How does the annual depreciation expense for a $10,000 production machine purchased in 2025 differ between North Carolina and federal tax rules when bonus depreciation is claimed federally?
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To answer how the annual depreciation expense for a $10,000 production machine purchased in 2025 differs between North Carolina and federal tax rules when bonus depreciation is claimed federally, we must analyze both federal and North Carolina state tax treatment for such property, specifically focusing on the treatment of bonus depreciation.
1. Federal Tax Treatment (2025)
Bonus Depreciation under IRC §168(k)
- For property acquired and placed in service after January 19, 2025, the federal bonus depreciation rate is 100%. This means the entire $10,000 cost of the production machine can be deducted in the year it is placed in service (2025) as a bonus depreciation deduction.
- After claiming bonus depreciation, the basis of the property is reduced to zero, so no further depreciation is allowed in subsequent years.
Federal Depreciation Deduction for 2025:- $10,000 (entire cost expensed in 2025)- $0 in subsequent years
2. North Carolina State Tax Treatment (2025)
Bonus Depreciation Decoupling
- North Carolina does not conform to federal bonus depreciation under IRC §168(k).
- North Carolina law requires taxpayers to add back 85% of the federal bonus depreciation deduction to state taxable income in the year it is claimed for federal purposes.
- The taxpayer is then allowed to deduct 20% of the add-back in each of the next five years.
How the Add-Back Works:
- In 2025, you must add back 85% of the $10,000 federal bonus depreciation = $8,500 to North Carolina taxable income.
- Over the next five years (2026–2030), you may deduct 20% of the add-back each year: $1,700 per year.
MACRS Depreciation for Remaining Basis
- For North Carolina, the machine is depreciated using regular MACRS rules (5-year property, 200% declining balance, half-year convention), but without bonus depreciation.
- The full $10,000 is depreciated over 5 years using the MACRS table for 5-year property.
MACRS 5-Year 200% DB (Half-Year Convention) Percentages:- Year 1: 20.00%- Year 2: 32.00%- Year 3: 19.20%- Year 4: 11.52%- Year 5: 11.52%- Year 6: 5.76%
Annual MACRS Deductions:- Year 1 (2025): $2,000- Year 2 (2026): $3,200- Year 3 (2027): $1,920- Year 4 (2028): $1,152- Year 5 (2029): $1,152- Year 6 (2030): $576
Total North Carolina Deductions Each Year
- 2025: MACRS ($2,000) + No add-back deduction yet = $2,000
- 2026: MACRS ($3,200) + Add-back deduction ($1,700) = $4,900
- 2027: MACRS ($1,920) + Add-back deduction ($1,700) = $3,620
- 2028: MACRS ($1,152) + Add-back deduction ($1,700) = $2,852
- 2029: MACRS ($1,152) + Add-back deduction ($1,700) = $2,852
- 2030: MACRS ($576) + Add-back deduction ($1,700) = $2,276
Note: The add-back deduction is limited to the amount added back, so the total add-back deductions over five years will not exceed $8,500.
3. Summary Table
4. Key Differences
- Federal: Full $10,000 deduction in 2025 (bonus depreciation).
- North Carolina: Only $2,000 deduction in 2025 (no bonus depreciation), with the remainder spread over the next five years as a combination of regular MACRS and the phased add-back deduction.
Result: The annual depreciation expense for North Carolina is much lower than the federal deduction in the first year, but higher than federal in years 2–6, due to the add-back mechanism and regular MACRS depreciation.
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