Bonus Depreciation Addition

G.S. 105-134.6(c)(8a) and G.S. 105-130.5(a)(15a) both require an addition to federal taxable income in the taxpayer’s 2008 tax year for 85% of the bonus depreciation allowed under section 168(k) of the Code for property placed in service after December 31, 2007, but before January 1, 2009, whether the bonus depreciation was claimed on a calendar year 2008 return or on a 2007 return for a fiscal year ending in 2008. Note: Fiscal year July 1, 2007 - June 30, 2008 would be filed on a 2007 tax year return.

Question: If an individual claims Code section 168(k) bonus depreciation of $100,000 (for property placed in service after January 1, 2008) on the 2007 fiscal year return (FYE 6-30-08) and $200,000 on the 2008 fiscal year return (FYE 6-30-09), what bonus depreciation addition is required?
Answer: This individual must make a bonus depreciation adjustment of $255,000 (85% x $300,000) on the 2008 individual income tax return. There is no bonus depreciation addition required on the tax year 2007.
   
Question:

A pass-through entity claims Code section 168(k) bonus depreciation of $500,000 on the 2007 fiscal year return (fiscal year 7/1/07 – 6/30/08) for property placed in service after January 1, 2008. The individual partner or shareholder files on a calendar year basis. What bonus depreciation addition is required at the entity and/or the individual level?

Answer:

There is no adjustment required at the entity level for the 2007 fiscal year return (7/1/07 – 6/30/08) or on the individual’s calendar year 2008 return. There is an addition of $425,000 (85% x $500,000) for bonus depreciation required on the pass-through entity’s 2008 fiscal year return (7/1/08-6/30/09) for property placed in service between January 1 and June 30, 2008. There is also an addition required on the individual’s calendar year 2009 income tax return for the individual’s portion of the $425,000 bonus depreciation adjustment.

Code section 1366 (tax treatment of shareholders) provides that the character of any item included in a shareholder’s pro rata share shall be determined as if such item were realized directly from the source from which realized by the corporation or incurred in the same manner as incurred by the corporation. Code section 702(b) (character of items constituting distributive share) provides that the character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership.

The item is not realized by the individual until it is passed through from the pass-through entity. Because the K-1 for the entity’s 2007 fiscal year (7/01/07 – 6/30/08) will not include the addition for Code section 168(k) bonus depreciation, there is no addition required on the individual’s calendar year 2008 return. The addition will occur once the entity properly shows this as a pass-through item on the K-1 for the 2008 fiscal year (7/1/08 – 6/30/09) and will be required on the individual’s 2009 income tax return.

The law allows taxpayers to recover the Code section 168(k) bonus depreciation addition over a five year period beginning in 2009. A partner or shareholder who was required to add back 85% of the section 168(k) bonus depreciation on the 2009 calendar year individual return may also claim the first deduction of 20% of that addition on the 2009 return.

North Carolina’s reference to the Internal Revenue Code was updated from January 1, 2007 to May 1, 2008. On May 22, 2008, Congress passed The Food, Conservation and Energy Act of 2008 (also known as The Farm Bill). This law allows special bonus depreciation under section 1400N(d) of the Code. The Emergency Economic Stabilization Act of 2008 was signed into law on October 3, 2008. Under this federal law, additional provisions for bonus depreciation were added under sections 168(m) and 168(n) of the Code.

Until the General Assembly takes action to update the reference to the Internal Revenue Code to include the Acts identified above and to determine how it wishes to treat the additional bonus depreciation provisions, the Department is also requiring an addition of 85% for the bonus depreciation claimed under these sections of the Code in the same tax year as that required for the bonus depreciation claimed under section 168(k). This addition should be shown on the same line of the tax return as that required for the section 168(k) adjustment.