Carolina decouples from federal bonus depreciation under N.C. Gen. Stat. §§ 105-130.5B (corporate) and 105-153.6 (individuals).- Taxpayers must add back 85% of the federal bonus depreciation to state income in Year 1, then deduct 20% of the add-back in each of the next five years,.- The asset’s basis for state depreciation remains the same as federal, except for the timing of deductions.
1. Step-by-Step Calculation
Federal Depreciation (2025, 100% Bonus Depreciation)
- Year 1: $10,000 (100% expensed)
- Years 2–6: $0
North Carolina Depreciation (2025 and Onward)
- Year 1:
- Federal deduction: $10,000
- NC add-back: 85% × $10,000 = $8,500 (added to NC income)
- NC deduction: $10,000 (federal), but $8,500 is added back, so net NC deduction is $1,500 in Year 1
- Years 2–6:
- NC allows 20% of the add-back as a deduction each year: 20% × $8,500 = $1,700 per year
2. Summary Table
Total over 6 years: $10,000 for both federal and NC, but the timing differs.
3. Explanation of North Carolina Decoupling
- Year 1: NC does not allow the full federal bonus depreciation. Instead, 85% of the bonus amount is added back to income, so only 15% of the cost is deducted in Year 1.
- Years 2–6: NC allows 20% of the add-back each year, spreading the remaining deduction evenly over five years.
- Basis: The basis of the asset for NC and federal purposes remains the same, except as adjusted for the add-back and subsequent deductions,.
4. Conclusion
- Federal: Full $10,000 deduction in Year 1.
- North Carolina: $1,500 deduction in Year 1, then $1,700 per year in Years 2–6.
- Result: The total deduction is the same, but North Carolina spreads the benefit over six years, deferring most of the deduction compared to federal law.
This approach ensures compliance with both federal and North Carolina tax rules for bonus depreciation in 2025 and beyond,,,.
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