Important Notice: Impact of Recently Enacted Laws on North Carolina Individual and Corporate Income Tax Returns
Issued By: Tax Administration
Date: July 23, 2026
The following important information is addressed in this notice:
• Background
• Definitions
• Updated Reference to the Internal Revenue Code
• New Decoupling Adjustment for Domestic Research and Experimental Expenditures
• New Tax Deduction for Eligible Timber Casualty Losses
• New Itemized Deduction for Gambling Losses
• Impact on NC Tax Returns
• Future Impacts and Assistance
Governor Josh Stein signed Session Law 2026-31 and Session Law 2026-41 in July 2026. These new laws made various changes to Chapter 105 of the North Carolina General Statutes (“Revenue Act”), including changes that may affect North Carolina individual and corporate income tax returns, (collectively, “NC Tax Returns”).
The purpose of this notice is to explain how certain income tax provisions included in the new laws impact individuals and corporations required to file NC Tax Returns. The notice also provides instructions on how these laws impact NC Tax Returns for tax years prior to 2026.
If the new laws affect the 2026 NC Tax Return, the North Carolina Department of Revenue (“NCDOR”) will incorporate the changes in the instructions for the 2026 NC Tax Return.
For purposes of this notice, except where the context clearly indicates otherwise, the following definitions apply:
1. Corporation - An entity subject to the income tax imposed under Article 4, Part 1 of the Revenue Act.
2. Federal Adjusted Gross Income – Defined in Internal Revenue Code § 62.
3. Federal Taxable Income – Defined in Internal Revenue Code § 63.
4. General Assembly – The North Carolina General Assembly.
5. Individual – A human being subject to the income tax imposed under Article 4, Part 2 of the Revenue Act.
For individuals, North Carolina taxable income starts with federal adjusted gross income (“AGI”). For corporations, North Carolina taxable income starts with federal taxable income (“FTI”). Both AGI and FTI are calculated based on the Internal Revenue Code (“IRC” or “Code”) as of a fixed date referenced in the Revenue Act.1 If a change is made to the IRC after the date referenced in the Revenue Act, an individual cannot include in AGI and a corporation cannot include in FTI the changes made to the IRC when computing NC taxable income, until the General Assembly enacts legislation to reference the updated IRC.2
As part of Session Law 2026-31 the State’s reference to the IRC was updated to July 5, 2025 (formerly January 1, 2023).3 As such, to the extent North Carolina conforms to federal income tax law, North Carolina follows the IRC in effect as of July 5, 2025.
When North Carolina does not follow the IRC (i.e., decouples from the IRC), individuals and corporations are required to add certain items to AGI or FTI that are not included in AGI or FTI for federal income tax purposes, and are allowed to deduct certain items from AGI or FTI that are included in AGI or FTI for federal income tax purposes.4
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Likewise, an S-Corporation, partnership, estate, or trust cannot include changes made to the Code after the date referenced in the Revenue Act until the change is adopted by the General Assembly.
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See Session Law 2026-31, Part XII, Section 12.(a).
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The Code in effect as of July 5, 2025, allows eligible taxpayers to fully expense domestic research and experimental (“R&E”) expenditures in the year they were paid or incurred. The General Assembly did not adopt this provision of federal income tax law.1 Thus, individuals and corporations that fully expensed domestic R&E expenditures under IRC section 174A(a) are required to adjust AGI or FTI to account for the differences between federal and North Carolina income tax law.
Session Law 2026-31 created a new decoupling adjustment for individuals and corporations that incurred domestic R&E expenditures: N.C. Gen. Stat. § 105-153.6A (for individuals) and N.C. Gen. Stat. § 105-130.5C (for corporations). The adjustment requires an individual or a corporation to add 80% of the amount of domestic R&E expenditures taken on the federal income tax return for the tax year under IRC section 174A(a) to AGI or FTI. The individual or the corporation is allowed to deduct 25% of the amount added to AGI or FTI in the subsequent four taxable years from AGI or FTI.2
The following table outlines the new decoupling adjustment and the applicable effective date of the adjustment. Notably, the General Assembly retroactively changed North Carolina law. If this adjustment affects the computation of NC taxable income, see the “Impact on NC Tax Returns” section for instructions on how to report this adjustment.
| NC Adjustment (N.C. Gen. Stat. §§ 105-153.6A and 105-130.5C) | Effective Date |
|---|---|
| (a) Expense Deduction Adjustment. - A taxpayer that took a deduction for domestic R&E expenditures under IRC section 174A(a) must add to the taxpayer’s AGI or FTI, as appropriate, eighty percent (80%) of the amount taken for that year under that Code provision.3 A taxpayer is allowed to deduct twenty-five percent (25%) of the add-back in each of the first four taxable years following the year the taxpayer is required to include the add-back in income.4 | (1) For taxable years beginning on or after January 1, 2022, for taxpayers that elect for federal income tax purposes the retroactive application of IRC section 174A(a) of the Code for a taxable year beginning in 2022, 2023, and 2024. (2) For taxable years beginning on or after January 1, 2025, for taxpayers that do not make the election. |
Example: ABC Corporation, a C Corporation, incurred $100,000 in domestic R&E expenditures in tax year 2025. On its 2025 federal income tax return, ABC Corporation deducted the entire $100,000 in domestic R&E expenditures that were paid or incurred during the taxable year.
On its 2025 NC Tax Return, ABC Corporation is required to add $80,000 to FTI.
The North Carolina add-back is calculated by multiplying $100,000, the amount taken as a deduction under IRC section 174A(a) in tax year 2025, by 80%, the amount of the NC adjustment required under N.C. Gen. Stat. § 105-130.5C.
On its 2026, 2027, 2028, and 2029 NC Tax Return, ABC Corporation is allowed to deduct $20,000 from FTI.
The North Carolina deduction is calculated by multiplying $80,000, the amount of the North Carolina add-back required under N.C. Gen. Stat. § 105-130.5C, by 25%, the amount of North Carolina deduction allowed under N.C. Gen. Stat. § 105-130.5C.
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See Session Law 2026-31, Part XII, Section 12.(b) and Section 12.(d).
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See Session Law 2026-31, Part XII, Section 12.(b), Section 12.(c), Section 12.(d), and Section 12.(e).
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See Session Law 2026-31, Part XII, Section 12.(b), Section 12.(c), Section 12.(d), and Section 12.(e).
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See Ibid.
Session Law 2026-31 created a new personal income tax deduction. N.C. Gen. Stat. § 105-153.5(b)(17) allows an individual who incurred a financial loss from the destruction or damage of timberland due to Hurricane Helene to deduct, subject to the limitations outlined below, an “eligible timber casualty loss” from AGI when calculating North Carolina taxable income.
Limitations. The eligible timber casualty loss deduction cannot be taken unless both of the following conditions are met:
1. The timber casualty loss was not deducted when arriving at the individual's AGI.
2. The timber casualty loss is not claimed by another person for the same timberland.
Definition of Eligible Timber Casualty Loss. Under State law, an “eligible timber casualty loss” is a timber casualty loss that meets all the following conditions:
1. The timber casualty loss occurred between September 24, 2024, and October 31, 2024, as a result of damage or destruction caused by Hurricane Helene in a county that qualified for individual and public assistance under FEMA 4827 DR federal major disaster declaration as of September 28, 2024.
2. The timber casualty loss is attributable to at least 20 but no more than 2,000 acres of timberland located in North Carolina that are owned by the taxpayer.
3. The timber casualty loss is determined by reference to a single, identifiable property that has been damaged or destroyed in accordance with IRC section 165.
The following table outlines the new personal income tax deduction and the applicable effective date of the deduction. Notably, the General Assembly retroactively changed North Carolina law. If this deduction affects the computation of NC taxable income, see the “Impact on NC Tax Returns” section for instructions on how to report this deduction.
| NC Deduction (N.C. Gen. Stat. § 105-153.5(b)(17)) | Effective Date |
|---|---|
| The amount of an eligible timber casualty loss that is equal to the fair market value of the timberland after the casualty loss subtracted from the fair market value of the timberland before the loss, less any amount received, directly or indirectly, related to the eligible timber casualty loss, including insurance payments, tax credits, tax deductions, disaster payments, grants, or relief funding.1 | For taxable year 2024. A taxpayer may elect to take the deduction in the taxable year 2023 by filing an amended return within the statute of limitations for obtaining a refund. |
Example: John Smith resides in Avery County, North Carolina, where he owns and operates ABC Christmas Tree Farm, which consists of approximately 1,000 acres of timberland.
On September 27, 2024, ABC Christmas Tree Farm lost thousands of Fraser Fir trees due to mudslides and wind damage during Hurricane Helene.
On September 28, 2024, Avery County was designated as a disaster area under FEMA Disaster Declaration 4827. The designation qualified Avery County for individual and public assistance.
When preparing the 2024 federal income tax return, John Smith calculated a casualty loss attributable to timberland destroyed at ABC Christmas Tree Farm that occurred on September 27, 2024 (“Timberland Loss”). The Timberland Loss was determined in accordance with IRC section 165.
On the 2024 federal income tax return, John Smith claimed the Timberland Loss as a federal itemized deduction on federal Schedule A. John Smith was the only person who claimed the Timberland Loss.
John is allowed to deduct the Timberland Loss pursuant to N.C. Gen. Stat. § 105-153.5(b)(17). John may elect to deduct the loss on the 2024 NC Tax Return or on the 2023 NC Tax Return by filing an amended return within the statute of limitations for obtaining a refund.
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See Session Law 2026-31, Part I, Section 1.6.
Under North Carolina law, in calculating North Carolina taxable income, an individual may deduct from AGI either the North Carolina standard deduction amount or the North Carolina itemized deduction amount.1 Importantly, North Carolina itemized deductions are not identical to federal itemized deductions and are subject to certain State limitations.
Session Law 2026-41 created a new itemized deduction for individuals who incurred gambling losses. N.C. Gen. Stat. § 105-153.5(a)(2) allows an individual who itemizes North Carolina deductions to include gambling losses as an itemized deduction subject to the limitation below.2
Limitation. The itemized deduction is limited to the amount of gambling losses allowed as a deduction under IRC section 165(d), to the extent the gambling losses are not included in arriving at AGI.
The following table outlines the new itemized deduction and the applicable effective date of the deduction. Notably, the General Assembly retroactively changed North Carolina law. If this itemized deduction affects the computation of NC taxable income, see the “Impact on NC Tax Returns” section for instructions on how to report this itemized deduction.
| NC Itemized Deduction (N.C. Gen. Stat. § 105-153.5(a)(2) | Effective Date |
|---|---|
| e. Gambling Losses. The amount allowed as a deduction for wagering losses under section 165(d) of the Code, to the extent the losses are not deducted in arriving at AGI. | For taxable years beginning on or after January 1, 2025. |
Example. Jane Smith is a resident of North Carolina.
In tax year 2025, Jane Smith had $10,000 in gambling winnings and $12,000 in gambling losses. In arriving at AGI, Jane Smith included all of the gambling winnings as income and did not deduct any of the gambling losses.
For purposes of this example, in tax year 2025, Jane Smith was allowed $10,000 in gambling losses under IRC section 165(d).
When calculating the North Carolina itemized deduction amount for tax year 2025, Jane Smith can include $10,000 in gambling losses.
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See Session Law 2026-41, Part XLIV, Section 44.2.(a)
An individual or corporation whose NC taxable income is impacted by Session Law 2026-31, Session Law 2026-41, or both, for a taxable year beginning on or before January 1, 2026, should file (or amend) the applicable NC Tax Return. Important. The applicable NC Tax Return must be completed in accordance with NCDOR instructions for the relevant tax year and include all documents that support the change made to the NC Tax Return.
If a taxpayer files (or amends) an NC Tax Return, and the NC Tax Return reflects an overpayment, the NC Tax Return must be filed with NCDOR within the statute of limitations for obtaining a refund.1 If the NC Tax Return reflects additional tax due, the unpaid tax is subject to applicable penalties and statutory interest on the tax not paid by the due date of the tax return, not including extensions.
Note. A taxpayer may request a waiver of penalties within the provisions of the Department’s Penalty Waiver Policy.
If the “Decoupling Adjustment for Domestic Research and Experimental Expenditures” affects the North Carolina taxable income of an individual or a C-Corporation for taxable years 2022 through 2025, refer to table below to determine the specific line(s) to use to report the adjustment.
| Entity Type | Decoupling Adjustment for Domestic Research and Experimental Expenditures (Tax Year 2022) | |
|---|---|---|
| Addition | Deduction | |
| Individual (Resident, Part-Year Resident and Nonresident) | Form D-400 Schedule S, Part A, Line 15 | N/A |
| Individual (Part-Year Resident and Nonresident Only) | Form D-400 Schedule PN-1, Part A, Line 11 | N/A |
| C-Corporation | Form CD-405 Schedule H Line 1(h) | N/A |
| Entity Type | Decoupling Adjustment for Domestic Research and Experimental Expenditures (Tax Years 2023, 2024, and 2025) | |
|---|---|---|
| Addition | Deduction | |
| Individual (Resident, Part-Year Resident and Nonresident) | Form D-400 Schedule S, Part A, Line 15 | Form D-400 Schedule S, Part B, Line 40 |
| Individual (Part-Year Resident and Nonresident Only) | Form D-400 Schedule PN-1, Part A, Line 11 | Form D-400 Schedule PN-1, Part B, Line 29 |
| C-Corporation | Form CD-405 Schedule H Line 1(h) | Form CD-405 Schedule H Line 3(g) |
If the “Tax Deduction for Eligible Timber Casualty Losses” affects the North Carolina taxable income of an individual, a partnership, or an S Corporation for taxable years 2023 or 2024, refer to table below to determine the specific line to use to report the deduction.
| Entity Type | Tax Deduction for Eligible Timber Casualty Losses (Tax Years 2023 or 2024) |
|---|---|
| Individual (Resident, Part-Year Resident and Nonresident) | Form D-400 Schedule S, Part B, Line 40 |
| Individual (Part-Year Resident and Nonresident Only) | Form D-400 Schedule PN-1, Part B, Line 29 |
| Partnership | Form NC-PE Part B, Line 40 |
| S Corporation | Form NC-PE Part B, Line 40 |
If the “Itemized Deduction for Gambling Losses” affects the North Carolina taxable income of an individual for taxable year 2025, refer to table below to determine the specific line to use to report the itemized deduction.
| Entity Type | Itemized Deduction for Gambling Losses (Tax Year 2025) |
|---|---|
| Individual (Resident, Part-Year Resident and Nonresident) | Form D-400 Schedule A, Line 9 |
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See N.C. Gen. Stat. §§ 105-241.6 and 105-241.7(b).
Guidance on how the income tax provisions included in Session Law 2026-31 and Session Law 2026-41 affect the 2026 NC Tax Return will be included in the instructions for the relevant 2026 NC Tax Return. NCDOR will also publish a FAQ document to answer common questions about these recent law changes.
Additional guidance regarding other tax changes included in Session Law 2026-31 and Session Law 2026-41 will be published on the NCDOR website. To stay informed about law changes, taxpayers should subscribe to receive NCDOR e-alerts. NCDOR e-alerts are a convenient way to receive timely information from NCDOR.
If you have any questions about this notice, you may call the North Carolina Department of Revenue Customer Service line at 1-877-252-3052 (7:00 am until 4:30 pm Eastern Time, Monday through Friday), or write to Customer Service, PO Box 1168, Raleigh, NC 27602-1168.
To the extent there is any change to a statute or regulation, or new case law subsequent to the date of this notice, the provisions in this important notice may be superseded or voided. To the extent that any provisions in any other notice, directive, technical bulletin, or published guidance regarding the subject of this notice and issued prior to this notice conflict with this important notice, the provisions contained in this important notice supersede the previous guidance.