Bonus Depreciation Deduction for Pass-through Entities

Effective for taxable years beginning on or after January 1, 2005, G.S. 105-134.6(b)(17) and G.S. 105-130.5(b)(21) allow a deduction for the amount of special bonus depreciation allowed under section 168(k) or section 1400L of the Code that was added to federal taxable income in 2002, 2003, or 2004. The deduction must be claimed in five equal installments in the first five taxable years beginning on or after January 1, 2005.

Change in ownership: With respect to pass-through entities where there is a change in ownership in 2005 at the partner or shareholder level, a new owner is not entitled to share in the depreciation deduction claimed on the pass-through entity return because the new owner would not have added back the depreciation in 2002, 2003, or 2004. Therefore, in the case of a partnership, the total deductions attributable to the special bonus depreciation for each individual partner included on line 7, Part 3 of Form D-403 and on line 3 of Form NC K-1 will not equal the total deduction attributable to the special depreciation claimed on line 7, Part 4 of Form D-403. The same analogy is applicable to S corporation shareholders.

A former partner or shareholder is entitled to the deduction allowed for any special bonus depreciation added back on the partner’s or shareholder’s individual return in 2002, 2003, or 2004.

Merger of entities: When two entities merge, the new entity is not entitled to the deduction for special bonus depreciation because the new entity did not add back the depreciation in 2002, 2003, or 2004. However, individual owners of the entities that existed prior to the merger would be entitled to the deduction if, on their individual returns for 2002, 2003, or 2004, the owners added back the depreciation that was passed through to them by either of the original entities. (See Bonus Asset Basis for impact of the transfer of an asset with remaining bonus depreciation deductions.)

Special bonus depreciation claimed by pass-through entities filing fiscal year returns: An owner of a pass-through entity must include his share of the entity’s net income in the owner’s federal taxable income for the year that includes the last day of the entity’s tax year. Therefore, a calendar year owner in a pass-through entity that had a fiscal year ending date in 2005 would not add back any special bonus depreciation claimed by a pass-through entity because G.S. 105-134.6(c)(8) does not require an addition for bonus depreciation for tax years beginning on or after January 1, 2005.