Bonus Asset Basis

Generally the five-year bonus depreciation deduction allowed on the North Carolina individual, C corporation, or pass-through income tax returns in cases where a taxpayer reported an addition for bonus depreciation in an earlier year is not impacted by the sale, transfer, or other disposition of the asset for which the bonus depreciation was claimed.  A taxpayer who was entitled to a five-year bonus depreciation deduction on his 2010 through 2014 North Carolina returns for bonus depreciation added back on his 2009 North Carolina return would continue to claim the deductions for the tax years 2012 through 2014 even if the asset was transferred in 2011. 

Legislation enacted effective for tax years beginning on or after January 1, 2013 causes a different result if an asset is transferred and the tax basis of the asset carries over from the transferor to the transferee for federal income tax purposes.

Transfer of an Asset On or After January 1, 2013

If an actual or deemed transfer of an asset occurs on or after January 1, 2013, the transferee must add any remaining installments of the five-year bonus depreciation deduction to the basis of the transferred asset ("basis adjustment") and depreciate the adjusted basis over any remaining life of the asset.  The transferee may elect the depreciation method used to recover the basis adjustment but the depreciation method must be consistent throughout the remaining life of the asset.  Neither the transferor nor any owner in the transferor may claim any remaining installments of the five-year bonus depreciation deduction.  The addition to basis occurs only to the extent that the transferor or each owner in the transferor that reported an addition for bonus depreciation in an earlier year with respect to the transferred asset certifies in writing to the transferee that the transferor or owner in the transferor will not take any future installments of the five-year bonus depreciation associated with the transferred asset. 

Transfer of an Asset Prior to January 1, 2013

If an actual or deemed transfer of an asset occurred prior to January 1, 2013, the transferor and transferee can make a mutual election to make a basis adjustment on the transferee’s 2013 State income tax return to the extent that the transferor and any owner in the transferor have not taken the bonus depreciation deduction on a prior return.  The basis adjustment is limited to the total remaining installments of the five-year bonus depreciation forfeited by the transferor and owners of the transferor.  To qualify for the basis adjustment, each of the following conditions must be met:

  • The transferor and any owner in the transferor are not allowed any remaining installments of the five-year bonus depreciation deduction.
  • The transferor and any owner in the transferor certify in writing to the transferee that the transferor and any owner in the transferor will not claim any remaining installments of the five-year bonus depreciation deduction for any tax years beginning on or after January 1, 2013 with respect to the transferred asset.

Remaining Life

For an asset transferred on or after January 1, 2013, the asset has remaining life if it has not been fully depreciated for federal income tax purposes as of the date of transfer.  The basis adjustment will be recovered over the remaining years in which the asset will be depreciated for federal purposes.  If the asset has no remaining life, the basis adjustment will be completely recovered in the year of transfer.

For an asset transferred prior to January 1, 2013, the asset has remaining life if it has not been fully depreciated for federal income tax purposes as of January 1, 2013.  The basis adjustment will be recovered over the remaining years in which the asset will be depreciated for federal purposes.  If the asset has been disposed of by the transferee prior to January 1, 2013 or has no remaining life, the basis adjustment will be completely recovered in the tax year 2013.

Adjustment on State Income Tax Return

The bonus asset basis resulting from the transfer of an asset as described above results in a difference in basis and a difference in the amount of depreciation or gains and losses for State and federal purposes.  An adjustment to federal adjusted gross income (individual income tax) or federal taxable income (corporate income tax purposes) is required for each year the asset is depreciated or for the year the asset is sold, disposed of or transferred.

Definitions

"Transferor" – An individual, partnership, corporation, S corporation, limited liability company, or an estate or trust that does not fully distribute income to its beneficiaries.

"Owner in a transferor" – A partner, shareholder, member, or beneficiary subject to North Carolina income taxation.